New measures to help savers after near-collapse of Northern Rock

Chancellor of the Exchequer, Alistair Darling, has announced new measures to protect savers who lose money as a result of a bank getting into financial difficulty.

The Government has also asked the Financial Services Authority to consult on increasing the current threshold for compensation from £35,000 to £50,000. Any changes will come into effect in the autumn or early next year.

The new measures have been proposed to boost public confidence after the near collapse of Northern Rock last September. Savers were queuing to withdraw their savings after their problems were revealed.

The measures are not set to cost banks any cash up-front, they will only be approached if problems occur.

Currently, if a bank encounters difficulties, it can take weeks or maybe even months before savers get their cash back.

Commenting on the new proposals, the British Bankers Association is arguing that up-front payments of money into a compensation fund would tie up capital and would be an additional drain on liquidity already stretched by the credit crunch.

Angela Knight of the BBA said it is vital that people can get to their cash quickly. The repayment of deposits should be given priority if a bank hits financial difficulty.

Mr Darling said the Government was committed to savers getting to at least a proportion of their funds within a week of a bank hitting problems, with the remainder paid in the following few days.

Many savers questioned whether £35,000 was adequate in terms of compensation when the Northern Rock crisis erupted.

Northern Rock was taken into public ownership after the Government rejected takeover bids from the board of Northern Rock and a consortium led by Sir Richard Branson’s Virgin Group.

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