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Who eventually pays for consumer compensation schemes?

As the financial services compensation scheme continues to grab the headlines acting as a safety net for many consumers caught out by failed banks there is a growing concern about who actually funds these compensation schemes in the long run. Despite the fact that consumers are inevitably the end recipient of such compensation schemes and compensation funding the revelation that 6 out of 10 UK building societies will increase their mortgage rates and reduce their savings rates to pay their premiums undermines the whole premise for compensation schemes.

In effect UK consumers are being asked to fund their own compensation scheme leaving UK banks and UK building societies to manoeuvre their charges and interest rates to make up any shortfall. While inevitably this is what always happens with compensation schemes it does make you wonder why the government and the regulators have been slow in coming forward to increase compensation figures.

On a slightly different note, the ongoing recession and the damage done to the UK financial sector will take some time to work its way through the system and eventually disappear. Balance sheets have been holed below the waterline, margins are under pressure and UK consumer confidence in the UK banking sector has never been lower.

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