As part of its work creating a safer and sounder financial system, preventing a future crisis and restoring consumer confidence, the European Commission has today proposed changes to existing European rules to further improve protection for bank account holders and retail investors. Furthermore, the Commission has launched a public consultation on options to improve protection for insurance policy holders, including the possibility of setting up Insurance Guarantee Schemes in all Member States.

The recent financial crisis illustrated once more how banks are susceptible to the risk of "bank runs". Since 1994, a Directive (94/19/EC) ensures that all Member States have in place a safety net for bank account holders. If a bank is closed down, national Deposit Guarantee Schemes are to reimburse account holders of the bank up to a certain coverage level.

When the financial crisis hit in 2008, some quick-fix amendments were made, notably to increase the coverage level to € 100 000 (in two steps) and to abandon the possibility to have co-insurance in place (i.e. that bank account holders are not fully repaid, but are to bear a certain percentage of their lost sum - even when the lost amount would be lower than the coverage limit). However, as other shortcomings were detected in existing schemes, the Commission now comes forward with a proposal to fully amend the 1994 Directive and ensure that all lessons are learned from the crisis.

The key elements of the proposal are as follows:

• Better Coverage: the upgrade to € 100 000 by the end of this year is now confirmed.
• Faster payouts: bank account holders will be reimbursed within seven days.
• Less red tape: This would be a strong improvement over the current situation, where all correspondence has to be done via the scheme of the country where the bank's headquarters are located. The new approach will mean less bureaucracy and faster payouts.
• Better information: bank account holders will be better informed on the coverage and functioning of their scheme by a new easy to understand standard template and on their account statements.
• Long-term and responsible financing: concerns have been expressed that existing Deposit Guarantee Schemes are not well funded.

Not only will Europeans have better protection for their savings, but they can now also choose the best savings product in any EU country without worrying about differences in protection. Banks will benefit from the proposal since they could offer competitive products throughout the EU without being hampered by such differences. Moreover, taxpayers benefit from a better financing of schemes – rendering state intervention much less likely.

Most improvements could already come in effect by 2012 and 2013 and would apply in all EU Member States as well as in Norway, Iceland and Liechtenstein, once incorporated in the European Economic Area Agreement.

Protecting your investments

Since 1997, the Investor Compensation Scheme Directive (97/9/EC) has protected investors who use investment services in Europe by providing compensation in cases where an investment firm is unable to return assets belonging to an investor. This might occur for example where there is fraud or negligence at a firm or where there are errors or problems in the firm's systems. It is not a protection against investment risks at such. There are now 39 investor compensation schemes in place in the EU's 27 Member States.

In recent years, the Commission has received numerous complaints about the Directive's application in some Member States. These complaints have concerned issues such as schemes having insufficient funding to pay out claims or lengthy delays in paying out claims.

The new proposal is intended to ensure that the rules on investor protection are more efficient, that there is a level playing field concerning the type of financial instruments that are protected and that there is appropriate funding and the necessary arrangements to make sure that investors are compensated.

The key elements of the proposal are as follows:

• Better coverage: the current minimum level of compensation for investors is € 20 000. Under the Commission's proposal, this will be increased to € 50 000 per investor.
• Faster payouts: under the current legislation, it can sometimes take up to several years for investors to receive any compensation.
• Improved information: investors are to receive clearer and more extensive information about the extent to which their assets are covered.
• Long-term and responsible financing: since 1997, there have been a number of cases in Member States where schemes have had inadequate funding to compensate lost assets of investors.
• Wider protection: currently, investors are not necessarily protected if the investment firm uses a third party custodian to hold the client's assets and the third party defaults without returning the invested assets.

Most improvements could already come in effect by end 2012 and would apply to all EU Member States as well as Norway, Iceland and Liechtenstein, once incorporated in the European Economic Area Agreement.