FSA consults on extra deposit protection

The current maximum deposit protected by the FSCS is £50,000 per individual per bank or building society. But some bank customers occasionally have balances far in excess of this at a single institution as a result of transactions such as selling a house, receiving an inheritance or pension lump sum, or an award for personal injury.

Thomas Huertas, director, banking sector, at the FSA, said: “We are proposing that such transactional temporary high balances should have additional FSCS protection. Our proposals will protect people who have little or no choice about holding a high balance for a limited period over the current FSCS limit of £50,000 before they can diversify it, if they wish, between different institutions. However, the FSCS is not intended to protect consumers who keep high account balances for a long period, so the extra protection will be time limited.

“This change would contribute to the banking reform objective of providing effective compensation arrangements in which consumers have confidence.”

CP 09/11 is seeking views on whether temporary high balances should benefit from additional FSCS protection where they arise in connection with:

• sale of a primary residence and property bought for dependent relatives, for use as their primary residence;

• pension lump sums;

• inheritance;

• divorce settlements;

• redundancy payments;

• proceeds of pure protection contracts; or

• court awards and out-of-court settlements for personal injury.

The introduction of extra protection for temporary high balances will be dependent on discussions at EU level on the amended Deposit Guarantee Schemes Directive. Under this an EU-wide common deposit protection limit of €100,000 will come into force from the end of 2010. If a common fixed upper limit of this kind is adopted, the UK will not be able to have higher protection for temporary high balances unless it is agreed at EU level that an exception should be made. The EU Commission has been asked to carry out an assessment of this question by the end of 2009.