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The Northern Rock fiasco succeeded in putting the wind up politicians, embarrassing the Bank of England and confirming the fears of Middle England that City boys (even with Geordie accents) cannot be trusted. The expression “Safe as the Bank of England” would never carry quite such weight again.

To preserve their dignity, almost everyone ended up blaming the law and the regulatory regime under which UK financial services operates. Mervyn King, the Governor of the Bank of England, argued in particular that the EU Market Abuse Directive prohibited him from engaging in behind-the-scenes salvage operations. Now, of course, political expediency has kicked in with changes in the financial services compensation scheme so as to protect more of savers’ deposits.

Yet how far can – or should – investors and savers be safeguarded by the law? That is the question behind the topic for this year’s Times Law Awards essay competition, which is being run in conjunction with One Essex Court.

The issue goes to the heart of people’s expectations of how far the law should protect them. In the midst of the Wall Street Crash, depositors did withdraw funds and hide them under their beds because they had no confidence in any bank. But, of course, that would not have protected their savings from fire or theft. And indeed the Northern Rock exodus was a windfall for neighbouring banks and building societies.

So the focus of debate must be how far people’s savings and investments should be made invulnerable to the vicissitudes of life. As Edmund Nourse, a barrister with One Essex Court, points out, the experience of numerous Equitable pensioners and BCCI customers has shown that legal protection often turns out to be less than it seemed: so should things be different for depositors at UK banks?

The Northern Rock crisis exposed the naivety of almost everyone involved – and that includes the depositors. While Mr King presided over a liberal, light-touch regulatory system that encouraged innovation and dynamic entrepreneurialism, the public applauded the opportunity to invest in banks that paid higher rates of interest and in funds that made encouraging noises about glittering returns.

But higher rewards equal higher risks – yet as the good times rolled no one wanted to admit that. Mr King had his own strong views about not condoning “moral hazard” (although maybe these had not penetrated through to the politicians). Meanwhile, the protection of savings turned out to be nothing like as generous as people had complacently assumed.

But can the Government write a blank cheque to ensure that no one ever loses anything when they deposit money in a bank? Isn’t that bound to encourage imprudent investment by the public, Nourse asks. Indeed, should the Government be encouraging directors to take bigger risks by assuring them that they will be bank-rolled out of any disaster when they get it wrong? Or could the law regulate directors more tightly and make it easier to sue those directors whose judgment proves deeply flawed?

There is also the issue of why depositors alone should be protected. Why not shareholders, too? Shares in Northern Rock have experienced a huge drop in value but no offer of compensation has been forthcoming. Moreover, since the growth of popular capitalism under Margaret Thatcher not all of these shareholders are “professional investors”. So should we not take pity on them, too?

Maybe the answer lies in greater transparency. Should financial institutions be obliged by law to be much more upfront about where they have invested or lent their depositors’ money? Or would such a proposal be impracticable?

The alternative might just be to make the public much more financially literate. The public is betting on the global casino but has little grasp of the rules. Maybe the small print needs to be made much bigger and the public made more aware of their responsibilities for reading it.

Defenders of the current system have until now said that more regulations would kill the inventiveness of the City and its long-term profitability. Critics say that the time has come to protect the man and woman in the street against the cavalier tactics of those City wheeler–dealers.

What do you think?

The Times Law Awards rules

In the bank or under the bed: should the law protect your money?

Entries are now closed.

Prizes: First: £3,500; Second: £2,500; Third: £1,500; Three runners-up: £1,000.

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