City watchdog looks at more saver protection

FSA considers raising depositor guarantee to £500,000

Depositors could have savings of up to £500,000 guaranteed under proposals to be considered by the UK City watchdog.

The Financial Services Authority on Tuesday began to seek views about the idea, which would provide extra protection for holders of temporary high-deposit balances if another bank were to fail.

Currently, savings of up to £50,000 are covered by the Financial Services Compensation Scheme, which is funded by a levy on the financial sector. Now, the regulator is to consider raising this substantially for depositors who had not had the time to split lump-sum payments such as house sales, pensions, inheritances or divorce settlements.

“This change would contribute to the banking reform objective of providing effective compensation arrangements in which consumers have confidence,” said Thomas Huertas, director of the banking sector at the FSA.

However, he warned that the FSCS was not designed to cover long-running high account balances so the time period the new rules could apply for would be limited.

The new scheme would also have to be examined under the European Union’s Deposit Guarantee Schemes Directive to see if there was scope to make the change.

“We’ve just published the directive and are going to bring forward a report by the end of this year. Further thinking is welcome,” an official said on Tuesday.

The proposal may encounter a mixed reaction within the EU. When Brussels acted last year to increase the protection for depositors, views were sharply divided among member states about how large a sum should be guaranteed.

Eventually, a two-step compromise was agreed that led schemes to guarantee at least €50,000 (£46,200) immediately. They are expected to raise that to €100,000 by the end of 2010 after a commission report due this year.

The changes come as a series of UK building societies have already complained about the high fees they have had to pay the FSCS this year.

In March Graham Beale, chief executive of Nationwide, Britain’s biggest building society, said the current scheme structure was “desperately unfair”.

The scheme paid out more than £20bn last year after five bank collapses – Bradford & Bingley, Heritable Bank, Kaupthing Singer & Friedlander, Landsbanki and London Scottish Bank.

That contrasted with a total pay-out of £1bn for the scheme’s first seven years of existence. It was forced to borrow the extra funds from the government.

The FSCS is only to repay interest on the loans for the next three years, but that amounts to £406m this year and an estimated £493m in 2010.

Unlike the general funds levied by the FSCS industrywide, the interest repayment relates only to the collapse of deposit-taking institutions and is therefore payable only by those – meaning it falls to banks and building societies.

Loretta Minghella, head of the FSCS, last month told the Treasury select committee that the tariff structure would be reviewed: “The compensation scheme has to be funded by the live industry and that does mean that good firms pay for bad firms that have gone, so there is always an element of unfairness about any of the bills that we produce for people.”

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UK deposit insurance


Savers are revolting. They did nothing to create the crisis, have suffered extreme declines in interest income and need reassurance their nest eggs are secure. Deposit-takers are still failing, as Dunfermline, Scotland’s largest building society, shows. Successive bank rescues have inculcated a dangerous belief that the government will stand behind retail depositors, regardless of whether their savings exceed the Financial Services Compensation Scheme’s £50,000 limit.