The current £50,000 limit on the payout the Financial Services Compensation Scheme (FSCS) can pay out to individual savers will be increased to £85,000 from 31st December 2010.

This will bring the UK FSCS into line with the European Economic Area (EEA) deposit compensation limit of €100,000 that comes into force across the EEA at the end of this year.

These changes will also include a couple of extra 'goodies'.

Firstly the fast payout rules mean that there will be a target of 7 days for the majority of claims and the rest to be completed within 20 days.

Secondly any deposits will be ring-fenced for compensation. At present any loans with the same organisation is deducted from deposit compensation.

The FSA's director of conduct policy said "The need to maintain customer confidence in the banking system is one of the key lessons from the financial crisis".

The FSCS is funded by the financial services industry on a 'pay-as-you-go' basis. So bodies like banks and IFAs pay an annual levy towards the fund. But guess who really pays at the end of the day, that's right, those that use banks and IFAs etc.

Be aware though that the new scheme applies to a maximum of £85,000 you individually have 'per authorised firm' not per account. Also the UK FSCS applies to deposits with UK banks and subsidiaries of foreign banks operating in the UK. But for branches of EEA financial companies operating in the UK the scheme of the country where that branch head office is located will apply.

But will this really increase confidence in the banking system? Or is it just a big PR exercise?

With this in place it may be more likely to lead people to leave their money where it is or take higher risks looking for the best rate without thought of risk entering their deliberations. After all their risk will be shared out amongst all the other financial services users too, whether or not they have savings.

In fact when discussing your affairs with an adviser you will find that the FSCS features in the risk assessment. The conversation is about how much compensation you will get, not about how risky that institution is.

So the risk to your money will not lie with what the IFA or bank does with it, but purely on how much you have with each regulated firm. How can this be other than a systemic risk in its own right?

When people amass wealth it is their wealth and they are responsible for it. That means they should fully understand where their money is and what the risks are. Other bank users should not have to pick up the risk too. The FSCS should be scrapped not increased so as to put true bank risk squarely back on the agenda.

This sort of compensationless approach would lead to greater depositors' scrutiny of the banks and advisers (wealth-worry concentrates the mind!) And when the risk gets too great across the board then people will be more likely to use safer havens like precious metals. But that is exactly what the government and banks do not want. They want easy access to your cash in order to impose fees and taxes on. Mass withdrawal into gold and silver does not facilitate this. A compensationless approach would also be more likely to highlight the true value of currencies, another thing the government does not want a spotlight thrown on.

Also consider that the FSCS has been increased for the political reason of EEA requirements, not due to any change in the risk profile of banks. Another reason why this is a flawed concept.

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