Customers will receive cover for money earmarked for house purchases or following insurance pay-outs, extending protection that covers just £85,000 of individual savings
Savers would see deposits of up to £1m protected if a lender collapses under new proposals to prevent runs on banks.
The Bank of England said on Monday that if someone has a large amount of money in their account for reasons such as buying a house, they will be protected by the Financial Services Compensation Scheme.
Currently, £85,000 worth of savings are protected in the event of a bank failure, but the Bank said this should be extended. The increased protection, which would apply from six months after the money is transferred, applies to:
• Funds in an account because someone is buying a house
• Pay-outs from life insurance, divorce settlements and retirement or dismissal pay.
• Compensation for criminal injuries or wrongful conviction
Additionally, the Bank outlined proposals for savers' money to be authomatically moved to a new bank if their bank collapses. For example, a customer of Bank A would see his savings moved to Bank B if Bank A collapses.
Andrew Bailey, the Bank of England’s Deputy Governor, said the proposals would minimise shocks to consumers and the economy.
The plans come as part of wide-ranging reforms of the sector that will see banks’ retail businesses formally separated from their supposedly-riskier trading arms.
On Monday, the Bank of England gave further detail of these plans that it said would ensure that the “ring-fenced” retail businesses are independent from the rest of a bank. A ring-fenced bank will need a separate board, chief executive and chairman.
The Bank is consulting on the plans ahead of a January 6 deadline for banks to submit their ring-fencing plans, which must be implemented by 2019. The plans are intended to protect customers and prevent a repeat of the bank bail-outs of 2008.
The Bank also unveiled new proposals for customers to receive 100pc compensation for certain forms of insurance in the event of an insurer collapsing. Previously, customers were only covered up to 90pc for annuities and life or incapacity insurance.
Under European rules, savers’ deposits up to £85,000 are protected by the Financial Services Compensation Scheme (FSCS). However, this usually takes seven days. Under the Bank's proposals, customers would still be able to withdraw cash and send money, but these transactions would come from their new bank.
Going beyond the level of protection outlined by the EU, the Bank said large deposits up to £1m would be protected in the extended circumstances. It said this would cover 99pc of housing transactions in the UK, and 92pc in London.
This process of moving deposits would apply to smaller, non-ringfenced banks that fail. Larger institutions such as Lloyds, RBS and Barclays would be rescued by a “bail-in” process that would see investors’ money put into the bank.
The new bank would be chosen by a process in which banks would bid for the customers.
It estimated that implementing these changes would mean a one-off cost to the industry of up to £390m, which it said was less than 1pc of the affected firms’ operating costs, and up to £50m a year from then on.
It is hoped that the proposals will prevent a run on banks as seen in the event of Northern Rock’s collapse in 2007.
“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,” Mr Bailey said.
“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.”