The FSCS deposit guarantee scheme protects eligible deposits when a firm holding customer funds fails. The proposed changes affect UK banks, building societies and credit unions as well as overseas firms permitted to accept and hold deposits at a UK branch or subsidiary.
The headline changes are as follows:
| Current limit (£) | % deposits covered 2024 | Proposed limit (£) | % deposits covered 2024 | |
|---|---|---|---|---|
| Deposit protection | 85,000 ($109,600) | 97 | 110,000 ($141,900) | 99 |
| Temporary high balance claims | 1m ($1,290,020) | 97 | 1.4m ($1,806,000) | 99 |
Temporarily high balance (THB) claims are intended to protect deposits that are high as a result of specific “life-events” such as a residential property transaction.
The deposit limit changes would mean that 99% of all depositors fully protected should this have applied in 2024 versus 97% of depositors covered under the current limit. This would also ensure that 98.5% of sales would be covered by the THB claims limit as compared to 97% of deposits covered by the £1m limit in 2024.
According to the PRA the proposed changes reflect “consumer price inflation since the limit was last changed in 2017” and are intended to “help maintain consumer confidence by ensuring that the limit has not been eroded in real terms.”
Depositor protection
The PRA emphasizes that while “there have not been any major deposit-taker failures in the UK in recent years” there have been a number of credit union failures and one small bank insolvency. But it goes on to mention the failure of Silicon Valley Bank UK Limited as highlighting “the importance of depositor protection in supporting confidence in the financial system.”
And it points to its analysis which suggests that the increases “could lead to a reduction in liquidity risk”, which would “ensure that deposit takers remain resilient” during an episode of stress or banking turmoil.
Interestingly, and understandably given the current climate, the PRA also connects the proposed increases to its secondary objective to facilitate international competitiveness and growth. It points out that the increases would ensure that the UK protection limits would compare with those available in the EU (€100,000 ($107,800)) and the US ($250,000).
Addressing the implementation costs of the new limits for industry, which total £44.2m ($57m), the PRA’s analysis suggests that while these may be “significant for some firms” they would “vary and may ultimately not be material” for some others.
A six-month transitional period is being proposed by the PRA. This is intended to permit firms to update their disclosure materials and also prepare for the higher deposit protection limits. It means that the new deposit limits would come into effect on May 31, 2026.
In addition to changes to the deposit limits, the PRA is putting forward changes to the FSCS to facilitate the introduction of the Bank Resolution (Recapitalisation) Bill, which is intended to provide the BoE with “greater flexibility to manager the failure of small banks effectively.”
The changes “sit alongside” but are “separate from those relating to compensation” and include:
- adding the concept of a recapitalisation payment and levy;
- creating a new class of levy payer; and
- general amendments to ensure that the bill and the depositor protection work well together.
HM Treasury approval will be required before these rules come into effect.