Darling's little something for savers

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The Chancellor, Alistair Darling, is to announce an immediate increase in protection for bank and building society depositors. They will enjoy, from today, 100 per cent protection on the first £35,000 of their deposits, a relatively modest increase on the current arrangement and far less than the £100,000 being talked about only a few weeks ago.

Under the current rules of the Financial Services Compensation Scheme (FSCS), savers are assured of 100 per cent of the first £2,000, and 90 per cent of the next £33,000 of their deposits. Thus, if a British bank goes bust, savers could receive a maximum of £31,700.

The new higher limit of £35,000 is still lower than that operating in the United States (around £50,000 at current exchange rates), but it is generally higher than that prevailing in other EU nations.

It is said to be the first step in an urgent reform of the deposit protection system. It falls some way short of the Government's apparent first instinct, which was to raise the limit to £100,000. That was criticised by the British Bankers' Association and the Association of British Insurers, among others, who were concerned about the costs to the industry of such a change. Angela Knight, chief executive of the BBA, said a few days ago that "we accept that reform of the existing scheme, but there are questions to answer about how it will be funded. The £100,000 figure seems very high".

The ABI had felt that "the public is now highly likely to perceive that one part of the financial services market will not be allowed to fail. That perception will distort savers' decisions about where to put their money, drawing them towards cash deposits and away from investment products."

Only investors with National Savings and, famously, established Northern Rock depositors enjoy an unlimited Treasury guarantee that they'll get their money back.

Last week, The Independent revealed that the Financial Services Compensation Scheme had only £4.4m left to pay to investors. Some £2bn was withdrawn by Northern Rock investors in a few days during the run on that institution last month.

At a meeting of the Business Council for Britain, Mr Darling is expected to say: "In a global financial market, no country or company can insulate itself entirely from international risk. So if a problem does happen, we need to be able to deal with it quickly to maintain stability and confidence. Savers need to be sure that they can get their money out if they need to. That is why in the current market circumstances we are providing a guarantee for Northern Rock's depositors.

"But for the future, we now need to put in place a better regime – a new orderly process with a better protection scheme as its foundation. This will be just the first stage of our reforms that I will set out to Parliament and then, with the FSA, consult on."

The FSCS was set up in 1997. It is funded by a levy on the financial services industry, and provides protection for depositors and investors in the event of failure of an authorised firm.

Hector Sants, chief executive of the Financial Services Authority, has previously acknowledged the inadequacies of the current system: "It does seem reasonable to conclude that that may well have been a contributing factor here to the loss of confidence with Northern Rock depositors."

Mr Darling is also expected to cover the wider scene and will set out more of the Government's thinking on how international financial regulation should be reformed, post-crisis.

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