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ABI warns FSCS protection for large deposits is unnecessary

ABI director general Stephen Haddrill has written to the Chancellor Alistair Darling warning that reforms to the Financial Services Compensation Scheme “must not distort the market for savings or remove all risk”.

Haddrill wrote the letter following a meeting of the ABI board to review the implications of the Northern Rock saga.

In the letter, he says: “We supported the measures taken to restore confidence in Northern Rock and the market as a whole. However, those measures can only be a temporary solution. The public is now highly likely to perceive that one part of the financial services market will not be allowed to fail. That perception will distort savers’ decisions about where to put their money, drawing them towards cash deposits and away from investment products. It is a perception that will injure the investment and insurance market, whilst at the same time is unwelcome to the banking sector which is, and wishes to be seen as, capable of standing robustly on its own.

“We therefore strongly urge you to put the market back on level ground as soon as possible, operating without benefit of guarantees, actual or perceived. We believe that to achieve this, the Financial Services Compensation Scheme needs to be put on a new basis.

“Our initial analysis suggests that we should increase the £2000 threshold below which compensation is paid at 100 per cent. People will not be put off from withdrawing their deposits if the scheme only pays out 90 per cent. But we do not believe that such protection should apply to the largest depositors, who are in less need of full protection. We certainly believe that pushing the scheme’s limit up to £100,000 risks undermining the health of the UK market, by incentivising significant investment in products that offer high return but can be higher risk.

“More analysis is needed, but we see attractions in setting the 100 per cent threshold at about £30,000, at which level it would cover 98 per cent of savers and would be consistent with the levels for insurance products, thus avoiding market distortions.”

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