Greater protection for savers
Savers’ money will no longer be used to offset any debt held with the same institution should the banking crisis lead to the collapse of more firms, under new rules just announced.
Currently, the first £50,000 of savers’ money is covered by the Financial Services Compensation Scheme (FSCS) should a bank or building society flop. However, if they have any outstanding debt with the firm in question – such as an overdraft, a loan or mortgage – this will be subtracted from the money they can expect to receive.
So, someone with £20,000 of savings and £15,000 of debt with a bank would only receive compensation of £5,000 from the FSCS.
However, new rules just announced will see savings ring-fenced from any debt with the same firm. The new rules mean the customer's savings will be protected to the limit of £50,000 and not used to offset loans.
Hector Sants, chief executive of the Financial Services Authority (FSA), says the new rule will help underpin confidence in the banking system. From 31 December 2010 new 'faster payment rules' will mean savers and other depositors should receive any compensation within a target of seven days.
“The FSA, along with HM Treasury and Bank of England, have set the FSCS a challenging target of delivering payout in seven days,” Sants adds.
And from 1 January 2010, all banks and building societies will be required to inform customers about their protection under the FSCS and proactively inform them of any additional trading names under which they operate.
This is because the FSCS rules state individual savers are protected for 100% of the first £50,000 per bank – this poses a problem for many savers with more than one account in the same bank, or several accounts in banks owned by the same parent group.
For example, Abbey and Bradford & Bingley share the same FSA licence, which means they are considered as one bank under the FSCS rules.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
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.