The Bank of England is consulting on plans to increase the compensation limit for deposits held with Prudential Regulation Authority authorised firms by £10,000 in light of a Brexit induced fall in the pound.
The Bank wants the Financial Services Compensation Scheme’s limit to be increased from £75,000 to £85,000 – the level of protection that was in place for five years up until July 2015 – to take in to account a weaker sterling to euro exchange rate.
The limit was cut to £75,000 to meet an EU directive requiring all states to offer the equivalent of €100,000 in deposit protection.
The directive also states limits must be adjusted in line with “unforeseen events such as currency fluctuations” however.
The Bank of England says: “Taking into consideration the developments in financial markets following the UK’s referendum vote to leave the European Union on 23 June 2016, including with respect to the GBP/EUR exchange rate, the PRA considers that a structural shift in the exchange rate has occurred. These events were unforeseen when the UK limit was reduced in 2015.”
The Bank plans to increase the limit from 30 January next year, but give firms an extra five months to update their systems and materials.
The Bank added that it would try not to change the level of deposit protection again unless further unforeseen events occurred.
Head of financial services at law firm CMS Paul Edmondson says: “Arguably the UK is obliged to make an early adjustment under the relevant EU directive, on account of the post-Referendum adjustment in the exchange rate, but there is little doubt that putting the level of financial protection back to its pre-2015 sterling level of £85,000 serves the UK’s domestic agenda.”
As a funding review of the FSCS continues, FSCS chief executive Mark Neale is also calling for a removal of the current £50,000 compensation limit for individuals mis-sold investments.
The lifeboat fund currently has no limit to compensation available for retirement savings held in insurance products, allowing consumers to reclaim 100% of their losses if an insurer or provider goes bust.