FSA move allows separate deposit protection limits

The Financial Services Authority (FSA) is introducing a rule change which will enable a building society which merges with another society to keep its separate compensation limit.

This follows recent concern that building society customers with savings in two merging societies can find that their combined investment in the successor society exceeds the £50,000 maximum deposit protection limit for the Financial Services Compensation Scheme (FSCS).

Jon Pain, FSA's retail markets managing director, said: "The exception we are introducing today to our compensation rules will allow a society which merges with another, and which continues to operate under its former name, to continue to have separate FSCS deposit limits for the pre-merger account holders of the business.

"Following mergers this will help existing savers with the societies who want to keep below the deposit protection limit and also reduce withdrawals from the successor society driven purely by compensation considerations on the part of savers."

The rule will also only apply if a successor society decides to continue to operate the business of the dissolved society under the name of that society and notifies the FSA.

Unlike banks, when two building societies merge they are legally required - if the depositors of the transferor society are to continue to have membership rights in the merged society - to operate as a single entity with a single FSA authorisation.

Any questions as to whether societies, which are merging, intend to take advantage of this new rule should be directed towards the societies themselves.

The new rules will operate on a temporary basis until September 2009 in order to address an immediate issue of consumer detriment which could transpire following any building society merger.

The FSA plans to consult in the New Year on wider reforms to the FSCS including the rules surrounding whether deposits are covered on a legal entity, a ‘brand' or an 'account' basis, and put the appropriate permanent solution in place during next year.