3 Big Changes To The Savings Protection Scheme
The FSA is proposing three major changes to the compensation scheme protecting your savings.
I've been impressed how fast people have been compensated by the Financial Services Compensation Scheme (FSCS). Hundreds of thousands of people received money from the scheme last year to restore the savings they lost in failed banks. What's more, most of them received the money inside two months. No technology has been specifically developed to confirm claim eligibility and to make payouts on a mass-scale, which makes this speed even more surprising.
Even so, the financial-services regulator, the Financial Services Authority (FSA), wants to make some improvements to its FSCS. Here are the main three changes it's proposing:
1. Rapid protection when your bank fails
Two months may seem fast for a logistical problem such as this, but it's a long time to worry about when you'll get your money back. Or if you'll get your money back. What's more, it may be that you really need your money immediately, e.g. for a house purchase that you've already agreed to, or because you've recently been made redundant.
In circumstances such as these, two months just isn't soon enough. That's why it's great, and quite astounding, news that the FSA is looking to ensure people get their money within seven days of a bank failing.
A bank collapses and everyone gets their money in a week. Is that possible? If it is, savers will feel more secure, and more savers will be happy to move their money back to the highest-paying savings accounts. People fled these accounts last year, because they are usually the most at risk. Even so, it makes sense to spread your savings across more than one institution.
This big change will require new IT systems at all the banks, which could take years to develop and install. It could also cost them £1bn but, between all the banks, even suffering as they are, that's not a huge amount. We shouldn't see much difference in the cost of financial products as a result; we'll still have difficulty finding cheap ones!
2. A beautiful payout
The FSCS is also consulting on a 'gross payout', which I assure you is less vulgar than it sounds. Under current rules, if you have debts with the same bank, the scheme's administrators usually rule that your savings must be used to offset the debt. This means you only get back the difference after paying off your debts, if there's anything left. The FSA is proposing that you get all your savings back.
You'll still owe the debt to someone (it could be another bank or the government) under the same terms of your existing credit contract. However, it won't mess up your financial plans in the way that seeing all your savings disappear in an immediate, large debt repayment does.
If this change goes ahead, we could firstly feel more confident having our savings and debts at the same institution, and secondly we could be more confident that our money plans won't get knocked about.
3. The Funny Bank's connected to the...?
Another proposal that the FSA has put up for consultation is that banks tell their customers how they are linked to each other, and how this affects our compensation claims.
Some banks are linked together under one banking group. In some cases, each bank still has its own licence with the FSA (such as Abbey and Alliance & Leicester, both part of Santander). This means that if you have savings in either of these banks within the group, they'll be protected separately under the FSCS.
However, in other instances the banks share one licence between them (for example, in the case of Halifax and Bank of Scotland). This means that you don't double the amount of savings compensation by splitting the savings between two of the banks within the group. Read Which Banks Are Connected? for more details.
By forcing banks to make it clear how their inter-relationships work, it should clear up a great deal of confusion and reduce worry.
Whether any of these changes will happen soon enough to help anyone during the current crisis is far from certain, but it'll be reassuring nevertheless, when it happens. That will be useful encouragement during our years of recovery.
I hope all these proposals turn into reality. In the past I've been critical of the FSA's dubious way of caring for the consumer, but at least it recognises that banks will also benefit from making customers feel safer when banks fail. Sorry, I mean if. That really was a sub-conscious slip.
The FSA usually squints myopically at small problems because it's not designed to think about minority groups, but rather the whole financial market. However, a small number of people are still awaiting compensation, and some others also don't receive compensation when perhaps they should. If the rules were tweaked a bit, and if great care is given to individuals' cases, we could help these people. Let's not forget them. Perhaps the FSA could work to sort out those issues whilst it waits for the consultation period to end on 6 April.
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