The Financial Services Authority is investigating whether the Financial Services Compensation Scheme should provide extra protection.

The financial services regulator has issued a consultation paper (CP 09/11) seeking views on whether the FSCS should provide extra protection for holders of temporary high deposit balances in the event of the failure of a UK bank, if the EU Deposit Guarantee Schemes Directive provides the UK with the scope to provide such protection.

The current maximum deposit protected by the FSCS is £50,000 per individual per bank or building society.

But some bank customers occasionally have balances far in excess of this at a single institution as a result of transactions such as selling a house, receiving an inheritance or pension lump sum, or an award for personal injury.

Thomas Huertas, director, banking sector, at the FSA, says, ‘We are proposing that such transactional temporary high balances should have additional FSCS protection. This 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 before they can diversify it, if they wish, between different institutions.

However, the FSCS is not intended to protect consumers who keep high account balances for a long period, so the extra protection will be time limited.

He adds, ‘This change would contribute to the banking reform objective of providing effective compensation arrangements in which consumers have confidence.’

CP 09/11 proposes a monetary limit of £500,000 and a time limit of six months for certain transactions, such as divorce settlements, pension lump sums, inheritance, redundancy payments or the proceeds from the sale of a home.

For personal injury awards and settlements there would be unlimited additional protection and the time limit would be 18 months to reflect that personal injury awards and settlements are often intended to provide an income for the rest of the injured person's life and that it may be difficult to assess for some time how the money should be allocated and invested between financial institutions.

The introduction of extra protection for temporary high balances will be dependent on discussions at EU level on the amended Deposit Guarantee Schemes Directive.  

Under this, an EU-wide common deposit protection limit of €100,000 will come into force from the end of 2010. If a common fixed upper limit of this kind is adopted, the UK will not be able to have higher protection for temporary high balances unless it is agreed at EU level that an exception should be made. The EU Commission has been asked to carry out an assessment of this question by the end of 2009.