Client money held in solicitors’ bank accounts has been given greater protection in the event of a bank collapse, after the Financial Services Authority unveiled rule changes today.

Implementing a European Commission directive, the City regulator upped the cap on the compensation available for deposits that are lost in the event of a bank collapse to £85,000, from £50,000. The change comes into force on 31 December.

However, the changes made by the FSA to its handbook did not refer to its earlier plans to compensate temporary deposits above £85,000 if they arise from private real estate transactions or ‘social reasons,’ such as ‘marriage, divorce, invalidity or [death] of a depositor'.

The FSA last year proposed a £500,000 cap as standard, but suggested that court awards and settlements for personal injury should be compensated in full, even if they exceeded £500,000.

FSA director of conduct policy Sheila Nicoll said today: ‘The need to maintain customer confidence in the banking system is one of the key lessons from the financial crisis.

‘Today’s announcement completes a radical overhaul of depositor compensation. In future, all the still-separate national compensation schemes across the entire European Economic Area will offer cover at €100,000 or the local currency equivalent – a limit which will protect the vast majority of depositors.’

Concern about the safety of solicitors’ client accounts arose after the near-collapse of HBOS and RBS at the end of 2008. Accountancy firm 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.

The UK’s Financial Services Compensation Scheme (FSCS) covers deposits with UK banks and subsidiaries of foreign banks which operate in the UK. However, deposits in branches of EEA banks operating in the UK will not be covered by the FSCS, but rather by the scheme of the country where the branch has its headquarters.

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