When the Doors Shut: A Plain-English Walk Through Bank Failure, Cover and Compensation in the UK
Photo: Chris Whippet , CC BY-SA 2.0, via Wikimedia Commons
Most people never read the terms that govern their current account, and there is no particular shame in that. The document is long, it is dry, and it is drafted for lawyers. Yet one paragraph inside it is worth knowing, because it describes what happens when a bank can no longer pay its depositors.
What follows is a walk-through of that paragraph in practice. We will use a fictional lender — call it Hartsmere Bank — and follow a customer called Alex, a sole trader in Leeds, from a Friday afternoon headline to compensation arriving in a new account. Nothing here is designed to alarm. The machinery exists to work quietly, and in most cases it does.
Friday, 16:52 — the headline appears
Alex sees it on a news alert while quoting for a job: Hartsmere Bank has been placed into the Bank of England's resolution process. The app still works. The card still taps. That is normal and it is deliberate — one of the first aims of any resolution is to keep the payment systems running so that wages, benefits and direct debits are not interrupted.
At this stage there is usually nothing to withdraw and nowhere obvious to move money to in a hurry. Panic transfers are more likely to create a bookkeeping mess than to protect anything.
What happens behind the scenes
The UK does not simply let a bank collapse and then post cheques. The preferred route is resolution: the Bank of England works through the weekend with the Prudential Regulation Authority and the Financial Services Compensation Scheme (FSCS) to either sell the bank, transfer its deposits to a healthy institution, or run it down in an orderly way. The FSCS is the backstop, not the first move.
In many past cases, customers have found their account simply reappearing under a new logo on Monday morning, with sort code and account number intact. Where a transfer is not possible, the FSCS pays compensation directly.
£85,000 per person, per licence
This is the sentence worth memorising. The FSCS protects eligible deposits up to £85,000 per person, per bank. Crucially, 'bank' here means the banking licence, not the brand on the app or the colour of the debit card.
| Situation | Protection |
|---|---|
| Single account in one name | £85,000 |
| Joint account in two names | £170,000 (£85,000 each) |
| Two brands operating under one licence | £85,000 combined |
| Current account, cash ISA and fixed bond at one bank | £85,000 combined |
| Temporary high balance after a property sale or inheritance | Up to £1m for six months |
Several well-known names share a single licence — high street groups with multiple consumer brands are the obvious examples — so a customer who has spread savings across two brands belonging to the same licence has not spread them at all. Building societies that have merged present the same trap. The FSCS publishes a firm checker; using it takes two minutes and settles the question.
Joint accounts and temporary high balances
A joint account is treated as belonging to each holder in equal shares unless the bank's records show otherwise, which is why a couple's combined cover at one bank is usually £170,000.
Temporary high balances are the exception that catches people out. If a sum above £85,000 lands because of a specific life event — selling a home, an inheritance, a redundancy payment, an insurance payout, a divorce settlement — the FSCS can protect up to £1m for six months from the date the money was deposited. The cover is time-limited and applies to individuals, not to companies. Anyone holding a large proceeds balance should treat the six-month clock as a real deadline rather than a technicality.
Sole traders, partnerships and limited companies
Alex is a sole trader, so the account is treated as a personal deposit: £85,000 of cover, with temporary high balance rules also potentially available.
A partnership is generally an eligible depositor in its own right, but how the bank records the partners' interests matters. It is worth confirming the classification in writing rather than assuming it.
A limited company is eligible only if it is a small company — broadly, turnover of no more than £6.5m and 50 or fewer employees. A larger trading company falls outside deposit protection entirely. This is the single most overlooked point in business banking: a company with £400,000 on deposit at one bank may have no FSCS cover at all, and no temporary high balance relief either.
The first 48 hours: a checklist
- Do not move further money into the failing bank, including customer payments.
- Download or print statements, and note account numbers, sort codes and any facility references.
- Tell regular payers — clients, customers, payroll providers — to redirect to a new account as soon as one is open.
- List direct debits and standing orders. In a transfer of deposits these normally move with the account; in a payout they must be re-established.
- Check the FSCS website for a firm-specific page confirming the position.
- Keep paying staff and suppliers from an alternative source if you can.
- Be sceptical of anyone who contacts you offering to 'release' compensation for a fee. No legitimate body asks for your online banking password or a release charge.
When the money arrives
Where a payout is required, the FSCS aims to pay most claimants within seven days, with more complex claims — including large temporary high balances — taking longer. Payment is usually made by transfer to an account the customer nominates, occasionally by cheque, and sometimes in the form of a bulk transfer of all deposits to a willing buyer. Since the scheme began, no eligible depositor has lost money on a protected deposit.
What is not covered
Investments, cryptocurrency and money held in e-money or payment institution accounts sit outside the deposit guarantee scheme; e-money firms safeguard customer funds instead, which is a different promise with different risks. Deposits held at an overseas branch of a failed bank may fall under another country's scheme. And, as noted, large companies are simply not eligible.
Keep this, and check it once a year
The practical lesson is unglamorous. Know your licence, not just your logo. Keep no more than £85,000 per person per licence unless you are willing to accept the risk above that line. Diarise the temporary high balance clock. And keep a copy of your statements somewhere that is not inside the bank's own app.
