Bank of England proposes better protections for bank account holders and insurance policyholders

The regulator, which is part of the Bank of England, has proposed extending the Financial Services Compensation Scheme (FSCS) to apply to bank deposits that are temporarily higher than the £85,000 limit, and to cover 100% of certain insurance policies. It has also proposed new rules to ensure continuity for customers if a bank or insurer fails.

"These proposals will allow customers to have continuous access to the money in their bank account – or receive payment from the FSCS if this is not possible," said Andrew Bailey, the PRA's chief executive. "Additionally, the increase in 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 product, have greater protection if their insurer fails."

The FSCS can pay compensation to customers if a regulated financial services firm goes out of business or is otherwise unable to pay claims made against it. The scheme is funded by contributions from participating firms, classified according to the type of business that they carry out. According to the PRA's consultation paper, changes to deposit guarantee protection will result in one-off costs to the industry of between £250m and £390m, and annual costs of between £35m and £50m.

The PRA's consultation on depositor protection would implement the requirements of the EU's Deposit Guarantee Schemes Directive, which includes extending depositor protection to large companies. It would introduce additional coverage for deposits that are temporarily higher than the £85,000 limit, up to a maximum of £1 million for six months from the date of the deposit. The intention is that this would cover one-off events such as the proceeds of private property sales, life insurance payouts or compensation awards.

Customers would either be transferred to a new, solvent financial services provider automatically in the event of business failure; or would be able to receive compensation more quickly from the FSCS, according to the consultation. Accounts would be transferred to a new bank which successfully bids for the customers. The FSCS would be able to make most compensation payments within seven working days, instead of the current 20 day limit, under the proposed new regime.

For insurance policyholders, the PRA is proposing to increase FSCS protection in the event of an insurer failing from 90% to 100% of cover for annuities, pure protection products, claims arising from death or incapacity and professional indemnity insurance. The change is intended to reflect the potential consequences to policyholders of their cover being disrupted. FSCS protection would also be provided to policyholders post-transfer to a successor firm who had outstanding protected claims against an insurer whose claims were covered by the FSCS before the transfer.