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• FSCS could be raised to £500,000 to cover temporary deposits
• FSA says protection would be extended for a six-month period
Consumers who hold a large sum of money in a savings account while they decide where to invest it or wait for a house purchase to complete could get temporary protection from the Financial Services Compensation Scheme (FSCS) under proposals outlined today.
Currently, UK savers have the first £50,000 of their savings covered in any bank or building society, but the Financial Services Authority (FSA) is considering lifting the level to £500,000 for savers who have a windfall to deposit for a short period of time.
Since the collapse of Northern Rock in 2007 and the demise of Bradford & Bingley and the internet bank Icesave last year, consumers have been advised to spread their savings around so they have no more than £50,000 with any one provider, but this has caused problems for anyone who is paid a large lump sum.
The change would allow consumers who have made money from the proceeds of a house sale, have redundancy payments, or have inherited a lump sum, to hold it in one place while they decide what to do in the long term.
The FSA has proposed that people in these circumstances are given extra protection for six months. The same rule would apply to those who receive pension lump sums or divorce settlements, while those who receive settlements for personal injury claims would get extra cover for up to 18 months.
Thomas Huertas, director, banking sector, at the FSA, said: "Our proposals will protect people who have little or no choice about holding a high balance for a limited period over the current FSCS limit of £50,000 before they can diversify it, if they wish, between different institutions.
"However, the FSCS is not intended to protect consumers who keep high account balances for a long period, so the extra protection will be time limited. This change would contribute to the banking reform objective of providing effective compensation arrangements in which consumers have confidence."
Talks are currently being held in Europe to establish a common limit for the protection of savers' cash, with the EU considering a limit of €100,000 to be introduced at the end of 2010. If this goes ahead the FSA said it would need to get approval from the EU to introduce a temporary higher limit in the UK.
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