How Safe Are Your Savings?
— TD FUEGO
Every government throughout every country in the world exhorts its citizens to save. This they do — not in order to inflate the liabilities of deposit-takers but — to satisfy a simple economic maxim which says that “Savings equal Investment.” The argument goes that the more people save, the more financial institutions are in a position to lend (at reasonable rates) to private firms and individuals who want to invest in manufacture and other businesses, as well help finance government expenditure. Thus, it follows that private savings can contribute to the socio-economic and infrastructural development of a country. Indeed, savings are considered to be so important to the economy that governments offer certain incentives, usually in the form of tax relief, to encourage their populations to save.
Now, it so happens that people save for a variety of reasons. These can range from a luxury holiday, to the children’s education, a deposit on a home, a pension in old age, and so on. Closer home, as the population ages, the push towards self-financed pension provision may become a very necessary part of economic policy, especially if Government wants to avert the spectre of a failed National Pension Fund (NPF), which is unable to meet its obligations. Already, report after report has been ringing the alarm bells that the NPF will not be able to support the strain beyond a couple of decades.
Unfortunately, our TINA-devotees scrapped the tax relief on all forms of savings in 2005. Not only that but, in a cynical move that could well have been designed to rub salt onto the wound they had inflicted, they proceeded to introduce a tax on savings!! As a consequence of their ill-advised policy, we have seen the national savings rate fall to a dismal 15 percent of GDP; 25 percent is considered to be a reasonable benchmark by most economists. Hence, there is a crying need to encourage people to get back to saving, and it is within the power of Government to do something about it. For a start, it can reintroduce some of the pre-2005 tax reliefs.
But, savings per se is not enough. We must also do all we can so people invest in long-term instruments. Life insurance, education insurance policy and pension provision schemes are prime examples. The latter not only ensures a steady savings rate over the long term, but also divests Government (read taxpayer) of the burden of funding universal pensions.
But, urging people to save is one thing. Ensuring that they can rely on the stability of the financial institution in which they save is another. In the aftermath of the financial meltdown of 2008, people have become very wary and are quite rightly looking for some form of guarantee which ensures that their hard earned cash is in safe hands. But, following the collapse of giants like Lehamn and the need for bailout by Lloyds and Royal Bank of Scotland among others, they wonder where is safe.
So far, the country’s financial institutions have had it too good. Let us consider the facts.
When a customer borrows money from his bank, the latter usually requires him to provide guarantees in the form of fixed assets, collateral deposits, life insurance, and so on. These, they explain, are required in case he (the customer) is unable to meet his repayments. Fair enough, he thinks; and complies willingly.
But, what happens if the bank is unable to meet its obligations? Zilch, nothing! For when we lend (deposit) our money to the same bank, we do not receive any form of guarantee whatsoever. Therefore, in case the bank goes bust and is unable to meet its obligations as a consequence, we can whistle in the wind for our money. Our savings are not always as safe as we are led to believe!
In these circumstances, it behoves the authorities to ensure that people’s savings are safeguarded as far as possible. Of course, only a nutter would wish to follow the crazy idea floated by President Sarkozy in the wake of the financial crisis of 2008 that the State should guarantee all deposits. Such a policy, if it were ever implemented, would only encourage swashbuckling bankers to become even more adventurous with depositors’ money than they were with the sub-prime fiasco that led to the financial crisis, and then on to the economic crisis from which the world is still reeling.
However, something akin to the UK’s Financial Services Compensation Scheme (UK-FSCS) would make perfect sense. For the uninitiated, the FSCS is “a mandatory fund of last resort” which was set up under the Financial Services and Markets Act 2000 to compensate customers of financial services institutions in the event of insolvency. It covers deposits, insurance, insurance broking, investment, mortgages and mortgage arrangement — all within certain limits.
For example, cash deposits are guaranteed 100 percent up to a maximum of GBP85k per person. If someone is unlucky enough to have deposits in more than one insolvent institution, he can expect to receive the maximum of GBP85k on behalf of each of those institutions. Joint account holders are compensated as though they were single accounts, and can each expect to receive the maximum payment. In the case of insurance (eg pensions, life and home), the insured can expect to receive 90 percent of his claims, and there is no upper limit.
Protection for Savers
In these times of uncertainty, no one knows for sure where the next Tsunami will hit. Fortunately for us, Mauritian banks and other deposit-takers were not affected by the financial crisis of 2008, but that does not mean that they are immunized against failure. Even without the recent crisis, we have seen the demise of banks like BCCI and Union and insurance companies like Rainbow and Sparrow in the recent past. With possible crises lurking behind the door, other bankruptcies cannot be ruled out.
Yet, amongst all the talk about the virtues of our financial centre, we hear very little about safety nets for savers. It is worth remembering that many of these people are widows and pensioners who rely on the income from their savings investment for their livelihoods; and it does not take a PhD to figure out the dire consequences to them in case their banks become insolvent.
For far too long, the dice has been loaded in favour of the financial institutions. In the name of justice and equity, there is urgent need to put the relationship between them and the saving public on a fairer footing. And short of re-inventing the wheel to achieve this equity, we could do a lot worse than adopt a Compensation Scheme along the lines of the UK-FSCS. The sooner, the better!