MPs will grill Treasury officials later this month over holes in the new compensation scheme for failed banks, announced by the government last week.

Michael Fallon, the Conservative vice-chairman of the Treasury Select Committee, said “serious gaps” still existed within the Financial Services Compensation Scheme (FSCS) in spite of improvements proposed by the Treasury, the Bank of England and the Financial Services Authority (FSA) last week.

The key proposal is to increase the amount of savings guaranteed by UK banks from £35,000 to £50,000 — short of the £100,000 mooted after the run on Northern Rock last year.

Fallon told The Sunday Times: “We shall be quizzing Treasury officials in the second half of July. We shall ask them why depositors in some Icelandic banks, for example, are not fully protected under our scheme.

“It is extraordinary that Danish housewives are entitled to recover the full amount of their savings with Northern Rock but UK savers who have deposits in Icelandic banks are not entitled to the same protection.”

According to the report, any changes will not require banks to fund the scheme upfront — unlike the US, where the industry has contributed $50 billion (£25 billion) to a compensation “pot”.

We answer your questions about the scheme.

What is the government proposing?

The “lead option” in the Treasury report is to increase the limit on savings guaranteed by the compensation scheme to £50,000 from £35,000.

The report also proposes that the Bank of England be allowed to take control of any bank that is in trouble.

Any other improvements?

Easier and faster compensation payments.

How will it be funded?

Banks regulated by the FSA will fund the compensation. The scheme may also be allowed to borrow from the public sector via the “National Loans Fund”.

I have my savings in a foreign bank, am I covered?

It depends which bank you have your savings with. For example, Icesave, ING Direct and AK Bank are only partly covered.

Savers who have deposits in such banks must first apply to the scheme in the account’s “home country”, or to the EU scheme.

What if I have multiple accounts with one bank?

Advisers urge customers who have multiple accounts with one institution to limit their deposit to £35,000 at present. Savers also need to check which bank actually owns their account.

I have savings and loans with the same bank — is my situation different?

Yes. Savers only receive “net” compensation under the FSCS at present. The net balance is calculated by deducting the amount of a mortgage, loan or credit card debt from any savings.

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