Insolvency Practitioners - deposits
Following the implementation of the Banking Act 2009, failing banks and building societies will be dealt with in a bank/building society liquidation, under Part 2 of the Banking Act 2009, unless the circumstances justify the alternative stabilisation options.
The decision to appoint the liquidator will be made by the Authorities, and the liquidator will be appointed on the petition of the PRA or the Bank of England. On appointment, the initial Liquidation Committee comprises of the Bank of England, the FCA, the PRA and FSCS.
FSCS is the “statutory fund of last resort” established under Part 15 of the Financial Services and Markets Act 2000. It is the UK’s deposit guarantee scheme, meeting the requirements of the European Commission Deposit Guarantee Scheme Directive. FSCS protects claims against UK authorised financial services firms for deposits, investments, insurance, and home finance advice and arranging. Generally, FSCS protects all individuals and small businesses.
On the appointment of the liquidator, FSCS will seek to compensate eligible depositors, to the limit of FSCS compensation, by a direct payout or by a transfer of deposits to an alternative, authorised deposit taker. With effect from 30 January 2017 the deposit limit is £85,000.
The provisions of the Banking Act, dealing with bank liquidation, together with supporting changes made to FSMA 2000 and the FSCS COMP Rules, are to enable FSCS to deliver a faster payout of deposit compensation, in particular, to seek to pay the majority of depositors within seven days of failure. This follows the consultation by the Authorities, commenced in 2007, following the run on Northern Rock. As the Banking Act was not yet in force, the bank failures in 2008 were dealt with by FSCS under the Banking (Special Provisions) Act 2008, FSMA 2000 and the COMP Rules.
The objectives of a bank liquidator
A bank liquidator has two objectives – objective 1 is “to work with the FSCS so as so ensure that as soon as reasonably practicable each depositor (a) has the relevant account transferred to another financial institution, or (b) receives payment from (or on behalf of) the FSCS”. Objective 2 is to wind up the affairs of the bank so as to achieve the best results for the bank’s creditors as a whole. (Section 99).
Importantly, objective 1 takes precedence over objective 2. In addition to the precedence of objective 1, the FSCS has additional powers, e.g., to inspect information held by a liquidator, for example, under Section 220 FSMA, and under Section 221A of FSMA 2000, FSCS may arrange for its functions to be discharged on its behalf by another person, such as the bank liquidator.
The Liquidation Committee (comprising of the Bank of England, the FCA, the PRA and FSCS) will recommend to the liquidator either an account transfer or FSCS payout, or both. In doing so, the Liquidation Committee must consider the desirability of achieving objective 1 as quickly as possible (Section 102). FSCS is responsible for the payout of depositors but would work with the authorities in connection with any transfer to another financial institution.
Single customer view (SCV)
With effect from 1 January 2011, all deposit takers are required to maintain an SCV – “a single consistent view of an eligible claimant’s aggregate protected deposits with the relevant firm which contains the information required by COMP 17.2.4R but excluded from that view those accounts where the eligible claimant is a beneficiary rather than the account holder or if the account is not active as defined in COMP 17.2.3R(2)”. Firms with more than 5,000 accounts are required to maintain the SCV in electronic form; firms with less than 5,000 accounts may hold the SCV file in paper-based format.
The SCV is to be provided by a deposit-taking firm within 72 hours of request. It is expected to be up to date and accurate. Its reliability is critical to faster payout. The SCV file is to be submitted to FSCS and its agent, in this case Experian, for testing and verification. The file will then be converted into a payment file from which FSCS will make the payments to individual depositors.
The SCV is intended to capture the vast majority of deposit accounts, in particular most individual depositors. Those accounts in the SCV are intended to be paid within the seven-day target. Following simplification of the COMP eligibility rules, nearly all depositors are now eligible for compensation. All accounts must be paid within 20 working days.
The SCV will exclude certain accounts such as dormant accounts, accounts subject to legal dispute, and trust/beneficiary accounts where further information is required to identify the beneficiaries (and their eligibility for compensation). Further, the SCV will “flag”, using keys and codes applied by each individual deposit taker, accounts not fit for straight-through payout, e.g., “gone aways” or where there is lack of clarity owed to the account or depositor status.
Where depositors/accounts are not fit for straight-through payout or excluded from the SCV, further information will be required from the depositor or from the liquidator.
Accordingly, FSCS will require from the bank liquidator:
(a) extraction of the updated SCV file;
(b) submission of the SCV file to FSCS and Experian as FSCS’s agent; and
(c) further information as necessary to assess accounts excluded from the SCV and accounts flagged in the SCV as not fit for straight-through payout (e.g., gone aways).
FSCS does not expect the liquidator to warrant the content of the SCV file. FSCS does expect the liquidator to competently carry out the obligations of the firm to extract and delivery the updated SCV file. Similarly, when providing additional data, e.g., in-flight transactions or answering depositor queries, the liquidator will assume an obligation to do so competently. The liquidator will need to keep FSCS up to date with any further information of details of accounts both in and out of the SCV even after delivery of the file.
FSCS anticipates that there will be a heavy demand by it on the resources of the liquidator, and retained staff in IT systems functions, call handling centres and communications. For delivery of the SCV, the liquidator may need to secure both staff but also systems and connected or third-party suppliers, using the estate’s funds accordingly. Further branch staff, call handlers or operations may be required either to handle calls or receive information or, possibly, to assist in effecting payout. FSCS’s current payout mechanisms comprise cheques, Post Office “over the counter” (for small amounts) and a potential electronic solution in due course. However, FSCS is working on alternatives which may include distributing compensation through the branch network or, possibly, in due course, through ATM.
As FSCS will rely on the SCV to pay compensation, it is important that a “rigorous and comprehensive” approach is taken to updating the SCV with any transactions “in-flight” at the time of failure. FSCS expects the liquidator to include “irrevocable” transactions in the updated SCV file, so that depositors receive the correct payment and that FSCS, as the assigned/subrogated creditor will be admitted for its recovery claim in the amount paid. Any changes to balances after the date of the SCV file will need to be notified to FSCS.
If possible, any opportunity to pre-plan for the appointment of a liquidator would be helpful to the FSCS payout process, in particular access to the SCV.
In its verification process, in the first half of 2011, FSCS will receive sample SCVs and implementation reports from all deposit takers by which it will familiarise itself with, and in respect of which it will record, the form and type of SCV. It is important to maintain SCVs from time to time to ensure that upon appointment of a liquidator, the file is an up to date and readily transmittable form. If there may be any restrictions or third-party dependencies for the delivery of the file, these will need to be identified. Any opportunities to review, update, and cleanse the data will accelerate the FSCS payout.
Further, communications are critical. Detailed communications plans between the authorities, the liquidator and FSCS are required. FSCS will seek to maintain contacts with IPs to carry out contingency planning from time to time.
Following the depositor payout, FSCS will take the place of the depositors as a creditor. FSCS expects to remain on the Liquidation Committee after payout, to work with the liquidator in the realisation and distribution of the bank’s assets. FSCS will rely on the provisions of Section 215 FSMA and COMP 15.1.17R to effect an automatic transfer or subrogation of depositor’s rights, rather than rely upon an application form or written assignment. FSCS expects to be admitted as a creditor for the amount of the SCV payout and in respect of accounts paid that are not in the SCV; if there are any changes to that data FSCS must be notified immediately. In the event of an overpayment, FSCS may wish to consider with the liquidator what (if any) action to take to claw back any funds overpaid to depositors.
The bank liquidator will have the primary objective of facilitating FSCS to payout or transfer depositors’ accounts. FSCS will rely heavily on the bank liquidator for account data, and support in dealing with depositors to meet the seven-day target, in the majority of cases, and the backstop 20 working days target for all other deposit accounts.
The operation needs to be supported by comprehensive and well-worked contingency and communications planning prepared in collaboration with the authorities.
The following templates are available for Insolvency Practitioners to download: