Increased protection planned for savers

Plans to increase the protection available to consumers who lose money when a bank collapses were announced today.

The Chancellor Alistair Darling is calling for people who lose their savings to be paid compensation within a week, while the amount of money that is protected could be increased from £35,000 to £50,000.

But he stopped short of calling for the Financial Services Compensation Scheme (FSCS) to be pre-funded, instead saying it would have the power to borrow money from the public sector to enable it to pay savers quickly.

The banking industry had expressed concerns about earlier proposals to pre-fund the scheme, warning that this would divert vital capital away from banks at a time when they were already under pressure from the credit crunch.

But the Government decided to keep its options open, saying it would include powers in the legislation that would enable it to introduce a pre-funded element if this was thought to be appropriate in the future.

The proposals aim to increase confidence in the UK's banking system following the near-collapse of Northern Rock last year, which sparked the first run on a bank for 150 years.

The Government plans to introduce legislation on the issues this autumn, following a further period of consultation.

It said today that enabling people to have quick and ready access to their savings was "crucial" for them to be able to continue paying bills and carrying out everyday financial transactions.

Under the current system it typically takes around one month to process claims relating to relatively small firms that fail, while consumers who lose money held by bigger institutions can face waits of several months for compensation.

But under today's proposals people would receive at least a portion of their money after seven days, with the balance paid within the next few days.

The Government said it would be introducing a range of measures to help speed up the process, including no longer requiring consumers to lodge a claim in order to get compensation.

Much of the consultation document covered new rules to be introduced to reduce the chances of another bank running into problems.

These include increasing the FSA's powers to obtain and share information on banks with the other authorities, as well as introducing legislation to enable the authorities to take control of a bank or building society that is judged to be failing.

The Government also outlined plans to increase the role played by the Bank of England in maintaining financial stability, including creating a Financial Stability Committee, as well as moves to ensure there is co-ordination between the Bank, Treasury and FSA.

It is also consulting on whether banks which receive liquidity support from the Bank of England should have to disclose it immediately.

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 British Bankers' Association said it supported the need for the public to be confident that their savings were safe.

But it said: "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."

Liberal Democrat shadow chancellor Vince Cable said: "If there is to be confidence in the banking system it is critical that there is rapid repayment from the Financial Services Compensation Fund when a bank goes under.

"The only way this can happen is for the banks to make 'up front' payments into the fund so that there is a pool of funds to draw on.

"We must be clear that deposit protection is the responsibility of the banks, not the taxpayer."

Vera Cottrell, personal finance campaigner at consumer group Which?, said: "These proposals still won't offer enough protection to people with savings.

"Payouts must be faster than the proposed seven days to minimise the disruption to people's lives."

Martin Lewis, creator of MoneySavingExpert.com, said: "Any rise in the amount (covered by the FSCS) is very welcome, hopefully not because it'll ever be practically needed, but more importantly, to persuade savers that their cash is safe.

"With growing mutterings about keeping cash under the mattress, over the last year we've run the risk of returning to the Victorian era. This latest announcement should help quell fears."

Peter Vipond, director of financial regulation at the Association of British Insurers, said: "It is vital that any change in legislation should not undermine the FSA's role of supervising financial institutions and promoting financial stability.

"There has to be clarity in the roles of the Treasury, the FSA and the Bank of England.

"Depositor protection is an important element in restoring confidence and making payments faster and raising awareness of the protection available will help. However, the best form of depositor protection is top-class supervision."