Savings protection to be reformed in the wake of US banking crisis

16 September 2008 / by Rebecca Sargent
A number of reforms have been proposed for a nervous UK banking system following the collapse of US investment banking giant Lehman Brothers yesterday.

As shares in the leading UK banks fall in reaction to US banks going under or narrowly escaping disaster, the UK is in need of reassurance that deposits are safe, and according to the Treasury, more needs to be done in order to ensure such financial stability.

As the UK system stands, a Financial Services Compensation Scheme (FSCS) is in place to protect depositors' money in savings accounts to the maximum amount of £35,000.

However, according to reports in the Financial Times today, shadow chancellor George Osborne is calling on the Government to increase this limit to £50,000 in order to protect more people.

But, according to a Treasury report released today 'Banking Reform', the most important things to consider, including the speed that compensation can be claimed in the event that a bank collapses.

Speaking of the report, which was originally drafted up after the Northern Rock crisis, Treasury Committee chairman, John McFall said: "There has been much focus on whether the appropriate compensation limit should be £35,000, £50,000 or £100,000. This is irrelevant if we do not possess a deposit protection scheme that actually works.

"It is far more important that banks be able to identify who their insured depositors are, and that the FSCS be able to process compensation claims quickly. The overarching priority for the FSCS must be to design a simple and confidence-boosting scheme, which does not rely on consumers having an unrealistic knowledge of banking licences, European directives and foreign compensation schemes."

Commenting on the report, head of banking at moneysupermarket.com Kevin Mountford, said: "From having little profile, the Financial Services Compensation Scheme and the role it plays has gained greater prominence since the run on Northern Rock just over a year ago. Suddenly the average saver is taking notice."

Touching on the fact that the report is in favour of contributions to the scheme varying depending on the bank's position, Mr Mountford added: "This seems a dangerous route to go down – we saw earlier this year how ill-founded rumours almost brought HBOS to its knees. So tarring a bank with the 'risky' brush could destroy consumer confidence in it, rather than going some way to repairing it."

City experts are expected to welcome these measures, as the future of UK banks once again comes into question while shares fall.

Investment adviser at The Share Centre, Graham Spooner commented: "Investors holding UK banking shares have had a torrid time of late and there's still no sign of any immediate improvement. Those considering buying into weakness at present should probably remain on the sidelines until the picture is a little clearer."

© Fair Investment Company Ltd