The UK's banking watchdog has significantly increased the financial safety net for customers, raising the protection limit to £120,000 from £85,000 in a move designed to bolster public confidence in the banking system.
This crucial update means additional customer funds will be safeguarded if their financial provider collapses, providing greater security for savers across the nation.
Enhanced Financial Protection Details
The Prudential Regulation Authority (PRA) announced the substantial increase to the Financial Services Compensation Scheme (FSCS) limit, which protects deposits when banks or building societies fail. The decision follows a consultation process that began earlier this year, with the Bank of England seeking to align protection levels with inflation.
Interestingly, initial proposals suggested raising the limit to £110,000, but the regulator decided on a higher figure of £120,000 after considering consultation feedback and the latest inflation data.
The FSCS was originally introduced in 2001 under the Financial Services and Markets Act 2000, consolidating various compensation schemes across the financial industry. The previous £85,000 limit was first established in December 2010, representing the sterling equivalent of the European Deposit Guarantee Schemes Directive requirement for €100,000 protection.
Historical Context and Additional Changes
The protection limit has seen several adjustments over the years. It was reduced to £75,000 in 2015 when the pound strengthened, then increased back to £85,000 in 2017 following the currency's decline after the Brexit referendum.
In addition to the main protection increase, the cap for certain temporary high balance claims will also rise significantly to £1.4 million from £1 million, effective from 1 December. This enhanced protection covers qualifying life events such as property transactions or insurance policy payouts.
The timing coincides with persistent inflation concerns, with the consumer price index remaining stubbornly above the Bank of England's two per cent target at 3.8 per cent in September. Economists project a modest easing to 3.6 per cent for October.
Maintaining Public Confidence
Sam Woods, chief executive of the PRA, emphasised that these changes will "help maintain the public's confidence in the safety of their money", noting that such confidence supports the overall strength of the financial system.
The FSCS operates through industry levies paid by financial services firms, rather than government funding or taxpayer money. These levies are grouped into different classes based on the business activities of contributing firms and cover both compensation payments and operational costs.
Eric Leenders, managing director at banking industry body UK Finance, supported the changes, stating it was "right to update it to take account of inflation". He confirmed the industry would work with members to implement these changes and ensure customers receive comprehensive information about their enhanced FSCS protection.
In its March consultation, the PRA acknowledged that increasing the limits would involve some costs to firms but concluded these would be "outweighed by the benefits" of strengthened consumer protection and maintained financial stability.
