The compensation cap, currently at £50,000, could be raised to £500,000 in certain circumstances if a proposal from the Financial Services Authority (FSA) is given the go ahead.

However, the new limit would only apply to balances for up to six months, and would not protect those customers who hold high balances over extended periods of time.

The FSA said that the higher limit would apply to savings account customers whose balances were temporarily high, for example, after selling a property; according to the FSA, the higher threshold would cover 95.5 per cent of all house sales.

The new limit could also apply to those customers who had just received large sums of money from other sources, such as receiving an inheritance, divorce settlements, redundancy payments, or pension lump sums.

The Financial Services Compensation Scheme (FSCS) currently protects savings account customers for only the first £50,000 with each savings provider, which means any amount over that limit in the account would be lost if their bank or building society was to fail.

“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,” explained Thomas Huertas, director of the banking sector at the FSA, “before they can diversify it, if they wish, between different institutions.”

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

Whether or not the FSA’s proposal comes to fruition depends on the Government successfully negotiating an exemption from European Union rules, which are soon expected to enforce a protection limit of €100,000 across the EU from 2010.

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