Last week saw the publication of the Deposit Guarantee Scheme Directive – known to its friends as DGSD. This establishes common standards across the EU for protecting savings in banks and building societies. It is to be implemented by 2 July next year.
Without common rules and consistent protection for consumers, an open market for deposits cannot operate effectively.
That protection continues to be provided, however, by national deposit protection schemes – by FSCS for savers in UK-regulated banks, building societies and credit unions and in their branches in other Member States. Proposals for a pan EU scheme were not adopted.
So European-wide standards, but national liabilities and national implementation.
So what changes and what stays the same under the new standards?
Well, much will stay the same.
The protection limits for deposits remains at €100,000 or its sterling equivalent which is currently £85,000.
And the Directive brings the rest of Europe into line with FSCS’s current standard of a seven day pay-out, although with a generous implementation lead-time of nine years. (And the EU has settled on seven working days compared to our commitment to return deposits in seven calendar days).
There are also important new departures which strengthen protection for consumers and other depositors.
Anyone selling a house or in line for a personal injury insurance pay-out or legacy will benefit from new proposals in the directive. People will welcome the directive’s mandate that deposit protection must cover what are known in the trade as “temporary high balances”.
The Prudential Regulation Authority (PRA) will consult later in the summer on the precise definition of such temporary balances and the level of protection they will enjoy. However, it’s a welcome principle that consumers will have some additional protection for exceptional and short-lived deposits resulting from major life events like a house sale. This seems a sensible extension of the protection FSCS provides for consumers.
FSCS protection will also extended in another respect – to all businesses, not just SMEs as now. This may be modest protection for the finances of big businesses – the £85,000 limit applies – but it will dramatically simplify the administration of deposit protection for both deposit takers and FSCS: no need any longer to apply the SME test.
Finally, there is an important change in funding arrangements.
Levies on the industry to fund deposit protection will in future be “risk-based”. In other words, firms’ liability to meet our levies will no longer be based solely on their share of UK deposits, but will take account of the risk they pose to the deposit insurer.
Regular readers of these blogs will know that I have been a long-time supporter of the principle of taking account of risk in our levies provided a fair and transparent way of doing so can be found. That task falls to a working group under the auspices of the European Banking Authority.
I look forward to its conclusions and to considering whether its approach could be applied more widely.
Now, this is by no means a comprehensive guide to the DGSD’s provisions. There is much of detail on which we are working with both PRA and our European counterparts. Readers who want to read the directive itself can read the European Journal.
And there will be ample opportunity to comment on the approach to implementation in the UK when PRA publishes a consultation document later in the year. In due course we will be communicating with both deposit takers and consumers on the changes.
But I hope that this has, at least, whetted your appetite for what is an important development of deposit protection. We will keep you informed of what it means for FSCS and the industry as our work progresses.
The Financial Conduct Authority website includes a searchable database of all firms authorised and regulated by the FCA and the Prudential Regulation Authority (PRA).