EUDGS, Could it be worse?
HBW readers may be worried that we are obsessed with the European Deposit Guarantee Scheme Directive (EUDGSD) because this is the third article on the subject. The reason we are at it again is that the PRA have been very busy on the subject. After their original consultation paper (CP20/14) published last year, they have come up with three more tranches of information; the first another Consultation Paper in January 2015; then a Policy Statement, Supervisory Statement and another Consultation Paper all in April 2015 and another Consultation Paper and Supervisory Statement on July 3rd 2015.
The headlines are:
- January Consultation Paper – mostly good news for banks with the key feature being flexibility for banks during an 18 months transition period.
- April Supervisory Statement – mostly bad news for banks with an affirmation of the need for Continuity of Access and some nasty disclosure requirements.
- July 2015 – a right pain for banks with a change of limit value from £85K insured to £75K just at the time banks were implementing changes for the previous consultation papers and supervisory statements.
This article explores these in more detail. The article assumes the reader is familiar with the EUDGSD. If not then read;
This article applies equally to both types of institution.
The PRA issued consultation paper CP4/15 in January. The main feature of this paper was a response to industry concern that being able to provide an SCV file, which includes Corporate and EU Branch depositors, by July 3rd 2015 would be virtually impossible for many, if not most institutions. This was because most institutions keep the records of large corporate deposits in different systems to their retail accounts. Furthermore the corporate customer identifiers and aggregation processes for associating different types of deposit (e.g. money market deposits, currency accounts) on different systems are completely different to Retail ones.
As a result the PRA introduced the concept of a transition period starting from 3rd July lasting until the Policy Statement to be published in April came fully into effect – December 2016. The transition period permits a bank with corporate deposits;
- To not have to create an SCV file including corporate deposits by July 2015.
- Only to have a credible plan to be able to produce such a file if requested (rather than a system that works every day); i.e. some form of emergency procedure using manual interventions and database queries during the transition period;
- To have 72 hours to provide such a corporate file;
- To provide the corporate file in a different name to the Retail file.
This is most welcome to most banks. Furthermore, during the transition period banks can produce their Retail SCV file more or less as today and their Corporate reporting as above. The Consultation Paper also loosened up the approaches to how to “mark” accounts. Banks do not have to mark eligible deposits on their core customer accounting platforms but can also use reports based on SCV files or other reports to provide the information to the FSCS. For many banks this is also most welcome news.
Having said all that, at the end of the transition period banks have to provide full reporting on both Corporate and Retail deposits in 24 hours in a single file.
On the not so good front the January Consultation Paper confirmed that any existing waivers as regards SCV reporting will not be automatically carried through post July 2015. Many UK banks do not report Credit Card accounts in their SCV files as these are not ordinarily a deposit holding instrument and so currently have a waiver to not have to report these in their SCV files. They also have a waiver to not have to make Credit Card holders aware of the FSCS insured deposits scheme. Banks will have to re-apply for such waivers with no guarantee of success.
Another unappealing part of the January announcement was the creation of a new class of customer; small local authorities (one’s whose annual budget is less than 750K). These are covered by the Deposit Guarantee scheme whereas Government and Local Authority deposits in general are not covered. This is vexing for Banks as they will have to create a store for the recording of the size of the local authority and put a process in place for determining that size. Furthermore the classification of such authorities has to be in place by 3rd July.
The PRA published a Policy Statement (PS 6/15) and a Supervisory Statement (SS 18/15) which means that the banks have got some certainty on the requirements; these were mostly based on the previous Consultation Papers.
The key bad news was that the PRA re-asserted they will require banks to implement a capability to separate insured deposits from non-insured and excluded deposits in 48 hours (this is called Continuity of Access). Furthermore this capability has to be implemented by December 2016. In the opinion of HBW this is a completely impossible timescale, particularly given the other major regulatory changes in the same timescales.
They also introduced some requirements related to Disclosure that are very worrying:
- Customer Statements of account should make clear if the customer’s account is eligible and/or if the customer is eligible to be insured (for example certain classes of customer are not eligible such as Government departments or Financial Institutions). This is required by July 2015; a ridiculously demanding timescale for a complex change to customer statements.
- The annual summary statement of accounts that are insured has to be included with the customer’s statement of account. Many customers have several accounts with an institution often having different statement dates and sometimes different media (e.g. electronic for some, paper for others). How to square the requirement of an annual summary with these different statement practices is far from clear. Another complicating factor is that the customer statement of account processes are often systematically very separate. Credit Cards are on different platforms to Money Market deposits which are on different platforms to currency accounts and so on. Finally, the SCV and account marking processes are completely separate from the Customer Statement of Account systems and integrating them will be very difficult and expensive.
Through CP23/15 and PS 14/15, much to the Banking Industry’s annoyance, the PRA announced a “trivial sounding” change but one that has caused a lot of aggravation; namely the reduction of the Insured amounts limit from £85K to £75K.
This change is caused by a need under EU law to harmonise the amount of insurance to Eur 100K and the exchange rate movements mean that this now corresponds to £75K.
This is particularly vexing to banks because under the various changes to the FSCS scheme a wide range of changes to branches, posters, web sites, account opening systems etc had all been lined up to come into effect on the 3rd July. All these changes were in effect invalidated by the change of insured value.
The PRA recognise that this change in value at such a late stage is a problem, principally for customers who had designed their savings around the £85K value. As a result they have created another transition period; this time until December 31 2015 during which time a customer can remove the lower of £10K on the amount of money above £75K from a deposit contract without penalty or loss of interest.
This idea, whilst well intentioned for the customers, will create substantial complexities for banks to implement. For example it permits the early partial reduction from a fixed term deposit. Most bank system do not allow this so complex manual processes will have to be developed in short order to override the system blocks in this sort of behaviour.
The PRA have also provided some time for banks to change their disclosure requirements to reflect the lower value of £75K to September 1st 2015; however banks also have to communicate the reduced insured value to all customers by September.
Finally there is some complexity injected into the SCV reporting requirements as the PRA say that since the existing Retail customers are covered up to £85K up to December 31st 2015, the SCV file should continue to reflect this on its calculations but for the new Wholesale deposits which were never insured before, the limit for SCV reporting should be £75K. I.e. the SCV reporting process needs to be capable of supporting two different limits from July 3rd to Dec 31st 2015.
From a bank’s point of view, this long string of changes to the Deposit guarantee Scheme is really making a mess of the story to customers and staff. The chance of a bank being able to communicate a depositor’s rights correctly over the next six months is virtually nil. The regulator needs to call a truce on change for a year to allow the scheme to settle down and get implemented properly.
Also the regulator will have to recognize the impossibility for banks of implementing Continuity of Access in parallel with their sorting out all this regulatory mess.