The government is proposing to raise -- and speed up --the compensation paid out when banks bomb. This is great news for savers!
This article was originally sent to Fools as an email in our 'Summer Lolly' series.
After the near-collapse of Northern Rock last September, followed by its nationalisation in February, the government is desperate to boost public confidence in banks. Hence, the chancellor, Alistair Darling, has published a proposal to increase the amount of compensation paid to savers if a savings institution fails.
From £35,000 to £50,000, with faster payouts
At present, the Financial Services Compensation Scheme (FSCS) protects only the first £35,000 of savings held with any single institution. For joint accounts, this limit is doubled to £70,000. The chancellor proposes increasing this limit to £50,000, and £100,000 for joint accounts. There will be a consultation period regarding this proposal lasting until September. Therefore, a stronger safety-net for savings should be introduced in late 2008 or early 2009.
Thanks to the ongoing credit crunch, banks are short of ready cash. Thus, they were reluctant to hand over large sums in order to underpin the FSCS, as this would further reduce banks' liquidity. The good news for banks is that this extra protection may not require upfront funding. Instead, problems at one savings institution will trigger a cash call on other banks.
Another suggested improvement is to speed up the length of time it takes for the FSCS to compensate savers. At present, it could take several months before savers receive their payouts. Under the new regime, emergency payments may be made within seven days, with the remainder handed over shortly afterwards.
These measures will undoubtedly improve public confidence, but there will still be losers. Although £50,000 pounds is a huge sum to most of us, some people -- especially older savers -- have far more than this. Hence, a significant number of rich and elderly savers could still lose a proportion of their life savings under the new regime.
Playing it ultra-safe
It's important to note that the current £35,000 limit applies to savings with a single institution. Thus, by spreading your savings between different banks, you can make sure that you never have more than £35,000 with any single bank. Then again, banks usually trade under various different brands, so you need to be sure with which organisation you're dealing. In this article, we list eight major banking groups with separate banking registrations.
Alternatively, you can dump all of your savings with Northern Rock, as 100% of its deposits are underpinned by `the full faith and credit' of the British government. The same protection applies to all sums deposited with National Savings & Investments (NS&I), the government's very own piggy-bank.
In summary, if you have savings in excess of £35,000, you can gain extra peace of mind by dividing your rainy-day money, nest egg or life savings between high-interest savings accounts with different banks. Some people may regard this as being overly cautious, but it will help well-off savers to sleep more easily.