FSA proposes extension of separate deposit protection limits

The Financial Services Authority (FSA) today proposes to extend until December 2010 interim rules which allow separate compensation cover for customers with deposits in two merging building societies.

It also proposes a similar extension for customers of a building society which merges with a subsidiary of another mutual society and for 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 30 September 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 (FSCS).

Jon Pain, the FSA's retail markets managing director, said: "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 European Union Deposit Guarantee Schemes Directive (DSGD) has recently been amended to introduce an EU-wide common deposit protection limit of €100,000 from 31 December 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, but even then it may not be clear what the eventual outcome will be. In these circumstances the FSA has decided that an extension to December 2010 is the right course now allowing a permanent decision to be made later when the final DGSD position is known.

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 and also continues to operate the business of the previous firm under its former name.

The proposed extension of these rules is set out in CP09/16 and consultation on this will conclude on 6 July 2009 to allow the necessary changes to be made in good time before the interim rules expire in September.

CP09/16 also proposes measures on how the FSA would supervise the ‘single customer view' (SCV) of deposits covered by the FSCS, if that goes forward. The FSA consulted on the SCV in CP09/3 published in January 2009. CP09/16 also makes proposals on how the FSCS would treat term deposit accounts when it pays compensation following a default. Consultation on these proposals will conclude on 4 September 2009.