THE safety of British savings was thrown into doubt last week after the Financial Services Compensation Scheme appeared to fail its first serious test.

About 300,000 savers have been unable for more than a week to get their hands on £4.5 billion held in Icesave accounts after the Icelandic internet bank’s parent company, Landsbanki, which also owns Heritable in the UK, collapsed.

Consumers were asking why they were not given warning after it became clear early in the week that the Financial Services Authority considered Landsbanki likely to be declared insolvent.

Sunday Times readers had been locked out of their accounts for as much as nine days and were told — incorrectly — that there were insufficient funds in their accounts to make a withdrawal.

On Wednesday, Alistair Darling, the chancellor, confirmed that Landsbanki had guaranteed that savers’ deposits would be fully refunded, and further signalled that the government would be prepared to step in where other banks defaulted.

However, critics doubted this would occur if a larger bank collapsed. And those promised a refund face an agonising wait.

Offshore savers with Landsbanki Guernsey may receive no compensation at all, while savers with deposits in Kaupthing Isle of Man, whose parent, Kaupthing, has been nationalised, are entitled to a maximum of £50,000.

More than half of Icesave accounts are supposed to be “easy access”, with 12% in cash Isas and 41% in easy-access savings.

Michael Fallon, Conservative vice-chairman of the Treasury select committee who has demanded the FSCS be comprehensively pre-funded by the industry, said: “The turmoil shows the Finance Bill needs to be toughened so that people can access their funds before they can be frozen by administrators — and get the money back within no more than a few days.”

Nick and Kathryn Rich, a retired couple of Harpenden, Hertfordshire, tried to transfer £20,000 from Icesave last Monday but were unable to move their money. They still have £11,000 in an Icesave cash Isa and £3,000 in their account as well as £35,000 with Kaupthing Edge, taken over last week by ING Direct, the Dutch bank.

Nick Rich, 57, said: “I’ve been a rate chaser. Now I’m beginning to wonder whether I shouldn’t be doing it anymore.”

We answer your questions.

What’s happened to my Icesave deposit?

You should be able to log on and see your money — but you will not be able to move it. The accounts were frozen after Icesave, the UK arm of Landsbanki, was taken over by the Icelandic government and the bank placed into receivership.

Will I get my savings back?

Alistair Darling promised on Wednesday that Icesave customers would be fully reimbursed, even above the FSCS’s limit of £50,000. However, it is not clear when. Customers have been told they will have to claim from the FSCS and will be sent an application form. Information on the FSCS is available at www.fscs.org.uk.

Why did the government have to step in?

Icesave is one of the foreign savings providers with “passport status” in the UK. This means Icesave was only part-protected by the FSCS, and customers of banks with passport status must first apply to the provider’s home scheme — which should compensate up to €20,000 (£16,000). After the home scheme has paid out, savers must apply to the FSCS for the rest, up to £50,000.

However, the passport scheme has been discredited — the Icelandic government said it could not compensate UK savers, forcing Darling to guarantee their deposits.

The Icelandic government has since pledged to reimburse the UK government for refunding Icesave customers.

Even then, Darling couldn’t be seen to let down those with savings in excess of £50,000. Many transferred from online rival ING when it cut rates in 2006 and then again last year.

Why the delay in getting my money back?

Unlike its counterparts in America andJapan, the FSCS is not pre-funded to guard against a bank run. Banks, building societies and credit unions contribute a small sum each year — only £27m last year.

As a result, the FSCS is arranging a loan from the Bank of England to repay customers. The industry would have to repay the loan but this could take some years.

EU rules say the FSCS has to pay out within three months, but experts said this was unlikely because of the numbers of customers involved and the size of the payout, and the government will not give a timetable.

What about my Isa savings?

Arrangements are being made to ensure all Isa customers of Icesave continue to benefit from the accounts’ tax-free status.

I’m a Kaupthing saver, what about me?

ING Direct, the UK arm of the Dutch savings provider, has bought the deposits business run by Kaupthing Edge, as well as Landsbanki’s Heritable accounts. ING said savers could access their accounts as usual.

Andrew Hagger, of Moneynet, the comparison site, said: “There is a disappointing irony in the fact that savers — many of whom turned their backs on ING when they saw their interest payments dwindle — have ended up back with ING.”

Kaupthing Singer & Friedlander and Kaupthing Isle of Man have not been sold, so savers who have accounts in the former should receive a letter from the FSCS. Offshore savers must apply to the Isle of Man’s Depositors’ Compensation Scheme, which guarantees £50,000.

What about other banks?

The best savings rate on the market at the moment is a fixed-rate bond paying 7.20% from ICICI, the Indian bank. Savers invest in the bank’s UK subsidiary, which is regulated by the FSA. Your savings up to £50,000 are fully guaranteed by the FSCS.

The next best rate is Anglo Irish Bank’s fixed-rate bond paying 7.05%. Anglo Irish, alongside the Bank of Ireland, which owns Post Office accounts, is not fully covered by the FSCS, so savers would need to apply first to the Irish scheme.

Ireland guarantees 100% of deposits, so there should be no need for savers to call on the UK scheme unless the Irish government is unable to pay.

ING is only part covered by the FSCS, so in the event of a default customers must apply to the Dutch scheme which covers deposits up to €100,000.

UK banks are fully regulated by the FSA — does this mean they are more secure?

Nationalisation of Northern Rock and Bradford & Bingley, the rescue of HBOS and violent share-price movements have highlighted the banks’ vulnerability.

However, the £500 billion government bailout has improved their prospects. The banks look unlikely to fail as long as the UK government remains able to borrow.

Analysts recommend keeping only up to £50,000 in any account (or less, as the limit covers interest as well as the original investment). Kevin Mountford of Moneysupermarket, a comparison site, said: “It pays not to have all your eggs in one basket.”

Can I rely on the FSCS?

Large holes remain in the scheme. If you have a mortgage with a bank that becomes insolvent your savings will be deducted from your debts.

The FSCS only guarantees up to £50,000. Other countries offer 100% guarantees.

Savers are advised to bank with institutions with strong credit ratings.

A guarantee that failed

DANNY PITKIN, 52, pictured with his wife Julia, has £32,000 trapped in an Icesave two-year, fixed-rate account due to expire in October next year paying 6.5%, and £6,000 in an easy access.

‘I always knew they were exposed but I fully believed we had their guarantee that we would be compensated and that would protect us,’ said Pitkin, who is semi-retired.

‘We were very relieved that the government reacted but we were disappointed that guarantee doesn’t mean guarantee.

‘The Icelandic bank did not honour their promise. It makes you wonder what you can trust.’