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FSA proposes extra deposit protection for temporary high balances

The FSA is consulting on whether the Financial Services Compensation Scheme should provide extra protection for holders of temporary high deposit balances in the event of the failure of a UK bank.

Currently the 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 and the FSA is considering whether the EU deposit guarantee schemes directive provides the UK with the scope to provide extra protection for such holders.

The FSA is considering whether extra protection should be provided on temporary high balances which have arisen from the sale of a house, receiving an inheritance or pension lump sum, divorce settlements, redundancy payments, proceeds of pure protection contracts or an award for personal injury.

These claims would have a monetary limit of £500,000 and a time limit of six months apart from personal injury awards and settlements where there would be unlimited additional protection and a time limit of 18 months.

The introduction of extra protection will hinge on EU discussions 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 this cap 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, a question which will be answered by the EU Commission by the year end.

FSA banking sector director Thomas Huertas says: “Our proposals 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.”


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