Savers' money still at risk
There is still a risk that savers could lose their money should a bank fail, despite the government’s protection scheme, a Parliamentary committee has warned.
In a banking reform report, the all-party Treasury Committee warns that unless the government does more to protect savers against failing banks there remains a serious risk that it will have to pump taxpayers' money into the banking system in a repeat of the Northern Rock incident.
It also notes that should a UK bank fail, savers would be “deprived” of their money for several months and would be forced to write off any funds over £35,000.
The report is a response to a consultation document, published in July by the Tripartite Authorities – the Treasury, Bank of England and Financial Services Authority (FSA) – that called on the government to raise the depositor protection limit from £35,000 to £50,000, and force banks to make pre-payments into a compensation fund.
The government is currently planning to introduce new laws to protect savers by the end of February 2009, with the exact details of how to achieve this decided at some point this autumn.
The Treasury Committee’s new report says reform of the depositor’s protection is desperately needed, with strict seven-day deadlines for compensation payments. However, it dismisses plans to increase the compensation limit beyond £35,000, warning this could encourage “irresponsible behaviour” by banks.
John McFall, Labour MP and chairman of the committee, says: “There has been much focus on whether the appropriate compensation limit should be £35,000, £50,000 or £100,000. This is irrelevant if we do not possess a deposit protection system that actually works. It is far more important that banks be able to identify who their insured depositors are, and that the FSCS be able to process compensation claims quickly.”
The FSCS compensation limit is currently set at 100% of the first £35,000 per person per bank. However, the rules vary slightly for foreign-owned saving banks that are not 100% regulated by the FSA.
For example, savers with Icelandic bank Icesave and Dutch firm ING Bank would have to apply to both the Financial Services Compensation Scheme and the equivalent scheme in their bank’s own country in order to get their money back.
There is also a confusion regarding banks that belong to the same group: for example, Royal Bank of Scotland and NatWest, both part of the RBS group, are regulated separately so they count as different banks. However, Halifax, Intelligence Finance and Birmingham Midshires are regulated as part of the HBOS group and therefore count as just one institution.
The Treasury Committee says these differences are not apparent enough to consumers. It believes that banks must make it clearer to savers how their money is protected, so that the onus isn’t on the consumer to find out themselves.
Although the committee effectively rules out raising the depositor protection limit beyond £35,000, it does suggest reforms to the way compensation is calculated.
Currently, the FSCS provides compensation up to £35,000, with any money owed to the bank – such as mortgages or personal loans – deducted.
The Treasury Committee says this is unfair and calls for the FSCS to move to gross payments.
* The Financial Services Consumer Panel (FSCP) says that it would still like to see unlimited compensation for savers. It argues that although the current limit protects 98% of depositors, it only covers around 70% of the amount deposited. This, it says, still poses a risk of a run on a bank.
However, it agrees that claims should be dealt with on a per brand rather than per bank basis, and that compensation payments should not have any deductions made. David Lipsey, chairman of the FSCP, says: "For a compensation scheme to give [consumers] confidence, it must be clear to consumers so they understand how, when and to what extent their savings will be protected."
* George Osborne, the shadow chancellor, says urgent action is needed to protect savers, including the deposit protection level raised to £50,000 and faster payouts.
In an open letter to Alistair Darling, Osborne writes: “More than a year on from the run on Northern Rock, we are still operating under the old system that so manifestly failed… You yourself say we are facing the worst economic crisis for 60 years. It is time to stop dithering and instead act decisively.”
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
The Financial Services Compensation Scheme is the compensation fund of last resort for customers of authorised financial services firms. If a firm becomes insolvent or ceases trading, the FSCS may be able to pay compensation to its customers. Limits apply to how much compensation the FSCS is able to pay, and those limits vary between different types of financial products. However, to qualify for compensation, the firm you were dealing with must be authorised by the Financial Services Authority (FSA).