Consumer watchdog Choice has called for the Financial Claims Scheme (FCS) to be maintained to enhance competition in the banking sector and benefit consumers.

Choice has strongly supported a permanent consumer deposit guarantee as part of its Better Banking Campaign, arguing that the guarantee should be properly explained to consumers in a consistent way, on all relevant banking products.

Choice has put forward recommendations on the FCS as part of its submission to the Financial Claims Scheme Consultation Paper, including on transitional arrangements should the Government decide to reduce the scheme’s current cap.

The FCS provides a guarantee for individual deposits of up to $1 million and was fast-tracked for introduction in 2008.

The Gillard Government is currently consulting on possible changes to the FCS from this October, including a recommendation to reduce the ‘cap’ under the scheme from $1 million to between $100,000 and $250,000.

“The FCS plays a crucial role in promoting competition in Australia’s banking sector by promoting confidence in smaller lenders,” says Choice Head of Campaigns, Matt Levey.

“That’s why we support maintaining this scheme, including the current cap of up to $1 million.”

Choice says that reducing the cap under the FCS would risk a potential flight of funds from credit unions, building societies and regional banks to the perceived safety of the big four banks, thereby making the smaller players less competitive.

“Small institutions rely more heavily on deposits in the medium-size range, between $100,000 and $1 million, which allow them to compete on financial products such as home loans,” says Mr Levey.

“We believe that these competition concerns are more important to consumers than any other perceived benefits of the FCS, which is designed as a last resort.”