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A joke doing the rounds in financial circles: what's the difference between Iceland and Ireland? Answer: one letter and six months.
The inference is that the Irish economy could have less substance than a puff of steam rising from an Icelandic geyser. For the 170,000 UK-based people with savings in either the UK Post Office or a division of an Ireland-based bank, the joke is probably wearing thin.
This week, Anglo Irish Bank and the UK Post Office - whose savings accounts and mortgages are provided by the Bank of Ireland - added to the unease by writing to their UK savers to inform them they are now entirely reliant on the Dublin government's compensation scheme should the worst happen and a bank collapses.
The letters arrived in the same week that the European Commission said Ireland will have the second-worst performing economy - after Latvia - in Europe this year. They also coincided with a collapse in Irish bank share prices, fuelling fears about the future of the country's entire banking system.
The letters, which have been prompted by the Financial Services Authority (FSA), point out that the UK's Financial Services Compensation Scheme (FSCS) would play no part in reuniting savers with their money in the event that an Irish bank failed in a similar way to Icesave, the UK arm of collapsed Icelandic bank Landsbanki.
The move has led to an outcry here among savers, who in some cases have been trying to get their money out of the Republic - even at the cost of losing interest. Many say they opened their accounts in the expectation that the FSCS would have a role in handling compensation claims. They have questioned having their money in a country whose economy looks even more shaky than that of the UK - though some would say we are in no position to give other countries a hard time.
Ironically, most savers welcomed the announcement in September last year that the Irish government would guarantee 100% of all savings deposited in its leading banks until September 2010 - including UK savers' cash held by the banks' subsidiaries here.
Back then, it put in the shade the British government's decision to cover the first £50,000 in savers' accounts, and even led to a rush of money out of the UK and into Irish institutions. The UK Post Office also did well from savers seeking a safe haven in an Icelandic storm. Some were possibly unaware that the savings accounts are actually offered by Bank of Ireland.
But, since then, the outlook for the Irish economy has worsened. The Irish government has been forced to nationalise Anglo Irish Bank; Bank of Ireland has said it is dramatically scaling back its UK business; and this week bank shares in Dublin were hammered as dealers reacted to more bad news on the Irish economy. Talk of a possible International Monetary Fund bail-out for the country of just over 4 million people has not helped, and all this uncertainty has led some savers to question the ability of the Irish taxpayer to stand behind the guarantee if Ireland's banking system were to emulate Iceland's financial meltdown last autumn.
A spokeswoman for the FSCS confirmed its new stance: "Because the Irish deposit scheme covers 100% of deposits, we would no longer be involved in the event one of the Irish institutions failed, on the basis that the Irish scheme offers unlimited cover."
When Jamie Russell, from Shropshire, tried to withdraw his money from an Anglo Irish Bank fixed-rate savings bond, the bank said he could not access it until his bond matured, unless it was an emergency. "I was told that, in this case, the bank would consider closing the bond early at their discretion, but with the loss of 60 days' interest, and that my concern about Anglo Irish's balance sheet and Ireland's possible need for an IMF bail-out did not constitute an emergency. I feel I was mis-sold this product. I was specifically told my deposit was at least partly covered by the FSCS, yet now that cover has been rescinded."
Later the bank agreed to refund his money, albeit with the loss of interest.
Post Office customers Elisabeth and Mike Field, from Bedford, also feel let down. "We chose to invest with the Post Office because it was (partly) covered by the FSCS. We are surprised the Post Office can alter the terms under which we invested after the event. We do not want the complication of having to claim under another country's scheme, should it become necessary, or risk problems that can arise when a smaller economy such as Iceland or Ireland suffers a dire financial crisis."
David Turner, from Westmorland, Cumbria, told Guardian Money he, too, felt misled. "My wife and I put money into Anglo Irish Bank on 6 January because sales literature and the terms and conditions sent by the bank in late December stated that our savings would be covered by the FSCS, even though (we now learn) this had not been the case since November." He claimed the bank was "using false information" to attract customers from the UK and is asking it to return their money without penalty, "as we only invested it with them because of their assurances".
Toby van der Meer, head of retail banking at Anglo Irish in the UK, this week moved to reassure savers: "Under EU law, a bank can't be a member of another country's top-up scheme if their own offers greater protection - hence the letters. Any saver who wants to withdraw money from our fixed-rate products can request this, but it has to be done in writing. We will look at each one on a case-by-case basis."
The Post Office said: "Following a request from the FSA, we have written to customers informing them of the changes to the compensation arrangements linked to their savings account with the Post Office."
m.brignall@guardian.co.uk
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