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HBOS deal gives protection reforms fresh urgency

Lloyds TSB’s acquisition of HBOS brings together personal savings worth £65bn from Lloyds TSB and £139bn from HBOS, and creates a new imperative for reform of the Financial Service Compensation Scheme.

The FSCS currently guarantees up to £35,000 of an individual’s savings with any one institution, so savers with deposits in both HBOS brands and Lloyds TSB could find themselves above the limit.

Reform of compensation arrangements took a small step forward on September 16 when the Parliamentary Treasury Committee published Banking Reform, a report that makes a series of recommendations in areas such as depositor protection, the proposed Financial Stability Committee of the Bank of England, and work undertaken by the Financial Services Authority in relation to potentially failing financial institutions.

Committee chairman John McFall said: “There has been a focus on whether the appropriate compensation limit should be £35,000, £50,000 or £100,000 but this is irrelevant if we do not have a deposit protection system that actually works.

“It’s more important that banks are able to identify who their insured depositors are, and that the FSCS is able to process compensation claims quickly. The overarching priority for the FSCS must be to design a simple confidence-boosting scheme which does not rely on consumers having an unrealistic knowledge of banking licences, European directives and foreign compensation schemes.”

The report proposes that the tripartite authorities should stand firm in their determination to introduce tough deadlines for processing compensation payouts and that the authorities must ensure that a bank’s inability to calculate compensation immediately does not jeopardise the proposed seven-day payout target.

The report supports an element of pre-funding of the FSCS but recommends that such a scheme should be flexible enough for contributions to be suspended in times of economic crisis.

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