Practice makes perfect
Crises or disasters more or less inevitably come as something of a surprise. It’s the lack of forewarning which creates the crisis.
Surprise does not, however, have to result in a disorderly reaction to crisis. Crises can be planned for and practised. Contingency planning is part and parcel of standing ready to respond.
That is not to say that organisations can predict exactly what form the next crisis will take. They can’t. The only sure thing is that next crisis will not resemble the last.
But organisations can ensure that they have resilience to deal with a crisis.
This matters especially to FSCS because our protection for consumers is an important safeguard of confidence and stability when a big financial failure or crisis occurs. So we have to be certain – and the public has to be certain – that FSCS and its partners can gear up to deal with many more claims than normal while maintaining normal (and high levels) of service and protection.
To do that, we plan. And we practice.
FSCS maintains contingency plans for all main eventualities we might face - the failures of banks and building societies of course, but we also have plans to protect consumers in the event of major failures in other parts of the industry.
We run regular exercises to test these plans, often in partnership with the regulators and HM Treasury. For example, we have just completed earlier this month a three week exercise simulating the failure of a bank from resolution discussions to payment.
We assumed in this case that the Bank of England would decide to resolve this fictional bank through insolvency and an FSCS pay-out of depositors.
To the end, we practised with a real Single Customer View (SCV) file (though with personal details) anonymised from receipt of the file to payment.
We made a real (though modest) draw down on the credit facility we maintain with a consortium of banks to ensure that we can always meet the costs of a seven day pay-out.
And we geared up our out-source partners to deal with the telephone enquiries and more complex claims that a bank failure would produce.
There have certainly been some important learning points along the way which we shall now bring together in an action plan to improve our existing plans.
I can tell you now that we’re all very glad to come across these things in an exercise rather than in real life. And that’s the point.
I can also tell you, on the other hand, that, despite the various issues encountered, we did pay out the customers of the fictional bank in seven days.
As chance had it, the exercise also coincided with two real credit union failures – the Staffordshire Credit Union and the West Wales Credit Union. Between them they accounted for around 2,700 savers and £1.5m of deposits.
The great majority of depositors in these credit unions were paid out in well under seven days of failure. And, in fact, I think we broke our all-time record in the case of the West Wales Credit Union.
So our arrangements for a seven day pay-out work in practice as well as in theory.
Of course, the credibility of our protection also depends on people knowing about it. This is important because new international research shows increasing consumer awareness greatly reduces the chances of a run on an institution.
And the month of September also saw us reach a ground-breaking agreement with banks and building societies about the use of the FSCS badge on websites, banking apps, customer information sheets and in advertising.
This partnership with the industry will extend our reach in a big way. It will help ensure that consumers understand and believe in FSCS protection and so avert panic in any future crisis.
We aim to develop similar agreements with the insurance and pensions industries where out strategy is to work with firms to build consumer awareness. This too is part of preparing for contingencies.
So, yes, FSCS practices for a crisis. And as someone said (more or less): the more we practice, the luckier we get. I should like FSCS to be well practised, well-prepared and lucky.