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Last Updated: Tuesday, 6 November 2007, 13:54 GMT
New bank protection laws imminent
Chancellor Alistair Darling
Improving confidence in banks is Alistair Darling's top priority
A new law will be introduced in the coming year to improve safeguards for banks in danger of going bust, and to protect savers' money.

The government wants to reform the current system which has been widely criticised in the wake of the near collapse of the Northern Rock bank.

The new laws may include a higher level of protection for depositors and a new legal regime to rescue insolvent banks.

Discussion on the shape of the new regulations started in October.

In her annual speech outlining the government's plans for new laws, the Queen said: "Legislation will be brought forward to protect depositors and ensure confidence in the banking system."

More consultation

Details of what may be in the new legislation are still hazy but a formal consultation paper will be published early next year.

"This [forthcoming] regime would mean depositors are insulated from a bank that has failed, greater compensation for them and certainty their compensation can be paid out quickly," Chancellor Alistair Darling told MPs last month.

The British Bankers' Association said: "We are currently looking at the discussion paper and looking forward to working with the government over the consultation paper and the legislation when it comes."

In the immediate aftermath of the run on the Northern Rock, the government upgraded the existing Financial Services Compensation Scheme (FSCS).

This means that savers now get 100% compensation for the first 35,000 of their savings if their bank becomes insolvent.

Mr Darling had suggested that this might be raised to 100,000, but this idea now appears to have been dropped.

The government's ideas are now focused more strongly on introducing a new insolvency regime, just for banks and building societies, so that they can be taken over and rescued quickly.

Lack of clarity

One beneficial effect of that would be the swift return of money to savers.

The government stressed that it "wants to be reasonably assured that the benefits of the proposed changes exceed the costs".

But Martin Lewis, creator of Moneysavingexpert.com, criticised the lack of detail in today's announcements.

"The financial protection currently offered is abysmally confusing; and this has done nothing to help," he said.

He highlighted the anomaly under the current rules whereby the 35,000 threshold applies per bank, and not per account, adding that the rules of what constitutes a bank in these circumstances were "virtually impenetrable."

"If you've money in the Halifax, Bank of Scotland and Birmingham Midshires, all part of HBOS you've only 35,000 of protection. Yet if you've money in RBS and Nat West, both part of RBS Group you've 35,000 protected in each," he said.

"After a year of panic and confusion, with the first run on a bank in living memory; the one thing everyone wants, and still waits for, is clarity."

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