Payout arrangements from 1 January 2011
From 1 January 2011, set off is no longer being applied by the FSCS. This means if a depositor owes a bank money, the debt is no longer set off against the positive balance when calculating the amount of the protected deposit. Instead the Scheme pays compensation as a gross payout up to the limit of £85,000.
Removing set off is designed to help speed up payment and ensure that eligible depositors do not lose liquidity in the event of a default.
Negative balances such as overdrafts, credit cards and certain types of “off set” mortgage accounts (where the savings and loan elements cannot be separated) are now excluded by the FSCS. However, under insolvency law, the remaining deposit balance, anything over £85,000, is automatically set-off against any debts in the liquidation, meaning consumers debts will be reduced by that excess amount.
How are offset mortgages dealt with?
If a deposit account is separate from the mortgage balance, it would be dealt with separately and compensation would be calculated on a gross basis. However, if the deposit account is combined with the mortgage account and operated as one large overdraft, the FSCS would have to treat it as an overdraft and no compensation would be payable. It is important that consumers appreciate the difference between these accounts.
If the accounts are separate the FSCS would pay compensation up to the limit and the remainder would automatically be set-off against the debt (or in this case mortgage) under insolvency law.