James Daley: Mervyn King is not the only culprit

Mervyn King, the Governor of the Bank of England, got quite a grilling on Thursday, as the Treasury select committee tried to get to the bottom of who was to blame for the crisis that engulfed Northern Rock last weekend.

It's probably only fair that Mr King should take some of the blame. After all, his failure to act sooner than he did ensured that the situation ran completely out of control, resulting in the first run on a major British bank for many decades.

But the Bank of England was by no means the only culprit. The Financial Services Authority, which regulates the industry and sets the parameters of the compensation scheme that is meant to protect consumers when things go wrong, must also shoulder some of the responsibility. If the Financial Services Compensation Scheme (FSCS) had not been exposed as being so inadequate, surely Northern Rock's customers would not have been queuing round the block demanding their money back.

The FSCS fails on two levels. Not only does it guarantee just £2,000 of your savings in the event that a bank goes bust, but there are no assurances as to how quickly you might get your money if the worst was to happen. People who put their money into a savings account, do so because they don't want to take any risk with their cash – but also, they often plump for savings accounts so that they can withdraw their money instantly when they need it.

Although the FSCS guarantees 100 per cent of the first £2,000 and 90 per cent of the next £33,000 – most people would not put their money in a savings account if they were told there was a chance that they might not get 10 per cent of their money back. As soon as there was even the remotest possibility of Northern Rock going to the wall, it made perfect sense for anyone with more than £2,000 to get down to their nearest branch as soon as possible.

Ironically, the FSCS does a very good job when it comes to compensating people who invested in riskier ventures. If a fund management firm goes bust, for example, customers in their funds can expect to get 100 per cent of the first £30,000 of their investment back, and 90 per cent of the next £20,000. Yet these are investors who agreed to take a degree of risk, whereas banking customers, who did not want to take any risks, get a much poorer deal.

Fortunately, Hector Sants, the new chief executive of the FSA, has said he is now going to look at improving the deal for banking customers – but it's a shame the architects of the scheme did not consider the implications of the FSCS's limitations when they first designed it. America's equivalent guarantees 100 per cent of deposits up to $100,000 (£50,000) – why did we choose to take such a more relaxed approach?

The other fascinating lesson from the events of the last week, was seeing just how little faith consumers now have in the financial services industry. After the mortgage endowment scandal, Equitable Life and the recent occupational pensions crisis – to name but three – consumers no longer trust banks (even the Bank of England) when they tell them not to panic.

Many of those who lost their pensions were told by their employers to keep paying into the schemes, only days before they went bust, while thousands of customers at Equitable saw their savings go up in smoke in spite of reports from the insurer that everything was running smoothly.

In the end, it took the Chancellor to promise he would underwrite the entire banking sector to put an end to the panic. The banks have a lot of work to do to win back consumers' loyalty and trust.