13 10 2014

Temporary guarantee will apply only to money temporarily deposited in a bank, for instance from a house sale or insurance claim.

Savings of up to £1m in collapsed banks are to be protected under new proposals from the Bank of England intended to avoid a Northern Rock-style run on a financial institution. The £1m limit will apply only to money temporarily deposited in a bank, for instance from a house sale or insurance claim, and will last for six months.

The Financial Services Compensation Scheme (FSCS) guarantees savings up to £85,000 in banks and building societies which run into financial difficulty and the six-month temporary guarantee will save customers having to race to break their savings up into £85,000 blocks to deposit in separate banks.

In a series of measures intend to protect customers when banks are on the brink of collapse, the Bank also called for changes to the way the customers are paid out of the FSCS. Customers who would have had to wait for their money for seven working days will instead be automatically transferred to another financial firm to avoid any confusion or delay when a company is failing. When customers of Northern Rock were concerned about their savings in September 2008 they queued around the block to take out their deposits – scenes that policymakers are keen not to repeat.

“These proposals aim to facilitate effective and prompt payment of compensation, to improve depositor confidence and this minimise the likelihood of a run on a deposit-taker,” the Bank of England said.

Publishing four detailed papers on how to handle financial firms in a crisis and avoid taxpayer bailouts, the Bank of England also set out plans to bolster protection for insurance policies. It also outlined how banks should comply with the ringfencing proposals set out by Sir John Vickers in his industry review three years ago, in which he said it was necessary to protect high street banks from investment banking operations.

The proposals have costs for the industry. For the £1m depositor protection, the one-off compliance cost to the industry is £390m – which Threadneedle Street described as 1% of operating costs – and up to 80% of this will fall on the biggest banks. The Bank of England said annual cost could be up to £50m. For ringfencing, the total cost has been put at between £1.7bn and £4.4bn.

The tougher protection for customers of insurance companies means that cover for 100% of the value of a product is being introduced, up from 90% for products where a customer would be impacted if they lost their cover, such as professional indemnity insurance or an annuity which is paying out. The increased cover for bank depositors is part of a directive set out by the EU and comes into effect in July. The other changes would come into effect in late 2016.