Savers who lose money when a bank fails could receive compensation within a week after the City watchdog announced a consultation calling for claims to be processed quickly.

The Financial Services Authority (FSA) wants banks and building societies to hold up-to-date information about their customers in order for the Financial Services Compensation Scheme (FSCS) to speed up its process.

A new IT system to maintain the details is expected to cost financial firms £891.8 million over the next five years.

Also proposed is that compensation payments should ignore any debts that the consumer has with the same company, unlike the current scheme in which the FSCS deducts outstanding mortgage, credit card or loan debt.

Companies will also have to provide information to their customers making them aware of the compensation scheme and what it covers, as well as which trading names will be treated as one firm by the FSCS.

Currently the FSCS pays out up to £50,000 lost by an individual saver, rising to £100,000 for joint account customers.

This limit applies to all accounts held with the same authorised group, even though the accounts may be held under different brand names.

The FSA said firms' obligations to tell customers about the scheme and which trade names are part of the same group would cost around £34.6 million in set-up costs, with ongoing annual maintenance costs of £4.2 million.

The FSCS is currently in the process of paying out compensation to people who lost money through the collapse of Icelandic internet bank Icesave.

Hector Sants, chief executive at the FSA, said: "Experience in the last year has highlighted how essential compensation is and that it is imperative consumers understand and trust that they will be reimbursed if a bank, building society or credit union fails.

"Our current scheme has worked well in these unprecedented times, compensating hundreds of thousands of savers in a matter of weeks.

"But today's consultation paper seeks to learn the lessons from those events to produce an even better system."

Copyright © Press Association 2009