The scheme to protect savers with money deposited in UK banks and building societies has been expanded.
The scheme to protect savers with money deposited in UK banks and building societies has been expanded, following the recent run on the Northern Rock.
Under the guarantee - promised after the run on Northern Rock - customers' first £35,000 are now fully protected.
The current deposit protection scheme will now guarantee a saver's first £35,000 of savings.
Chancellor Alistair Darling told the BBC that this was the first stage of a wider process to reform the system that protects UK savers.
Chancellor Alistair Darling said this was the first stage of a wider reform to the system that protects customers.
New legislation could protect savings of up to £100,000 and specially protect savers' assets should a bank go bust.
But the British Bankers' Association (BBA) said more extensive reforms would be harder to achieve.
Under the old Financial Services Compensation Scheme, savers were given a guarantee for 100% of their first £2,000 of their savings, and 90% of the next £33,000. This would have left them with just £31,700 of their savings had a bank gone into administration.
Savers need to be sure that they can get their money out if they need to Alistair Darling
This was not enough to calm nerves when UK bank Northern Rock had to go to the Bank of England for an emergency loan.
"No saver in Northern Rock came close to needing the scheme, and ours remains one of the most generous in Europe," said the BBA's chief executive Angela Knight.
"We still need urgently to understand why our regulatory framework did not break the chain of events which resulted in such dramatic scenes outside branches of a British bank," she added.
Compensation
The Chancellor has used his existing powers to raise the limits of the current Financial Services Compensation Scheme (FSCS) with immediate effect.
Any additional legislation may protect savings of up to £100,000 and attempt to ring fence savers' assets should a bank go bust.
"Savers need to be sure that they can get their money out if they need to," said Mr Darling.
If it is very expensive then ultimately, of course, there will be consequences in terms of costs, charging structures and so forth Angela Knight, BBA
"But for the future, we now need to put in place a better regime," he explained.
Under the old FSCS levels, savers were given a guarantee for 100% of just their first £2,000 of their savings, and 90% of the next £33,000.
This would have left them with just £31,700 of their savings had the Northern Rock gone into administration.
This was not enough to calm nerves when the bank had to go to the Bank of England for an emergency loan.
Thousands of savers queued outside Northern Rock branches or went online and withdrew several billion pounds over just a few days - until the Treasury stepped in and guaranteed all their savings.
Thousands of savers queued outside Northern Rock branches or went online and withdrew several billion pounds over just a few days - until the Treasury stepped in and guaranteed all their savings.
No unlimited guarantee
No unlimited guarantee
Mr Darling told BBC Radio 4's Today programme that by using administrative powers he could ensure that 100% of the first £35,000 of savings would be protected straight away.
Mr Darling told BBC Radio 4's Today programme that the first £35,000 of people's savings would be protected straight away.
During the second stage of the reform process he hoped to "separate savers' money from the rest of a bank's assets, so that savers' money is as much protected as possible".
During the second stage of the reform process he hoped to "separate savers' money from the rest of a bank's assets, so that savers' money is as much protected as possible".
To do this the government needed to go through a process of consultation with the banking industry, followed by new legislation, Mr Darling said.
To do this the government needed to go through a process of consultation with the banking industry, followed by new legislation, Mr Darling said.
The chancellor, however, ruled out an unlimited protection of savings.
The chancellor, however, ruled out an unlimited protection of savings.
He said the government would study savings protection schemes around the world and indicated that the government might aim to protect savings up to £100,000.
He said the government would study savings protection schemes around the world and indicated that the government might aim to protect savings up to £100,000.
'Market distortion'
'Market distortion'
Detailing the changes the Financial Services Authority said that "at a time of market uncertainty" it was important for consumers to know their deposits were properly protected.
Detailing the changes the Financial Services Authority said that "at a time of market uncertainty" it was important for consumers to know their deposits were properly protected.
The new rules apply only to customers of banks and building societies that default on or after 1 October 2007.
The new rules apply only to customers of banks and building societies that default on or after 1 October 2007.
The Association of British Insurers has warned that a more generous savings guarantee scheme could distort the savings market, drawing people towards cash savings and away from investment products.
The Association of British Insurers warned that a more generous savings guarantee scheme could distort the savings market, drawing people towards cash savings and away from investment products.
BBC political correspondent James Hardy said that Mr Darling was stepping up efforts to restore public confidence in the banking system after Northern Rock's near-collapse.
Angela Knight of the BBA warned that higher compensation levels might mean higher charges for bank customers.
Previously, the chancellor had guaranteed protection for Northern Rock's savers, but the new guarantee applies to every bank and building society.
"If it is very expensive then ultimately, of course, there will be consequences in terms of costs, charging structures and so forth," she told the BBC.
Do you have savings? Are you satisfied that this move will protect your cash? Or should the government do more? Send us your comments using the form below:
Do you have savings? Are you satisfied that this move will protect your cash? Or should the government do more? Send us your comments using the form below:
