Depositor protection was until recently something that we paid little attention to, however these days thanks to the credit crunch it is now of great relevance. Even though you may not think it will effect you because you don't have enough to go over the current threshold I suggest you take a look at the concerns raised by the panel and the circumstances that could mean anbody falling foul of the current protection.
Issues that should be looked into are:
* Unlimited compensation (or to a maximum of £1million) would provide consumer confidence and avoid any future run on a bank increasing the destabilisation of a possibly containable issue. It may be that 98% of depositors will be covered by the new limited compensation arrangements, but it only covers around 70% of the amount deposited. Therefore it is possible to have a considerable run on a bank for 30% of deposits.
* Claim limits between brands and authorised firms as proposed would mean that consumers need to have a sophisticated knowledge, not only of the ownership of different banks, but also of their authorisation. It is unrealistic to expect every consumer to check on the FSA register to discover that some banking groups have more than one authorised firm (such as Royal Bank of Scotland and NatWest); whereas others operate several brands within a single authorisation (eg Halifax, Bank of Scotland, Birmingham Midshires), so a single compensation limit would apply across all a person's accounts in the latter case.
* Communication with consumers is needed to help consumers to understand the compensation system when they open and they manage any account. Firms should be expected to provide effective communication to cover all types of banking provision and consider the differing levels of financial capability of consumers. We have said that if limits apply across brands, banks would need to state regularly each customer's compensation limit with reference across that bank's brands, for example on their bank statement.
* Gross payouts will be important in ensuring that payouts are as speedy as possible and depositors with loans outstanding would still have access to liquid funds. We support the consultation's proposal that compensation on account and savings balances be paid separately to the consideration of any outstanding loans and mortgages.
* Continuity of service will be vital for consumers in the event of any bank failure. This is especially important for lower income consumers with basic bank accounts who may have no other account or credit card to obtain funds if there is any gap in their bank's service. We have asked for further research and debate here to ensure an effective system could be set up speedily.
* Transactional amounts are when people have a temporarily high balance due to property sales or redundancy payments, and these must be considered as a special case in the debate on limits on compensation cover.
David Lipsey, Chairman of the Financial Services Consumer Panel, said: "The purpose of any banking compensation scheme is to give consumers confidence that money they entrust to a bank, is safe in the event of the bank failing. For a compensation scheme to give that confidence, it must be clear to consumers so they understand how, when and to what extent their savings will be protected."
