The UK Financial Services Authority is consulting the banking industry on whether there should be more generous protection for savers with temporarily high cash deposits, as can happen when savers receive a large lump-sum payment such as an inheritance or liquidiate their equity holdings.

The FSA, the UK financial regulator, has issued a consultation paper seeking views on whether the Financial Services Compensation Scheme should provide extra protection if a bank fails.

As the credit crunch has hit UK financial institutions such as Northern Rock and Bradford & Bingley, as well as foreign-owned banks with UK savers such as Iceland’s Kaupthing, there is a heightened focus on the amount of compensation UK savers can get if a bank collapses.

At the moment, savers can be compensated on deposits of up to £50,000 per individual per bank or building society.

Some people will have short-term balances way above the £50,000 figure as a result of transactions such as house sales, receipt of an inheritance or pension lump sum, or a payout connected to a personal injury case.

“We are proposing that such transactional temporary high balances should have additional FSCS protection,” Thomas Huertas, director, banking sector, at the FSA, said in a statement.

“However, the FSCS is not intended to protect consumers who keep high account balances for a long period, so the extra protection will be time limited,” he said.

Additional depositor protection depends on European Union talks on amending an EU directive about such protection. Under this an EU-wide framework, protection limit of €100,000 will come into force from the end of 2010. If a common fixed upper limit of this kind is adopted, the UK will not be able to have higher protection for temporary high balances unless it is agreed at EU level that an exception should be made.