The FSA has announced changes to the savings compensation system.

The Financial Services Authority (FSA) has announced new rules for the Financial Services Compensation Scheme (FSCS), which will ensure more small businesses and individuals – with savings up to £50,000 – receive quicker compensation.

The Deposit Guarantee Schemes Directive (DGSD) requires payout to savers within 20 days, however from 31 December 2010, the FSA plans to exceed this target and aims to compensate people within seven days.

Current legislation states that any individual or small business holding both savings and debt with the same financial institution would have the debt deducted from the amount of compensation before it was paid out. Under the new rules, savings of up to £50,000 will not be used to offset loans.

Hector Sants, FSA’s Chief Executive, said: “To help underpin confidence in our banking system, individuals and small businesses must feel confident that their money is well protected. The new rules announced today will help deliver that confidence, build on the successful role of the FSCS to date, and aim to further minimise the potential hardship faced by depositors if an institution defaults.

“The FSA, along with HM Treasury and Bank of England, have set the FSCS a challenging target of delivering payout in seven days. The systems requirements that the rules introduce for banks are crucial to enable the FSCS to deliver fast payout.”

Other changes to the system include: if companies are trading under other names, they must disclose this to their customers; the amount of compensation will now be calculated as at the date of default; and from 1 January 2010, companies must provide customers with information regarding the FSCS and its protection levels.

Loretta Minghella, FSCS Chief Executive, said: “We welcome the FSA Policy Statement, which marks the next phase of improvements to the FSCS that will benefit consumers. Both we and the industry have much to do to implement the FSA’s new rules. Once we have done so, it will be much easier for the FSCS to respond quickly should a deposit taker fail. That will be good news for consumers and will help to promote consumer confidence.”

In October 2008, ICM reported that the FSA had announced the amount of savings eligible for protection was to increase from £35,000 to £50,000. All these changes aim to increase consumer and business confidence in light of the volatile economic situation.