Compensation plan loophole may hit savers

Nervous savers spooked by the Northern Rock banking scandal have been warned that improvements to the deposit protection compensation lifeboat may still leave them vulnerable to losses in the event of another crisis.

Banking analysts said that while the Chancellor increased the amount of money protected by the Financial Services Compensation Scheme yesterday, a serious loophole could leave savings in jeopardy. The scheme will pay out just once in the event of a bank failure, even if savers have several accounts with the group in question.

Alistair Darling has increased compensation for depositors with savings accounts in defaulting banks and building societies to 100 per cent of the first £35,000 of losses, but this applies only to each firm that is separately authorised by the Financial Services Authority.

Several big brands such as Abbey and HBOS have joint authorisation for their divisions and brands, or have a single authorisation for their parent company. In this case, if a saver held savings accounts in separate units of the bank and the parent went bust, only compensation up to an aggregate of £35,000 for all accounts would be paid.

In other words, if a banking group were to go under, savers with £35,000 in each of several accounts would be able to claim compensation just once.

The loophole is important because of the growing fragmentation of the UK's savings market. The HBOS group, for example, offers savings accounts through brands including Bank of Scotland, Halifax, Birmingham Midshires, Intelligent Finance and the AA. Several other groups also have a series of brands held under one authorisation.

Robin Gordon-Walker, a spokesman for the Financial Services Authority, the UK's chief City watchdog, urged savers to ask their banks about the issue – and to consider holding no more than £35,000 with any one group.

Sue Hannums, savings manager at the independent financial adviser AWD Chase de Vere, said: "People just didn't think about whether their money was safe. We are seeing people moving their money into the Government-backed Nat-ional Savings Bank in order to be safe." She warned: "Even people in the industry have never thought about that – if you are nervous about your money you should certainly opt for different savings institutions."

Clive Briault, the FSA's managing director of retail markets, said: "The action we have taken is designed to help reassure depositors with accounts up to £35,000 that they are 100 per cent covered. The Government has indicated that it will propose further changes relating to financial services compensation arrangements designed to give consumers confidence that their savings and deposits are safe and secure."

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