Savings to get extra protection
Savers are to get additional protection in the event of a bank collapsing or getting into difficulties, the Chancellor, Alistair Darling has announced.
The plans, which are to go out to consultation, aim to avert a repeat of the uncertainty that surrounded the troubles in which Northern Rock found itself.
One recommendation is that the threshold on compensation for depositors’ savings be raised under the Financial Services Compensation Scheme from its current £35,000 to £50,000.
Banks will not be asked to pre-fund the compensation as this might place further pressure on their liquidity, although the Treasury has said that the option will remain open if it is deemed appropriate.
Instead, the government will use public funds to pay compensation, ensuring that savers will receive their money within days rather than the months it can take under the present system.
The covering funds would then be raised through a sale of the bank’s assets.
Other possible reforms include altering the basis on which compensation to savers is paid.
At present, protection for deposits is set against any loans which the saver may also have. Compensation is paid out on the difference between the two rather than on the whole sum of the savings. It has been suggested that, as part of the changes to the system, compensation may be liable on the whole of the savings without any deductions made to take loans into account.
Launching the reforms and consultation, Alistair Darling said: “No system of regulation can or should prevent the failure of each and every institution, but we must do everything possible to prevent problems which could pose a wider threat to stability.
“The challenge is to ensure that the authorities can act quickly and decisively where necessary to support financial institutions. These proposals will give the authorities the full range of powers they need.”
Which?, the consumer watchdog, said, however, that the plans were not sufficiently radical. Vera Cottrell, its finance campaigner, commented: “Payouts must be faster than the proposed seven days to minimise the disruption to people’s lives.”
The new proposals should come into force later in the year or in early 2009.
