We’ve all been to conferences and wondered by the end whether the sound and fury really signified anything. Some conferences even fail to generate much sound and fury.
Not so the International Association of Deposit Insurers (IADI) conference which FSCS hosted in London late last month.
IADI does what it says on the tin: it represents organisations worldwide which protect savers if banks or building societies fail. Those organisations are many and varied: some are part of central banks; some are government agencies; some, like FSCS, are independent, industry-funded bodies.
All have in common, though, that they are critical parts of the resolution arrangements when deposit-takers get into trouble. The truth is that you can’t allow banks or building societies to fail safely without system-wide disruption unless you can protect savers.
The Northern Rock queues in 2007 showed what happens when savers believe their money is at risk.
That’s where deposit protection comes in.
But what makes for effective deposit protection and what role should deposit insurers play?
Paul Tucker, Deputy Governor of the Bank of England, was clear that deposit protection could not just consist of paying out depositors and liquidating failing banks. In many cases that would be a poor outcome for consumers who needed continuity in their banking arrangements to run their lives.
A better option, Paul suggested, would be to bail-in unsecured creditors, including the deposit insurer, to shore up the equity of the failing bank or building society and maintain a continuous service for its customers.
That raises interesting questions for FSCS which would potentially, under such arrangements, become a major shareholder in a deposit-taker. Should we be an active shareholder or distribute our shareholding to levy payers?
Of course, pay-outs will continue to be an option. Indeed FSCS paid out a failing credit union – the North Yorkshire – at the beginning of this month returning just under £2m to around 5,000 savers in well under a week.
So many speakers focused on what made for effective pay-out and its implications.
The Financial Secretary to the Treasury, Greg Clark, spoke about the importance of deposit protection and foreshadowed the Government’s plans to legislate in the forthcoming Banking Reform Bill to provide for what is called “depositor preference”. This would mean FSCS having priority over other unsecured creditors in a liquidation.
I would welcome this. It would underpin FSCS’ existing responsibility to maximise recoveries for its industry levy payers.
Andrew Bailey, head of the Prudential Business Unit at FSA, had another take: on the importance of raising awareness of FSCS. He spoke eloquently of his family connection to Idaho where he had first seen how prominently US banks display information about our sister organisation, FDIC.
We’ve only just caught up in the UK, with banks and building societies now putting up posters about FSCS protection in all their branches and on websites. This is a very welcome development and we are calling for the industry to go beyond the minimum requirements. In fact, a recent meeting with senior people from the deposits and insurance worlds supported doing more to promote FSCS.
And Martin Lewis of Moneysavingexpert.com told the conference in no uncertain terms that awareness depended on simpler rules and straightforward messages.
Among other things, Martin took aim at the difficulty consumers have in determining how the £85,000 limit on deposit protection applies to banks or building societies with multiple brands or subsidiaries. Is it one lot of £85,000 or several?
I agree with Martin: it should one £85,000 limit for each banking or building society group. That will reassure consumers and make things much clearer. However, I also recognise the industry may not share this view.
If you thought deposit protection was slightly dull, you’ll think otherwise if you read these conference speeches. Though IADI is actually only 10 years old, the consensus was that it had come of age at its London conference.
The Financial Conduct Authority website includes a searchable database of all firms authorised and regulated by the FCA and the Prudential Regulation Authority (PRA).
Federal Deposit Insurance Corporation