Raising the £35,000 savings guarantee?

Oblivion

As the Northern Rock fiasco played out, the Chancellor and the PM made great efforts to reassure the public that their savings would be safe, and that they would be reviewing with the FSA the savings guarantee limit with a view to increasing it. I believe at one point that Chancellor Darling even went as far as saying that a £100,000 guarantee might be on the cards, but I think the banks were less keen to go quite so far.

Wasn't the period of review supposed to end some time in April? If so, isn't it about time we had an announcement on this? A £100,000 guarantee per person per institute would be nice, but I'd be happy enough to see a compromise figure of say £75,000 as this would go a long way to rebuilding confidence amongst savers.

Aegis

Oblivion wrote: »

As the Northern Rock fiasco played out, the Chancellor and the PM made great efforts to reassure the public that their savings would be safe, and that they would be reviewing with the FSA the savings guarantee limit with a view to increasing it. I believe at one point that Chancellor Darling even went as far as saying that a £100,000 guarantee might be on the cards, but I think the banks were less keen to go quite so far.

Wasn't the period of review supposed to end some time in April? If so, isn't it about time we had an announcement on this? A £100,000 guarantee per person per institute would be nice, but I'd be happy enough to see a compromise figure of say £75,000 as this would go a long way to rebuilding confidence amongst savers.

The problem is the funding issue. Where would the guarantee of £100K per person come from? At the moment, financial services groups are already required to contribute jointly to the FSCS pool, from what I can remember, and increasing the amount of contribution they would need to achieve a guarantee of £100K per person would undoubtedly result in costs being charge back to the consumer in the end. Personally I'd rather see free banking with limits no higher than £50K than charged banking with much higher limits, largely because I have no intention of ever keeping more than about £50K in cash if I can avoid it!

I can see that the larger safety net would be nice for a few people, but it would have to come at a cost, and it would then be a cost for something that only a privileged few would ever need to use. I can't see it going down too well!

moonrakerz

Aegis is quite correct in his response to the OP - but - the OP is has a point which the Government has still not answered.
Why should Northern Rock be afforded a "bullet proof" existence when all the other Banks & Building Societies are still at the usual commercial risk. This is even more pertinent when you consider that everyone in the UK is contributing finance to prop up NR.

I suppose everyone should queue up outside HSBC, Nationwide, HBOS etc, etc, etc to withdraw all their money and put it into the NR as it is the only really safe place to put your money.

But, hang on ! wouldn't the government then have to put all the other institutions into "short term public ownership" (ha - ha!) as well.

Oblivion

Aegis wrote: »

I can see that the larger safety net would be nice for a few people, but it would have to come at a cost, and it would then be a cost for something that only a privileged few would ever need to use. I can't see it going down too well!

I think there's a bigger picture here, not just a safety net for a few people.

1.) Raising the limit will encourage those with more than £35,000 to keep there savings in one preferred account rather than having to spread it around as now ... benefits - fewer accounts, less administration.

2.) The 'assurance factor' will encourage more people to put there money into savings with peace of mind. More cash, more liquidity for the banks and building societies.

3.) There hopefully will be no real cost to the banks in offering bigger guarantees. One would hope that they have now learnt their lessons from the recent financial jitters and will be adopting more cautious business models that make the chance of a bank going under and invoking savers' guarantees all the more unlikely. Indeed, bigger guarantees will serve as a proactive means of making the banks think before taking risks.

4.) And if it is an unlikely requirement, then there is no need to actually physically fund the guarantee pool, just get the banks to sign a legal undertaking to fund it in the hopefully unlikely event that a bank does fail.

earlgrey_3

moonrakerz wrote: »

Why should Northern Rock be afforded a "bullet proof" existence when all the other Banks & Building Societies are still at the usual commercial risk.

I think the simple answer is that because otherwise a lot of ordinary people would have lost their life's savings. I remember the BBC speaking to one person in a queue who had put the entire proceeds from the sale of their house there until they bought another. Must have been many like them.

Some would point out that the present problems originated when the former building societies and banks and were deregulated and allowed to privatise under Lawson. I think those who object to the present arrangements should tell us the course they would have preferred.

Aegis

Oblivion wrote: »

I think there's a bigger picture here, not just a safety net for a few people.

1.) Raising the limit will encourage those with more than £35,000 to keep there savings in one preferred account rather than having to spread it around as now ... benefits - fewer accounts, less administration.

You're already talking about a fraction of the population by referring to someone with £35k or more in savings! That's not exactly common.

2.) The 'assurance factor' will encourage more people to put there money into savings with peace of mind. More cash, more liquidity for the banks and building societies.

Most people already have assurance for most of their money for most of their lives. As I've said previously, few people have cash assets exceeding £35k, so most are already fully covered by the FSCS

3.) There hopefully will be no real cost to the banks in offering bigger guarantees. One would hope that they have now learnt their lessons from the recent financial jitters and will be adopting more cautious business models that make the chance of a bank going under and invoking savers' guarantees all the more unlikely. Indeed, bigger guarantees will serve as a proactive means of making the banks think before taking risks.

There absolutely will be higher costs associated with higher guarantees, as the FSCS is required to maintain a pool of assets that can be used to fund claims. The banks have to contribute to this every year, as do other financial services companies. Increasing the level of compensation would require more money in the pool simply because the potential payouts would be higher, assuming that the FSCS doesn't make its decisions based on how much cash people actually have in total (unlikely)

4.) And if it is an unlikely requirement, then there is no need to actually physically fund the guarantee pool, just get the banks to sign a legal undertaking to fund it in the hopefully unlikely event that a bank does fail.

I doubt you'd ever get that to work. Imagine what would happen if one of the larger banks crashed. The other banks would then have to cough up huge amounts of cash assets, and most large companies simply don't keep that much liquidity on their balance sheets because it's utterly pointless when it could be making money elsewhere. Quite simply, the strain of a sudden huge requirement on their cash flow such as we'd see in the event of a large bank going bust would probably ruin several more institutions, which would then require more funding, etc, etc...

The funding needs to be centrally managed for any form of guarantee to work. No bank is ever going to sign an agreement saying they'll pay for their rivals' business mistakes like that!

dunstonh

3.) There hopefully will be no real cost to the banks in offering bigger guarantees. One would hope that they have now learnt their lessons from the recent financial jitters and will be adopting more cautious business models that make the chance of a bank going under and invoking savers' guarantees all the more unlikely. Indeed, bigger guarantees will serve as a proactive means of making the banks think before taking risks.

It's not just the banks that pay towards the FSCS. Every financial services firm does. Insurance companies, mortgage brokers, IFAs etc There are different classifications within the scheme to try and reduce the degree of paying for things you are not involved in but there is still some areas we were pay for things that do not impact on our business.

Also, if you increase the deposit protection are you going to increase the investment and life assurance protections as well?

The funding needs to be centrally managed for any form of guarantee to work. No bank is ever going to sign an agreement saying they'll pay for their rivals' business mistakes like that!

I know its on a much smaller scale but it really gets on my nerves that I have to pay an extra levy for pension and endowment mis-sales from firms that no longer exist (another thing the FSCS cover) yet I have never had a mis-sale in these areas. I am effectively paying for other people's mistakes. The FSCS is basically a levy to the good firms to pay for the bad. I would prefer a focus on business models and funding and a raising of standards then you are less likely to get a problem.

earlgrey_3

Aegis wrote: »

You're already talking about a fraction of the population by referring to someone with £35k or more in savings! That's not exactly common.

Not sure of the numbers but I'd assume that a lot of people now have assets of substantially more than £35K that may need to go on deposit at some point - for example when selling their home.

On this forum I've seen several people asking where they should put the proceeds of their house-sale for a short period. Spreading the price of the average house into small enough parcels so as to be covered by the present arrangments seems less than ideal.

My guess would be that there are also many people, especially the elderly, who keep their life-saving in cash just as they've always done and they are likely to be a lot more than just £35K - which after all is now not so much more than just a single year's average earnings. May not be the wisest approach but then it's not just the wise and the shrewd that need to be protected.

Aegis

earlgrey wrote: »

Not sure of the numbers but I'd assume that a lot of people now have assets of substantially more than £35K that may need to go on deposit at some point - for example when selling their home.

There's always NS&I if people don't want to split their capital. 100% capital protection for any amount. In the short term, the poor rates you get there aren't likely to bother you as much as someone looking to save up a load of money over, say, 5 years.

If people really want the best deal, they can then choose to put some of their capital into higher-rate accounts, risking as much or as little as they want of it.

I think the current situation works a lot better than trying to cover damn near any deposit in any bank account...

On this forum I've seen several people asking where they should put the proceeds of their house-sale for a short period. Spreading the price of the average house into small enough parcels so as to be covered by the present arrangments seems less than ideal.

It's an annoyance though, rather than a necessity. They can keep all their money together if they're willing to accept lower rates of interest on their capital. See above for more.

My guess would be that there are also many people, especially the elderly, who keep their life-saving in cash just as they've always done and they are likely to be a lot more than just £35K - which after all is now not so much more than just a single year's earnings. May not be the wisest approach but then it's not just the wise and the shrewd that need to be protected.

This is actually something that I have to think carefully about. I do think that a limit raise to £50000 would be welcomed by most consumers and wouldn't impact too much on the amount that the various institutions have to pay to the FSCS, but there's still the possibility that what you've said will happen.

In which case there are other options. Pensioner-only protection schemes might work out, but would probably be considered ageist by a lot of people. It could become mandatory to remind customers of the compensation limits on a certain date (anniversary of account opening, for example) if their total assets exceed the compensation level.

All in all, I think there are better options than forcing everyone to indirectly pay for the limit raise when there are fairly straightforward solutions to most situations involving cash amounts.

earlgrey_3

Aegis wrote: »

In which case there are other options. Pensioner-only protection schemes might work out, but would probably be considered ageist by a lot of people.

Not just ageist but a little impractical and unfair too. Do we use the present arrangements of 60 for women and 65 for men?

I think there does have to be a root and branch rethink of a system that has been shown not to work. Otherwise the the burden falls on the tax-payer as it did in the case of Northern Rock - which then results in even those without a penny of savings or investments being required to take part in helping those who do.

Aegis

earlgrey wrote: »

Not just ageist but a little impractical and unfair too. Do we use the present arrangements of 60 for women and 65 for men?

I think there does have to be a root and branch rethink of a system that has been shown not to work. Otherwise the the burden falls on the tax-payer as it did in the case of Northern Rock - which then results in even those without a penny of savings or investments being required to take part in helping those who do.

I agree that it needs to be revisited and possibly redesigned from scratch. If nothing else they need to make sure that the FSCS is solving the problems it was set up to solve!

I just disagree with the idea that throwing more money at a problem will make it go away, which is why I disagree with the idea of raising the compensation levels (and therefore levies) without looking at alternative solutions.