The Bank of England has released proposals outlining measures to better protect account-holdersí savings in instances of financial disaster, such as the crumpling of several global banks seen in 2008.
In a welcome move as far as savers are concerned, the BoE has declared that temporary deposits worth up to £1m in failing banks will be protected for up to 6 months. Deposits considered to be of a temporary nature include cash gained from a house sale, a compensation pay-out or set aside to fund a sizeable investment, such as a property purchase.
At present, the Financial Services Compensation Scheme (FSCS) safeguards up to £85,000 in the occurrence of bank collapsing, but the BoE believes this figure ought to be higher as it shifts its stance toward greater protection of peopleís assets. The Bankís commitment to this stance is accentuated by its other proposals, which include the automatic movement of an accountholderís funds to a different bank in the event of said accountholderís bank collapsing.
It is thought that 6 months of asset-protection will mean greater breathing room for savers struggling to place multiple sums of £85,000 in different banks to ensure all their money is protected. It will also mean an enhancement of convenience for this group, as they can deposit one lump sum and feel secure in the knowledge their cash is legally sheltered, despite the turmoil surrounding their bankís collapse.
ìThese proposals aim to facilitate effective and prompt payment of compensation, to improve depositor confidence and this minimise the likelihood of a run on a deposit-taker,î the Bank of England said.
The proposed reform to individualís savings in the event of a bank collapse is entailed within a series of four papers, released by the BoE today, focussed on how to handle financial institutions during a crisis without succumbing to another regressive taxpayer bailout. Other measures entailed within the BoEís proposals, includes heightened protection for insurance policies and step-step guidance for lenders enabling them to conform to the Independent Commission for Bankingís (ICBs) ring-fencing recommendations made in 2011.
Ring-fencing pertains to the separation of a bankís retail sector from its investment arm, minimising the risk to its clientelesí deposits. This separation extends to both entitiesí infrastructure, with the BoE necessitating a new board and CEO for a lenderís ring-fenced retail sector.
ìImproving the resilience and resolvability of firms has been at the heart of international and domestic reforms since the financial crisis,î said Bailey.
ìRingfencing will improve banksí resilience, by protecting them from shocks, and facilitate orderly resolution ñ both of which are needed for a stable financial system.î
A key proposed reform to the insurance sector would see customers receiving 100% compensation for any policy taken out with a collapsed insurer. At present, policyholders are only entitled to 90% of their life insurance in the event of an insurer collapsing.
The proposed changes are expected to set lenders back a one-off, hefty, collective outlay of up to £390m ñ about 1% of lendersí operating costs according to the BoE. Maintenance would cost a further £50m every year from thenceforth.
Andrew Bailey, deputy governor of the Bank of England, said: ìThese proposals will allow customers to have continuous access to the money in their bank account ñ or receive payment from the FSCS if this is not possible.
ìAdditionally, the increase in the FSCS limits for certain types of insurance will mean policyholders who may find it difficult to obtain alternative cover, or who are locked into a project, have greater protection if their insurer fails.î
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