Savers may be able to receive compensation for up to £50,000 if their bank or building society collapses, if new proposals to improve financial stability are adopted.
The Treasury, Bank of England and the Financial Services Authority (FSA) published a consultation document in January 2008, setting out a number of proposals to protect savers in the event of 'another Northern Rock'. These included the creation of a new law that would force banks and building societies to make pre-payments into a compensation fund.
Savers who lost money as a result of a bank collapsing would then be paid compensation directly from the fund, to avoid delays.
The government has now updated the consultation, with an additional proposal to increase the amount of money protected by the Financial Services Compensation Scheme (FSCS) from £35,000 to £50,000.
The FSA will launch a further consultation in autumn 2008 on changes to the FSCS compensation limits for all sectors including saving deposits. It is likely to propose a £15,000 increase in the compensation limit for saving deposits to on a per person, per bank basis.
It will also take steps to ensure that full or partial compensation is paid out within seven days, in order to minimise disruption for deposit.
Back in January, the chancellor ruled out raising the protection limit, as proposed by the Conservative Party, instead suggesting a pre-paid compensation fund would be sufficient to increase consumer confidence in the safety of British banks.
At the time, trade bodies criticised the proposals. Richard Lambert, director-general of the Confederation of British Industry, said: "[It is important] to avoid any knee jerk responses, or the kind of heavy handed regulation that would kill competition and innovation in the financial services sector."
The British Bankers’ Association says it supports the need for the confidence in the banking sector.
But in a statement responding to the consultation, it says: "To focus on a specific amount of depositor protection is to miss the most important point: it is better not to need it at all. We have been talking with the government and regulators about intervening earlier should a bank get into difficulties to prevent a banking problem becoming a crisis."
The UK has a strong and robust banking system and a depositor protection scheme which already protects fully some 96 per cent of depositors. We will continue to work with the Government to ensure the safeguards to the UK's financial stability remain strong, effective and readily understood by the saving public.
The updated consultation also proposes new rules which will require banks to demonstrate they are sufficiently funded, through a 'special resolution scheme' that will permit the FSA, government and Bank of England to "take control" when a bank is judged to be failing. This could include nationalising more banks, or transfering assets on to a third-party.