Consumers will be able to receive compensation within a week of a financial institution's collapse following the implementation of new rules from the FSA.
As part of its reforms to the Financial Services Compensation Scheme (FSCS), the FSA wants to speed up compensation payments and change the way debts are taken into account.
The new rules, which come into force on 31 December 2010, mean most individuals and small businesses will receive compensation within seven days, while all payments will take no longer than 20 days.
In addition, payments will now be made on a gross basis if the consumer has debts with the same firm. Previously, a consumer with savings and a personal loan from the same institution would have their debt deducted from their savings before receiving compensation.
The new rules mean customers receive up to £50,000 compensation and their cash will not be used to offset borrowing.
Firms will also be required to provide consumers with clear information about the FSCS, and ensure they know of any different trading names a firm uses which do not benefit from additional protection.
Hector Sants, chief executive of the FSA, says: "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."
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