The European Commission has scuppered plans by the Financial Services Authority to vastly improve protection for client money held in solicitors’ bank accounts.

The commission has announced that it wants to increase to €100,000 (£83,200) the maximum level of compensation available for deposits that are lost in the event of a bank collapse. The FSA had suggested that compensation be increased to £500,000 , but confirmed today that it would have to follow the commission’s proposal.

The European Parliament and council must approve the commission’s plans. The commission said that it wants to adopt a number of EU-wide measures ‘to create a sound financial system’.

Concern about the safety of solicitors’ client accounts arose after the near-collapse of HBOS and RBS at the end of 2008 (see [2008] Gazette, 25 September, 1). Accountants BDO Stoy Hayward estimated at the time that solicitors held a total of up to £1bn of client money in pooled accounts; the Law Society has estimated up to £3bn.

In the UK, the existing level of compensation available under the Financial Services Compensation Scheme (FSCS) is £50,000.

EC internal markets and services commissioner Michel Barnier said: ‘European consumers deserve better. They need reassurance that their savings, investments, or insurance policies are protected no matter where in Europe they are based.’

The FSA had suggested that court awards and settlements for personal injury should be compensated in full, even if more than £500,000.

The European Parliament and council amended a directive on deposit guarantee schemes in spring 2009, proposing the €100,000 cap. The European Commission was due to report on the proposals at the end of 2009.

FSCS protection will still not apply to client funds if that client is deemed to be a ‘large business’, as only individuals and small business are protected by the scheme.