Financial Conduct Authority
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FSA announces changes to the Financial Services Compensation Scheme

The fast payout rules, which come into force on 31 December 2010, will mean many individuals and small businesses will receive compensation within a target of seven days, and all payments within 20 days as required under the Deposit Guarantee Schemes Directive. This will greatly reduce uncertainty for consumers.

An additional change is that in future, payouts will be made on a ‘gross’ basis, which will effectively ring fence the deposits if a depositor has savings and loans with the same firm. Currently, any outstanding loan or debt held with a firm would have been deducted from the amount of an individual’s or small business’ savings before compensation was paid out. The new rules change this arrangement and ensure that the customer's savings will be protected to the limit of £50,000 and not used to offset loans.

Consumer awareness of the FSCS will also be boosted by a new rule which comes into force from 1 January 2010, requiring firms to provide information on the existence of the FSCS and level of protection it offers to depositors, as well as proactively informing customers of any additional trading names under which the firm operates.

Hector Sants, chief executive of the FSA said:

'To help underpin confidence in our banking system, individuals and small businesses must feel confident that their money is well protected. The new rules announced today will help deliver that confidence, build on the successful role of the FSCS to date, and aim to further minimise the potential hardship faced by depositors if an institution defaults.

'The FSA, along with HM Treasury and Bank of England, have set the FSCS a challenging target of delivering payout in seven days. The systems requirements that the rules introduce for banks are crucial to enable the FSCS to deliver fast payout.'

Key changes announced today:

  • Ensuring that firms keep up-to-date information on customers to allow quick processing of claims by the FSCS if needed (the 'Single Customer View');
  • Changing the payout of compensation to avoid customers who hold loans and deposits with the same firm having any debt deducted from their compensation (i.e. gross payout);
  • Widening eligibility of the scheme to include more individuals;
  • Introducing a requirement that deposit takers must disclose the existence of the FSCS and the level of protection it offers to help familiarise consumers with the services it provides; and
  • If a firm operates under a number of trading names, it must tell its customers which of the different trading names are covered by a particular authorisation.

The FSA has introduced changes to the calculation of payment of compensation on term accounts, which will mean that compensation is calculated as at the date of default.

The FSA has also extended, until 30 December 2010, its interim rules which allow separate compensation cover for customers with deposits in two merging building societies. The same extension has been made for customers of a building society which merges with a subsidiary of another mutual society, and for customers who deposits are transferred from a failed firm to another deposit taker where they already have an account.

NOTES FOR EDITORS

  1. The Banking and Compensation Reform policy statement.
  2. The FSCS has played a key role in compensating eligible depositors of a number of deposit-taking firms which required resolution during 2008 and 2009.
  3. From 31 December 2010, the Deposit Guarantee Schemes Directive (DGSD), will require payout within twenty days. The FSA has aligned its rules with that requirement but expects that payout will be significantly faster with a target of seven days.
  4. Rules to cover compensation limits for temporary high deposit balances have been postponed until the European Union approach to this issue is confirmed.
  5. On 4 June 2009, the FSA consulted on the extension of its rules which allow separate compensation cover for customers with deposits in two merging building societies, for customers of a building society which merges with a subsidiary of another mutual society, and for customers who deposits are transferred from a failed firm to another deposit taker where they already have an account. It has gone ahead with the proposed extension of these rules.
  6. The FSA, along with the FSCS and the British Bankers’ Association (BBA), commissioned Ernst & Young to undertake research into the fast payout proposals. The report can be found on the FSA website.
  7. The FSA, along with the FSCS, commissioned Strictly Financial to undertake research into consumer understanding and awareness of compensation arrangements. The report can be found on the FSA website.
  8. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market;confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
  9. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.

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