Safety in numbers for savers as banks merge

Confirmation from the Financial Services Authority that compensation levels will be increased to £50,000 from October 7th is a "welcome boost" for worried savers, according to MoneyExpert.com.

But watchdogs need to do more to clarify how the rules for savers work in practice following recent bank and building society takeovers and rescue deals, the independent financial comparison website says.

Savers are increasingly confused about how the compensation limits apply to all bank offshoots following a takeover, says MoneyExpert.com. The Bradford & Bingley rescue deal has lead many savers to believe that deposits there are now guaranteed in the same way as savings at Northern Rock when that is not the case, it claims.

Recent deals include Bradford & Bingley's rescue by Abbey-owner Santander plus the same group's takeover of Alliance & Leicester, the takeover by Nationwide of Cheshire and Derbyshire Building Societies and the acquisition of HBOS by Lloyds TSB.

Current Financial Services Compensation Scheme rules mean every saver is entitled to £35,000 compensation in the event of a bank failure although that is increased to £50,000 with effect from October 7th. Rules apply to each saver in the event of a joint account and to all authorised institutions. If a bank is not authorised separately but relies on its parent company's authorisation then each saver is entitled to £50,000.

In practice this means a provider such as HBOS which operates Halifax, Bank of Scotland, Birmingham Midshires, Saga and the AA only offers one compensation payout as it only has one authorisation while Abbey and Alliance & Leicester will each have separate authorisations and would therefore offer two payouts.

Sean Gardner, Director of MoneyExpert.com, said: "The move to raise compensation levels to £50,000 is a welcome boost but there are lingering concerns about how the payouts would work in practice.

"Sticking all your cash under the mattress won't end the sleepless nights if you are really nervous about banks. Savers should focus on the facts and not the rumours.

"In the current climate it's easy to panic but the biggest risk for savers has to be giving up on banks and keeping all their money at home. It's important to remember that no major bank has gone bust and there are still some really competitive saving products available. By acting in haste and withdrawing money, savers will not only be missing out on interest but they will also be missing out on the security that banks offer. There is a much greater risk of being burgled than a bank going bust."

"That said though people are entitled to be confused and the FSA and FSCS could do more to clarify exactly how the compensation schemes work."