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Britain's banks and building societies will have to pay more than £1.1bn to cover compensation to customers of the institutions that failed due to the credit crisis, it emerged today.
The bill – paid, in effect, by anyone who has a savings or mortgage account in Britain — was revealed as the Financial Services Compensation Scheme (FSCS) published its budget for the next financial year. The plan shows that the cost to the remaining banks and building societies of bailing out the likes of Bradford & Bingley, the two Icelandic banks Kaupthing and Landsbanki, and others that failed last year, will have topped £1bn – and may go even higher after April 2010.
Banks and building societies were shocked in September when the FSCS demanded an extra £435m to cover the cost of compensating the 3 million savers who lost money after the collapse of five banks. They learned today that the figure for the 2009/10 financial year would be a collective £632m. The FSCS also said the levy it demands from all financial firms to cover its "normal" operations will rise from £130m to £186m – up 43%.
There has been growing anger among building society executives who are furious at being forced to pay for the risky excesses of the failed banks. They claim that while they pose the least risk of failure, they have had to pay proportionally more to the compensation scheme because the bill to each institution is based on the amount of money they hold in savings, and mutual building societies are funded by their savers. Some have warned customers they face lower returns on their savings because of the levy.
It is estimated that Nationwide, Britain's biggest society, will have paid £155m to the FSCS by the end of 2009-10.
Adrian Coles, director general of the Building Societies Association, said: "Recent interest rate falls have slightly lessened the blow, but these are huge sums of money that members are having to come up with. It is particularly galling that we have to pay for the excesses of our wider banking colleagues. There's no doubt that our members' customers will be paying for this as the societies have to increase their margins."
Paul Ellis, chief executive of the tiny Ecology building society which has 9,000 customers, faces an FSCS levy of £160,000 this year, and £270,000 in total. "This money comes straight out of our profits and is money that won't be going into our reserves. We've worked really hard this year, and a lot of it's all for nothing We do think the level of payment should be based on the risk we pose to the system. What happens if we get another couple of institutions going down?"
FSCS chief executive Loretta Minghella defended the figures. "The year 2009/10 is again likely to be a very difficult year for consumers and firms alike. In such a context, we recognise the levy will not be welcome news for firms. Whilst our primary obligation is to deliver compensation, we will be vigorously pursuing recoveries from the failed firms to help offset the costs of compensation. Our role as the safety net for UK consumers has never been more important."
This month more than 100 MPs signed an early day motion in the House of Commons calling on the government to redress the imbalance the FSCS levy imposes on small building societies.
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