Revolving door and entrance/exit of building.

Beyond the headlines some positive developments for depositors

03 July 2015

The PRA has today announced the existing level of deposit protection (£85,000) will be reduced to £75,000 after 31 December 2015.

The FSCS currently protects deposits up to £85,000 in the event of the failure of a bank, building society or credit. The PRA is required by the European Deposit Guarantee Schemes Directive (EDGSD) to recalculate the FSCS deposit protection limit every five years and set it at a sterling amount equivalent to €100,000; this recalculation took place on the basis of exchange rates today. Of course the timing of the recalculation is somewhat unfortunate in the light of the ongoing uncertainty with Greece and the consequent weakness of the euro.

For those depositors who were previously protected by the FSCS and who are contractually tied into products with balances above £75,000, the PRA is consulting on rules to help manage the impact of the limit change. Notwithstanding the fact that the consultation is ongoing until 24 July, the PRA has given a very strong indication as to what it will do at the conclusion of the consultation process. The PRA has stated that it intends to "allow depositors to withdraw funds between the old and new limits without penalty from 1 August 2015 until 31 December 2015 if they experience a decrease in deposit protection as a result of the limit change". Firms should assume that rules will be introduced shortly after the conclusion of the consultation to put this plan into effect.

In its press release, the PRA appears tacitly to acknowledge that the timing of the recalculation and the consequent reduction in the level of deposit protection will not be welcome news as it asserts that "the process and timing is specified by the Directive and is not at the PRA's discretion." In contrast the press release by the FSCS appears to be strangely upbeat, proclaiming that "savers are getting a new deposit guarantee limit from the New Year". The FSCS press release goes on to explain that the new limit "will protect more than 95% of all savers" and that "the overwhelming majority of people have £50,000 or less in savings". Though the truth is that few people will be impacted by these changes, at a time of crisis within the eurozone this news is unlikely to reassure depositors about the safety of their money even if it is covered by the new limit.

Whilst the reduction in the level of deposit protection will attract most of the headlines more welcome news (which is likely to impact upon far more people) is to be found in the announcement that some temporary high balances, resulting from certain specified events, will be covered. Depositors with temporary high balances will be covered up to £1 million for six months from the date on which the money is transferred into their account, or the date on which the depositor becomes entitled to the amount, whichever is later. This is to ensure that depositors are protected when they deposit funds over the £75,000 limit as a result of specified events. These specified events include a house sale or a 'life event' such as a divorce settlement or inheritance. The six months coverage is designed to allow depositors sufficient time to spread the risk between institutions to appropriately protect these funds.

The PRA has also announced a positive development for insurance policyholders, as it has changed the insurance limits for FSCS compensation in the event of an insurer failing. This increases the limit to 100% of cover for all long term policies, for professional indemnity insurance and claims arising from death or incapacity. The PRA has said that "this reflects the potential for significant adverse consequences to policyholders, and the wider financial system, of cover being disrupted".

The other change to be announced by the PRA has seen the EDGSD extend deposit protection to some categories of depositors that were not previously protected by the FSCS, such as large corporates and small local authorities (like parish councils). The new limit of £75,000 will apply to these newly protected depositors from today.