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Last Updated: Monday, 1 October 2007, 14:58 GMT 15:58 UK
Fresh rules to guarantee savings
Chancellor Alistair Darling
Mr Darling had already protected savings with Northern Rock
The scheme to protect savers with money deposited in UK banks and building societies has been expanded, following the recent run on the Northern Rock.

The current deposit protection scheme will now guarantee a saver's first 35,000 of savings.

Chancellor Alistair Darling said this was the first stage of a wider reform to the system that protects customers.

But the British Bankers' Association (BBA) said more extensive reforms would be harder to achieve.

Savers need to be sure that they can get their money out if they need to
Alistair Darling

"No saver in Northern Rock came close to needing the scheme, and ours remains one of the most generous in Europe," said the BBA's chief executive Angela Knight.

"We still need urgently to understand why our regulatory framework did not break the chain of events which resulted in such dramatic scenes outside branches of a British bank," she added.

Compensation

The Chancellor has used his existing powers to raise the limits of the current Financial Services Compensation Scheme (FSCS) with immediate effect.

Any additional legislation may protect savings of up to 100,000 and attempt to ring fence savers' assets should a bank go bust.

"Savers need to be sure that they can get their money out if they need to," said Mr Darling.

If it is very expensive then ultimately, of course, there will be consequences in terms of costs, charging structures and so forth
Angela Knight, BBA

"But for the future, we now need to put in place a better regime," he explained.

Under the old FSCS levels, savers were given a guarantee for 100% of just their first 2,000 of their savings, and 90% of the next 33,000.

This would have left them with just 31,700 of their savings had the Northern Rock gone into administration.

This was not enough to calm nerves when the bank had to go to the Bank of England for an emergency loan.

Thousands of savers queued outside Northern Rock branches or went online and withdrew several billion pounds over just a few days - until the Treasury stepped in and guaranteed all their savings.

No unlimited guarantee

Mr Darling told BBC Radio 4's Today programme that the first 35,000 of people's savings would be protected straight away.

During the second stage of the reform process he hoped to "separate savers' money from the rest of a bank's assets, so that savers' money is as much protected as possible".

To do this the government needed to go through a process of consultation with the banking industry, followed by new legislation, Mr Darling said.

The chancellor, however, ruled out an unlimited protection of savings.

He said the government would study savings protection schemes around the world and indicated that the government might aim to protect savings up to 100,000.

'Market distortion'

Detailing the changes the Financial Services Authority said that "at a time of market uncertainty" it was important for consumers to know their deposits were properly protected.

The new rules apply only to customers of banks and building societies that default on or after 1 October 2007.

The Association of British Insurers warned that a more generous savings guarantee scheme could distort the savings market, drawing people towards cash savings and away from investment products.

Angela Knight of the BBA warned that higher compensation levels might mean higher charges for bank customers.

"If it is very expensive then ultimately, of course, there will be consequences in terms of costs, charging structures and so forth," she told the BBC.

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