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29/04/2009Depositors, beware!

Depositors, beware! In the current financial downturn, it is vital that expats take a closer look at their financial planning. Natasha Gunn reports.

It’s fairly unanimous: Most experts today pin the blame for the current financial crisis on banks doling out too much credit for high risk mortgages. And these so-called ‘sub-prime’ mortgages were often shunted into offshore banks where financial regulations are loose or virtually non-existent.

At the same time, these shaky loans increased the risk to these banks’ stability, with devastating consequences for the host economies: banking systems in general--whether off- or onshore --are often disproportionately large in comparison to the national economies.

And for the first time since the 1930s, depositors have a real reason to worry.  

“Investments go up and down but we haven’t seen this for deposits before,” said Ian Parfitt, a British expatriate who lives in the Netherlands.

Parfitt lost his life savings when he deposited a lump sum in Kaupthing Friedlander & Singer Isle of Man (KSFIOM) bank last year, money he intended to use to pay his children’s university tuition and buy a home in the UK.

“Before you put money in a bank in the future, you need to know what will stand up in court if the bank goes bust, what you can legally get back,” he said. “You are risking your deposit now, which is new – everything in excess of what you can legally get back.”

“I had an agreement with the bank, under the jurisdiction of the Isle of Man, that they would look after my money,” he added. “They haven’t fulfilled their side of the bargain.”

Discriminating practices

Parfitt’s complaint goes beyond losing his money when the Icelandic bank crashed. He accuses the UK of discriminating against offshore depositors, taking an action that he and the other members of the KSFIOM Depositors Action Group believe is the real factor behind the bank’s crash.

“Our bank crashed because some one somewhere high up in the food chain in government decided in early October to move 550 million pounds out of the bank to the UK for ‘safekeeping’,” Parfitt said. “This money then became part of the liquidation of the UK arm and has been used to bail out British residents on the mainland.”

Parfitt heard only last week that the Isle of Man government will pay back the 50,000 pounds that is guaranteed, considerably less than his deposit.

“Having taken seven months to officially confirm what they were legally bound to do is rather frustrating,” says Parfitt. “One would have hoped that the seven months was spent figuring out how to return money for the 29 percent of their customers who deposited more than 50,000 pounds.”

It could have been worse. Last year, the legal minimum guaranteed by the government rose from 20,000 to 50,000 pounds in the UK and the Isle of Man, an amount which is still low in Europe. The Netherlands, for instance, guarantees deposits of up to 100, 000 euros.

Spread your savings

The bottom line, according to financial advisor Craig Welsh, who works for the Dutch arm of the Spectrum IFA Group, is that, although it takes time, some people will get some of their money back. In the meantime, he advises depositors to do their research.

“In the current economic climate, people need advice on how safe their bank deposits are,” he said. “For instance, we know of some UK banks which have offshore banking service centres on the Isle of Man hold their deposits in Jersey, where there is no protection scheme whatsoever.”

Also, due to recent mergers and acquisitions in the banking sector, people can end up with two accounts in seemingly different banks, which are in fact owned by the same parent company. This means that customers with two accounts in two different but affiliated banks would only be covered for 50,000 pounds total rather than 50,000 pounds for each of the two accounts.

“The safest approach for people with substantial savings would be to divide them under two different banks and remain, per individual bank, below the amount guaranteed by the government,” said Welsh. “Two years ago, no one thought of these things. Now expats should ask these basic questions: Which bank is my money in; who owns the bank; what is its credit worthiness; and which jurisdiction does it fall under?”
 
He added that with interest rates now so low, and likely to remain low for the time being, many are now considering other investments in the hope of achieving a decent return on their capital.

Regardless, there is always risk involved and experts advise caution. “Achieving a higher return always has to do with taking risk, said Dutch asset manager Jan, who prefers to remain anonymous. “But the flip side of the coin is that returns can be disappointing when taking risk. There is no such thing as a free lunch in financial markets.”

Natasha Gunn is the editor-in-chief of Expatica.com


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