The European Commission (EC) said on July 12 2010 that it was proposing changes to existing EU rules to enhance protection for bank account holders and retail investors.

This was being done "as part of its work creating a safer and sounder financial system, preventing a future crisis and restoring consumer confidence," the EC said.

The EC also launched a public consultation on options to improve protection for insurance policy holders, including the possibility of setting up Insurance Guarantee Schemes in all EU member states.

For bank account holders, the EC said, the measures adopted on July 12 mean that in case their bank failed, they would receive their money back faster (within seven days), increased coverage (up to 100 000 euro) and better information on how and when they are protected.

For investors who use investment services, the EC is proposing faster compensation if an investment firm fails to return the investor's assets due to fraud, administrative malpractice or operational errors, while the level of compensation is to go up from 20 000 euro to 50 000 euro.

Investors will also receive better information on when the compensation scheme would apply and get better protection against fraudulent misappropriations where their assets are held by a third party - such as in the recent Madoff affair, the EC said.

The proposals, fully in line with the EU's commitments under the G20, are now passed to the European Parliament and the Council of Ministers for consideration.

Internal Market and Services Commissioner Michel Barnier said: "The adoption of today's package marks the Commission's latest endeavour to bring transparency and responsibility to Europe's financial system in order to prevent and manage future crises. European consumers deserve better. They need reassurance that their savings, investments or insurance policies are protected no matter where in Europe they are based. To make this a reality, I now call upon the European Parliament and the Council to make rapid progress in approving today's package."

The recent financial crisis illustrated once more how banks are susceptible to the risk of "bank runs" – i.e. when bank account holders believe that their savings are not safe and try to withdraw them all at the same time, the EC said.

Since 1994, a directive ensures that all EU 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 euro (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 EC is now coming 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, according to the EC, are:

Better Coverage: The upgrade to 100 000 euro by the end of 2010 is now confirmed. This means that 95 per cent of all bank account holders in the EU will get all their savings back if their bank fails. Coverage now includes small, medium and large companies as well as all currencies. Excluded are all deposits of financial institutions and public authorities, structured investment products and debt certificates.

Faster payouts: Bank account holders will be reimbursed within seven days. This will be a major improvement as today many account holders wait weeks, even months, before getting their money back. In order to facilitate such a short payout, managers of Deposit Guarantee Schemes will have to be informed early about problems at banks by supervisory authorities. Banks will have to specify in their books whether deposits are protected or not.

Less red tape: For example, if you live in Portugal and have your account at a failing bank whose headquarters are based in Sweden, the Portuguese scheme would repay you on its own initiative and act as your contact point. The Swedish scheme would then reimburse the Portuguese scheme. 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.

"Today's proposals will ensure that they are now more soundly financed following a four-step approach," the EC said.

First, solid ex-ante financing provides for a solid reserve. Second, if necessary, this can be supplemented by additional ex-post contributions. Third, if this is still insufficient, schemes can borrow a limited amount from other schemes ("mutual borrowing"). Fourth, as the last resort, other funding arrangements would have to be made as a contingency. Contributions will, as is currently the case, be borne by banks. However, they will be calculated in a fairer way since they will be adjusted to the risks posed by individual banks.

"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," the EC said.

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.