Savers in mergers protected
The City watchdog said yesterday it was changing the rules of the depositor protection scheme to ensure savers with merged building societies do not lose out.
The Financial Services Authority said if a building society merged with another society it would be able to keep its separate £50,000 compensation limit under the Financial Services Compensation Scheme (FSCS).
The move follows concern that savers with money in two building societies that merged could find their holdings exceeded the £50,000 that is covered by the FSCS if a savings provider goes under.
It was thought this could lead to people withdrawing money simply to ensure they did not breach the limit.
The new rule, which will operate on a temporary basis until September next year, will only apply if the main building society continues to run the merged one under its former name and it notifies the FSA.
Jon Pain, managing director of retail markets at the FSA, said: “The exception we are introducing today to our compensation rules will allow a society which merges with another, and which continues to operate under its former name, to continue to have separate FSCS deposit limits for the pre-merger account holders of the business.
“Following mergers this will help existing savers with the societies who want to keep below the deposit protection limit and also reduce withdrawals from the successor society driven purely by compensation considerations on the part of savers.”
Unlike banks, when two building societies merge they are legally required to operate as a single entity with a single FSA authorisation.
There has been a wave of consolidation in the building societies sector recently, with Scarborough and Skipton, Barnsley and Yorkshire, and Catholic and Chelsea Building Societies all announcing mergers.
Nationwide’s merger with Derbyshire Building Society will take effect on Monday while its merger with Cheshire Building Society is due to take effect on December 15.
Nationwide was quick to say it would take advantage of the new arrangement.
Graham Beale, chief executive, said: “A number of customers of both the Cheshire and Derbyshire who have savings across the three societies raised concerns about the limits of the Financial Services Compensation Scheme.
“We have been working hard with the regulator to come up with a solution that works for members of merged societies and are delighted that we can now ease customers’ concerns.”
The Building Societies Association (BSA) also welcomed the move. Adrian Coles, director-general of the BSA, said: “It would not be appropriate that moves designed to reassure and protect members, such as the mergers currently under way, ultimately result in a reduction in the levels of FSCS protection for members with savings in both societies. This change to the FSCS allows those members to enjoy the same levels of protection as they would have if the merger had not taken place.”
The FSA plans to launch a wider consultation in the New Year on reforms to the FSCS, looking particularly at whether the £50,000 compensation limit should apply to each legal entity, each brand or each individual account held.