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UK to raise deposit guarantee after pound's Brexit plunge

(Adds lawmaker, lawyer reaction)

By Huw Jones

LONDON, Nov 21 (Reuters) - The Bank of England (BoE) has proposed raising the guarantee on bank account deposits back to 85,000 pounds ($105,000) from Jan. 30, 2017, to reflect the sharp fall in sterling following Britain's vote to leave the European Union.

The level of deposit account protection is set under EU rules at 100,000 euros or its equivalent in member states that do not use the single currency.

It was cut to 75,000 pounds in Britain in 2015 following a regular five-year adjustment under the bloc's rules. A weaker euro against the pound was the reason for the cut.

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The BoE's Prudential Regulation Authority (PRA), which regulates banks in Britain and requires them to fund the guarantee, said a change in the pound's value against the euro after the Brexit vote in June, meant it could be adjusted.

Sterling lost about a fifth of its value against the euro in the aftermath of the June referendum, and the EU rules allow for adjustments due to unforeseen events.

"Restoring the limit to 85,000 pounds - the level in effect for almost five years prior to 3 July 2015 - is intended to provide a measure of memorability and consistency," the PRA said in a statement, announcing a consultation on the matter.

Lenders would have until the end of June 2017 to implement the changes to systems.

"The PRA will continue to monitor fluctuations in the exchange rate but, barring unforeseen events, will seek to avoid making further adjustments to the deposit protection limit," the watchdog said.

Andrew Tyrie, chairman of parliament's Treasury Select Committee, described the cut in 2015 as absurd.

Tyrie said on Monday the PRA's consultation was a recipe for more uncertainty, but Brexit should allow Britain to write its own rules for protecting depositors.

"The absurd situation, in which the UK is left vulnerable, at the discretion of the European Commission, to frequent changes in our deposit scheme, must be brought to an end," Tyrie said in a statement.

"Brexit should give the UK the opportunity to set its own level of protection. We should take it."

Paul Edmondson, head of financial services at law firm CMS (HKSE: 0867-OL.HK - news) , said: "There is little doubt that putting the level of financial protection back to its pre-2015 sterling level of 85,000 pounds serves the UK's domestic agenda."

($1 = 0.8108 pounds) (Reporting by Huw Jones; Editing by Louise Heavens and Mark Potter)