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No-deal Brexit: what could this mean for your savings?

Sam Barker
A no-deal is likely to be bad for savers, but it could also spur on banks to raise rates - © 2019 Bloomberg Finance LP

A no-deal Brexit could erode savings, reduce choice and bar expats from accessing their money, experts have warned.

Leaving the European Union (EU) with no deal is looking increasingly likely after Theresa May's second attempt to get her Brexit deal through the House of Commons failed last night.

A no-deal Brexit is now the default option unless MPs vote against this later today.

But the financial industry has said a no-deal Brexit "should be avoided". 

Higher inflation

A no-deal Brexit could mean a rise in inflation, according to a report from Moody’s, the ratings agency. This is likely to be bad for savers, who already struggle to get savings rates that come anywhere near beating inflation.

The annual rate of inflation in January, the most recent date for which data is available, was 1.8pc.

The best-buy easy access account, from Family Building Society, pays 1.51pc, though savers will need £15,000 to take out the deal.

Savers cannot beat this without locking their money away for years.

 Mark Carney, Governor of the Bank of England, has said that Bank Rate would rise in the event of a no-deal Brexit to compensate for this.

A Bank Rate rise would mean higher savings rates for customers, but in real terms savers could still find that inflation erodes the value of their savings.

Expat problems

If you are a British expat living in Europe but using a UK-based savings firm, a no-deal Brexit could mean you cannot access your cash.

This is because the Financial Conduct Authority (FCA), the City regulator, has offered European financial firms the ability to keep trading in the UK after a no-deal Brexit, but the same has not yet happened in reverse.

A Government paper on the financial risks of not reaching a deal said European-based customers of British firms “may lose the ability to access existing lending and deposit services”.

Reduced choice

Currently, many overseas financial firms trade in this country through a registered British firm in a process called "passporting".

Some of these firms, such as Sweden's Ikano Bank, offer very competitive savings rates. 

The FCA has said that financial firms in the European Economic Area will still be able to trade here normally for three years under a no-deal Brexit.

But there is a risk that Brexit willl harm the confidence of overseas firms towards the UK – and of consumers towards these companies.

Tom Adams, of Savings Champion, the financial researchers, said: “There are some prominent companies that operate in the UK whose parent company is based outside of the UK. Any form of Brexit will have some impact on those providers, even if it is just a case of savers being more wary about using them. Any uncertainty will get savers thinking twice before putting their funds with them.”

Loss of protection

If you currently have savings with an overseas firm that "passports" into the country, you will be protected if that firm goes bust due to the Financial Services Compensation Scheme (FSCS).

This will pay out up to £85,000 for lost finances and £50,000 for lost investments.

But that coverage is not certain under a no-deal Brexit. The Government paper flagged this problem and said it would consult on ways to keep this protection going.

The FCA has pledged to make the overall Brexit process as smooth as possible for financial firms.

Could it be a good thing?

There is a chance a no-deal Brexit could be good for savers if it goads banks to offer better savings rates.

Many banks rely on savings deposits as a source of cash for them to lend out, for example as mortgage loans, which they receive back plus interest. 

Uncertainty about the consequences of a no-deal Brexit could encourage banks to raise savings rates to ensure they have enough cash to lend.

Rachel Springall, of Moneyfacts, the financial researchers, said: "Are banks going to now look at getting more money in for any repercussions from having a no-deal Brexit?"

A spokesman for UK Finance, the financial trade body, said: "We continue to work closely with the UK government and regulators to put appropriate contingency plans in place that minimise any disruption to consumers in the event of a no-deal Brexit.

“Ultimately, the finance industry believes that a no-deal Brexit should be avoided and efforts focused on securing a managed exit, for the benefit of customers and businesses on both sides of the Channel.”