Customers of failed banks could get their compensation within seven days under new proposals – and without having any debt taken from their savings.

The Financial Services Authority (FSA) has set out new proposals in a consultation paper that could see the Financial Services Compensation Scheme (FSCS) paying out up to £50,000 on deposits within a week if a bank fails.

In addition, the payout would ignore any debts the customer has with the firm. Under current rules, customers have the amount they owe in loans taken off cash returned by the FSCS.

The proposals include all private individuals and small entities to simplify the process.

Hector Sants, chief executive at the FSA, said: “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.

“We recognise that to help underpin confidence in our banking system consumers must feel confident that their money is well protected – regardless of whether they ever have to claim compensation.”

Firms will also be required to hold up-to-date information to allow quick processing of the claims and tell customers about the coverage the FSCS provides.