UK Financial Compensation Scheme Dismisses Worries

LONDON - Britain's compensation scheme to guarantee UK bank deposits dismissed concerns over its funding on Tuesday, after a newspaper report said it had only 4.4 million pounds ($8.9 million) to cover retail savings.

Attention has focused on the industry-backed Financial Services Compensation Scheme (FSCS), the safety net for UK bank deposits, after the near-collapse of lender Northern Rock and the first run on a UK bank in over a century.

Unlike its U.S. counterpart, the Federal Deposit Insurance Corporation, Britain's FSCS is funded on a "pay as you go" basis by UK institutions, so the 4.4 million pounds' of funds do not signal its capacity or its limit, a spokeswoman said.

"We operate in a completely different structure (to the United States) -- they are pre-funded, we operate on a 'pay as you go' basis. So we would levy for whatever funds we needed in order to meet compensation costs," the spokeswoman said.

"If a bank were to fail, we would look at what we have, that would help us to determine what we have to levy, and then we would go out and levy the industry accordingly."

That may be positive for depositors, whose cash is guaranteed to statutory levels, but an extra levy in case of bank failure could prove costly for the banking industry. Northern Rock, for example, held more than 24 billion pounds in retail deposits before its recent troubles.

The report in Britain's Independent comes amid widening concerns over Britain's deposit insurance and the current limits for compensation in case of a collapse.

The government said this weekend that it could raise current limits of 31,700 pounds to as much as 100,000 pounds, but gave no indication on how it would fund that rise. In the United States, 100 percent of deposits are guaranteed up to $100,000.

Funding of the FSCS is already under review. In a consultation paper published earlier this year -- and due to be published as policy in the coming weeks -- the Financial Services Authority rejected pre-funding, proposing instead the creation of a pool of retail funds to top up money held to cover separate categories of investment from insurance to deposits.

The general pool would be triggered by "catastrophic losses which overwhelmed a single class".

A separate concern on deposit guarantees is timing. U.S. compensation is paid in 3 days, but UK compensation can take 6 months. Industry observers, however, have said such a radical change in timing -- instituted in the U.S. after the bank runs of the Great Depression -- may be impossible given UK legal requirements without an overhaul of the entire structure.

Tuesday's concerns over deposits triggered worries on risk appetite and consumer confidence on the market, hitting sterling. The currency reached its strongest level in over a week in the previous session.

The pound slipped around half a percent against the yen as the news highlighted the ongoing fallout from the global credit crunch.