Bankers say you will pay for new safety net

A move to a US-style compensation scheme for savers could lead to higher mortgage rates and lower returns on savings accounts, the banking industry warned this week.

Responding to the chancellor, Alistair Darling's statement that he is considering moving to an American-style system where up to £100,000 of savers' money would be protected, the British Bankers' Association indicated that a move to such a scheme would be more expensive and, ultimately, would be paid for by borrowers and savers.

Angela Knight, chief executive of the BBA, says: "Clearly we need to review the existing scheme and see how it can be made to operate better. If you go to a more expensive model, it has got to have an impact. Everything a bank does has an impact on rates."

The crisis at Northern Rock highlighted shortcomings in the UK's Financial Services Compensation Scheme (FSCS). Many savers were shocked to find out that only the first £2,000 of savings were guaranteed, plus 90% of the next £33,000, had the bank gone bust. The UK scheme currently has funds of only £4.4m, raised through its standard annual levy, though it could potentially access up to £139m set aside for compensation for other sectors of the financial services industry.

This week a YouGov poll found that more than half of Britons no longer trust banks in the wake of the Northern Rock debacle. Around 23% of people said they did not trust any type of financial services provider, while only 46% said they thought high street banks were trustworthy.

Building societies achieved the highest trust score, 48%, with only 25% of those questioned declaring confidence in the internet banking system.

Meanwhile, many of the Northern Rock customers who withdrew their cash this month have jeopardised their tax exemptions on cash Isas, according to accountancy firm Baker Tilly.

Savers transferring Isas from one organisation to another are required to go through a formal process if they are to continue to enjoy tax-free interest. Revenue & Customs have confirmed that the usual rules on tax-exempt status will apply. "It would be helpful for the Revenue to provide a 'cooling-off period', so cash Isa funds can be reinvested with the same institution," says Baker Tilly's George Bull.