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Darling to boost saver protection

01/07/2008

Chancellor Alistair Darling today unveiled plans for new protection for savers, to stop a repeat of the Northern Rock debacle.

Under new proposals under consultation, higher levels of savings in a single bank could be guaranteed if a bank fails.

The current system of deposit protection came under fire during the Northern Rock crisis – with a lack of confidence leading to the queues outside the Novocastrian mortgage lender.

Mr 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."

The existing Financial Services Compensation Scheme (FSCS) covers savings up to £35,000 in each bank. But at the time of the Northern Rock collapse only 100 per cent of the first £2,000 was covered and 90 per cent of savings over that level to £35,000.

Initial figures bandied around for protection had hit as high as £100,000, but Mr Darling is expected to step back from that figure due to pressures from the banks.

Banks have also pushed the chancellor to ensure they would only have to pay into a protection scheme if another bank fails, and not pay into a scheme in advance to set up an emergency fund.

The British Bankers' Association (BBA) claims doing so now would hit lenders now when liquidity problems mean spare funds are scarce.

"There is no desire not to pay out in the event of a problem," a BBA spokesperson said.

"What we want is an improved scheme to allow investors to get their cash quickly."

She added regulations were also needed to stop a problem becoming a crisis, as happen to Northern Rock.

The BBA is also against an increase in protection over £35,000, which it claims now covers 95 per cent of savers.

"A simpler option is for savers to spread risk," she said, by putting cash in different bank, than increasing the amount protected to aid a marginally smaller group.

Confusion also exists in the current system over whether savings in separate banks are protected if two or more banks collapsed.

The FSCS maintains the current £35,000 protection stands for each account a person holds in different banks, so in the unlikely event of two separate firms collapsing a customer with £35,000 in both receive £70,000.

But the rules are unclear and experts point out only a single claim could be made if more than one bank failed within a single group failed.

New rules are set to come into force in the autumn after a consultation.