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FSA to extend FSCS cover for mergers

The FSA is today proposing to extend interim rules which allow separate compensation cover for customers with deposits in two merging building societies until December 2010.

It is proposing a similar extension for customers of a building society that merges with a subsidiary of another mutual society. It will also apply to customers whose deposits are transferred from a failed firm to another deposit taker where they already have an account.

The rules, due to expire on September 30, 2009, were introduced following concerns that customers with savings in two merging societies, or whose deposits were transferred, could find their combined investment exceeded the £50,000 maximum deposit protection limit for the Financial Services Compensation Scheme.

The separate compensation arrangements apply only if the new firm formed by a merger, or a firm that takes over deposits from another deposit taker, informs the FSA beforehand that it wishes them to apply. It must also continue to operate the business of the previous firm under its former name.

FSA’s retail markets managing director Jon Pain says: “The interim rules were introduced on a temporary basis to reassure customers involved in particular mergers or transfers. They helped existing savers who wished to keep below the deposit protection limit and also served to reduce withdrawals by savers from successor firms driven purely by compensation considerations.

“We now propose to extend the operation of these rules until December 2010, by which time it should be clear what changes will be made to the EU deposit guarantee schemes directive. We will then be able to put in place permanent arrangements which will take account of any new EU requirements.”

The EU deposit guarantee schemes directive has recently been amended to introduce an EU-wide common deposit protection limit of €100,000 from December 31, 2010.

But this amendment will only take effect if the EU Commission reports that such a change would be appropriate and financially viable for all EU member states. The Commission’s report is due by the end of this year.

BSA head of savings policy Brian Morris says: “Today’s announcement is a welcome, sensible move and means members of societies that have merged, or whose deposits have been transferred to another society, will continue to enjoy the same levels of protection as if the merger or transfer had not occurred.

“It would not be appropriate if moves, such as mergers, designed to reassure and protect members led to a reduction in the levels of FSCS protection for members who have savings in both entities.”

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