Compensation shake-up on the cards
Savers should be paid compensation if a bank collapses regardless of their level of debt with the same firm, the financial watchdog has proposed.
The Financial Services Authority has launched a consultation that could see the compensation rules given a major shake-up amid concerns that consumers are not fully protected from banks collapsing. Motions on the table include paying savers up to £50,000 in compensation even if they have a mortgage, loan or other form of debt with their bank.
Under current rules, this debt would be deducted from the total amount of compensation due. So, if you have £3,000 saved with a bank but also had a £1,000 personal loan, then you would only receive £2,000 back in compensation.
Other proposals include making payout within seven days and forcing banks to be clearer about how they and their associated brands are covered by the compensation scheme.
Hector Sants, chief executive at the FSA, says: “Experience in the last year has highlighted how essential compensation is and that it is imperative consumers understand and trust that they will be reimbursed if a bank, building society or credit union fails.”
Although the current scheme, the Financial Services Compensation Scheme (FSCS), has largely been successful in issuing refunds electronically to people hit by the collapse of Icesave, this process took weeks rather than days and the FSA wants to see payments made even faster.
Sants adds: “We recognise that to help underpin confidence in our banking system consumers must feel confident that their money is well protected – regardless of whether they ever have to claim compensation.”
In order to achieve faster payments, the FSA estimates that nearly £892 million will need to be invested in IT systems over the next five years.
Banks and other financial firms would also have to fork out an estimated £34.6 million to set-up and £4.2 million a year to maintain a system that proactively informs customers about how covered they really are.
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).
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.