DEPOSITORS temporarily sitting on large balances following house sales and personal injury payouts are to have extra cover if their bank fails.
The Bank of England (BoE) said that protection under the Financial Services Compensation Scheme would be raised from a maximum of £85,000 to as much as £1m to cover those briefly holding large amounts in their bank account.
The BoE is also introducing new rules to minimise disruption to accounts if a lender goes under, preventing Northern Rock-style panics. The goal is for accounts either to be quickly transferred to a new, solvent bank or for payouts to customers under the FSCS to be made in no more than seven days, instead of the current 20 days.
Protection for certain classes of insurance policy holder is also set to be boosted, to cover situations where a provider fails. The limit will be increased from 90 per cent to 100 per cent cover for annuities, claims arising from death or incapacity, and professional indemnity insurance.
The reforms aim to reduce the risk of panic and disruption after financial failures. The spectacle of depositors queueing up outside Northern Rock branches in 2007 contributed to one of the country’s worst-ever banking crises.
Andrew Bailey, head of the BoE’s Prudential Regulation Authority, said: “These proposals will allow customers to have continuous access to the money in their bank account – or receive payment from the FSCS if this is not possible.
“Additionally, the increase in the FSCS limits for certain types of insurance will mean policyholders who may find it difficult to obtain alternative cover, or who are locked into a product, have greater protection if their insurer fails.”
The overhaul of deposit guarantee protection is in response to new EU requirements and means that large non-financial companies will also be eligible for the scheme for the first time.
The higher insurance coverage for individual deposits will cover customers for six months. The new £1m ceiling will protect 99 per cent of house sales in England and Wales, and 92 per cent in London, and is aimed at removing the need for customers to lodge their deposits in several accounts to stay within the £85,000 limit. Protection on personal injury payouts would be unlimited.
The BoE is also introducing rules requiring accounts to be rapidly transferred to a healthy lender in the case of failure to ensure customers can continue to withdraw their money and use their cards. The shift of accounts would happen within 24 hours and would avoid customers having to wait several days for compensation payments.
The measures will result in higher costs for the industry. The changes to deposit guarantee protection and the streamlining of bank account access will lead to one-off costs of between £250m and £390m, and annual costs of between £35m and £50m.
FT
