Bank of England proposes savings protection limit of £1m
Savings of up to £1m in collapsed banks are to be protected under new proposals from the Bank of England intended to avoid a Northern Rock-style run on a financial institution.
The £1m limit will apply only to money temporarily deposited in a bank, for instance from a house sale or insurance claim, and will last for six months.
The Financial Services Compensation Scheme (FSCS) guarantees savings up to £85,000 in banks and building societies which run into financial difficulty and the six-month temporary guarantee will save customers having to race to break their savings up into £85,000 blocks to deposit in separate banks.
In a series of measures intend to protect customers when banks are on the brink of collapse, the Bank also called for changes to the way the customers are paid out of the FSCS. Customers who would have had to wait for their money for seven working days will instead be automatically transferred to another financial firm to avoid any confusion or delay when a company is failing. When customers of Northern Rock were concerned about their savings in September 2008 they queued around the block to take out their deposits – scenes that policymakers are keen not to repeat.
“These proposals aim to facilitate effective and prompt payment of compensation, to improve depositor confidence and this minimise the likelihood of a run on a deposit-taker,” the Bank of England said.
Publishing four detailed papers on how to handle financial firms in a crisis and avoid taxpayer bailouts, the Bank of England also set out plans to bolster protection for insurance policies. It also outlined how banks should comply with the ringfencing proposals set out by Sir John Vickers in his industry review three years ago, in which he said it was necessary to protect high street banks from investment banking operations.
The proposals have costs for the industry. For the £1m depositor protection, the one-off compliance cost to the industry is £390m – which Threadneedle Street described as 1% of operating costs – and up to 80% of this will fall on the biggest banks. The Bank of England said annual cost could be up to £50m. For ringfencing, the total cost has been put at between £1.7bn and £4.4bn.
The tougher protection for customers of insurance companies means that cover for 100% of the value of a product is being introduced, up from 90% for products where a customer would be impacted if they lost their cover, such as professional indemnity insurance or an annuity which is paying out. The increased cover for bank depositors is part of a directive set out by the EU and comes into effect in July. The other changes would come into effect in late 2016.
Andrew Bailey, deputy governor of the Bank of England, said: “These proposals will allow customers to have continuous access to the money in their bank account – or receive payment from the FSCS if this is not possible. ”
The Bank’s consultation on ringfencing provoked some controversy as it did not provide details of how much capital would need to be held by the protected high street unit. Even so, the Bank of England is requiring banks to submit their plans to erect the ringfence by the end of this year, which John Liver, a partner at EY, said was “a bit of game changer” as not all the rules will be finalised by then.
The ringfenced bank, which must be created by 1 January 2019, will not be allowed to share services with the non-ringfenced part. Under the proposals, being consulted on until January, the two entities can share only a third of their board members and cannot share a chairman or chief executive.
Andrew Tyrie, chairman of the Treasury select committee, said evidence would be taken from Bank officials in the coming weeks. “The more complex the rules the more vulnerable they are to gaming. It is up to the leadership of banks to implement these rules constructively. Equally important is the exercise of judgement by the regulator to ensure robust ringfencing stays in place as banking evolve,” he said.
Douglas Flint, chairman of HSBC, has called for the ringfencing rules to be delayed while a competition and markets Authority investigation takes place.
- The Guardian,