The Northern Rock crisis has revealed that all is not well with the state of banking regulation in the United Kingdom. One area that has been singled out for criticism is the UK’s deposit protection arrangements, as provided by the Financial Services Compensation Scheme (FSCS). Although no deposit insurance scheme, however well designed, can on its own help avert “bank runs”, in combination with other regulatory measures, an appropriately designed scheme has an important role to play in bolstering consumer confidence (by providing a guaranteed minimum level of protection) and providing (under certain conditions) a disincentive for depositors to join a “run”. The aim of this article is essentially threefold. First, to explain the role of deposit insurance in the context of preventing systemic risk. Secondly, to outline the contours of the existing deposit protection scheme as established under the Financial Services and Markets Act 2000 (FSMA), Part 15. And, finally, to identify weaknesses in, as well as assess recent calls for reform of, the UK’s deposit insurance arrangements.

In the United Kingdom, deposit insurance (and other types of investor compensation) is currently provided by way of access to the Financial Services Compensation Scheme (FSCS).1 Since it was established in 2001, the FSCS has processed some 87,000 investment or deposit claims and managed the failure of 27 deposit-taking institutions, all of which were credit unions.2 The run on Northern Rock in September 2007, which represents the first serious bank run in the UK since that on Overend and Gurney over 140 years ago, has, however, exposed major weaknesses in the UK’s Tripartite Arrangements3 governing banking regulation, and highlighted the inadequacy of the UK’s deposit protection scheme as provided by the FSCS.4 The inability of these arrangements to allay depositor’s fears with regard to the safety of their funds required the scheme to be by-passed and, in an unprecedented move, the Government to guarantee the deposits of Northern Rock’s customers directly.5 Set against this backdrop of events, the aim of this article is essentially threefold. First, to explain the role of deposit insurance in the context of preventing systemic risk. Secondly, to outline the contours of the existing deposit protection scheme as established by the Financial Services and Markets Act 2000 (FSMA), Part 15. And, finally, to identify weaknesses in, as well as assess recent calls for reform of, the UK’s deposit insurance arrangements.