At present, the FSCS protects deposits up to £85,000 in the event of the failure of a bank, building society or credit union.

However, the PRA is required by the European Deposit Guarantee Schemes Directive to recalculate the FSCS deposit protection limit every five years, setting it at a sterling amount equivalent to €100,000. A depreciating euro means that the new limit will be £75,000.

The existing limit will remain in place until 31 December 2015. This transitional measure is intended to ensure depositors have suitable time to plan for, and adjust to, the change.

Other changes

The Directive also extends deposit protection to some categories of depositors that were not previously protected by the FSCS, such as large corporates.  The new limit of £75,000 will apply to these newly protected depositors from today.

The PRA is consulting on rules to help manage the impact of the limit change for depositors previously protected by the FSCS and contractually tied to products with balances above £75,000.

The PRA intends to allow depositors to withdraw funds between the old and new limits without penalty until 31 December 2015, if they experience a decrease in deposit protection as a result of the limit change.

For insurance policyholders, the PRA has changed the insurance limits for FSCS compensation, aiming to increase protection for policyholders in the event of an insurer failing. This increases the limit to 100% of cover for all long term policies, for professional indemnity insurance and claims arising from death or incapacity.

This reflects the potential for significant adverse consequences to policyholders, and the wider financial system, of cover being disrupted. Limits for all other forms of insurance will remain the same.

Reaction

Reaction to the news has been largely negative. Andrew Tyrie MP, chairman of the Treasury Select Committee, told the BBC that the move was “defective.”

“It’s absurd that a depreciation of the euro – largely brought about by the crisis in the eurozone in general, and the Greek crisis in particular, should be forcing a reduction in the level of protection available to UK depositors.”

Anna Bowes, director of Savings Champion, said the move would be a “massive blow to savers” and “an administrative headache”, meaning “savers will need to find new homes for their money.”

Simon Healy, managing director for savings at challenger bank Aldermore, said the news was “a timely reminder to make sure all your savings are fully covered.”

“The rules do not come into force just yet, and they may not affect all savers, but it is a good time to check that you won’t be affected by the future changes and also an opportunity to review the savings market and ensure you’re getting the best return on your savings.”

Kevin Mountford, head of banking at MoneySuperMarket, said the decision was a disappointing one, “particularly as it will be fixed for the next five years.”

“This will be particularly difficult for savers who are tied into products such as fixed term accounts, which levy a penalty for, or completely ban, withdrawals before a set date. We urge providers to be flexible with savers who won’t have seen this change coming.

“There is good news however, as depositors with temporary high balances will now be covered for up to £1 million for six months from the date the money is transferred. There will be times when people may receive a short term boost, such as with proceeds from a house sale, so this will be a great help to them.”