Drop in value of pound following Brexit vote prompts Bank of England to propose rise to keep in step with rest of the EU

The amount of cash that will be protected for savers in banks and building societies that go bust is likely to be raised to £85,000 because of the slump in the value of the pound since the vote to leave the UK.

The £10,000 rise is required to keep the UK in line with an EU-wide deposit protection limit of €100,000.

Andrew Tyrie, the Conservative MP who chairs the Treasury select committee, said the situation was absurd and causing uncertainty for savers. “Brexit should give the UK the opportunity to set its own level of protection,” said Tyrie. “We should take it.”

The limit was cut to £75,000 in July 2015, when sterling was stronger, to keep the UK banking system in step with the rest of the EU. The measure was introduced after the banking crisis to prevent savers moving their money across borders to chase the highest level of protection, as was the case when Ireland offered more generous insurance during the height of the crisis in October 2008.

In the UK, the savings guarantee is provided by the Financial Services Compensation Scheme (FSCS), which in turn is funded by the financial services industry.

Take care, FSCS changes mean your savings aren’t as protected as they were Read more

Each country in the EU but not using the euro is obliged to review its limit every five years, but is allowed to make changes in the light of unforeseen events. Following the fall in the pound over the summer, the Bank of England’s Prudential Regulation Authority (PRA) is consulting on plans to bring the limit back up to £85,000, with effect from 30 January 2017.

“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 [pound-euro] exchange rate, the PRA considers that a structural shift in the exchange rate has occurred,” the Bank said. “These events were unforeseen when the UK limit was reduced in 2015.”

The Bank of England appears to be indicating that devaluation of sterling is for the long-term. Since the surprise result of the 23 June referendum, sterling has plunged to 30-year lows against the dollar. In terms of euros, the pound was was trading at €1.30 before result of the vote, and now trades at around €1.17.

Savings providers will be given until 30 June 2017 to update their systems and promotional material such as adverts and letters to customers.

Danny Cox, chartered financial planner at the independent financial advisor Hargreaves Lansdown, said: “Setting the level of deposit protection for UK savers based on the exchange rate from a foreign currency on a seemingly random date has never made much sense.”

He said the popularity of government-backed National Savings & Investments products showed how important security was to people. “Resetting the FSCS limit back to £85,000 sets a more positive tone for savers,” he added.

The FSCS protects customers of banks, building societies and credit unions that collapse. The queues outside branches of Northern Rock in 2007 forced policymakers to take action on deposit protection. The Labour government moved to guarantee 100% of £35,000 of savings, replacing a tiered system of protection. It was increased to £50,000 during the 2008 banking crisis and £85,000 at the end of 2010.

The plan to increase the protection level back to £85,000 will benefit about 500,000 savers and will mean around 98% of customers are protected. Just under 1m savings accounts hold more than the top limit of £85,000.

“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,” said Paul Edmondson, head of financial services at the law firm CMS.