CP9/22 – Depositor Protection

1. Overview

1.1 This Consultation Paper (CP) sets out the Prudential Regulation Authority’s (PRA) proposals to amend the Depositor Protection Part of the PRA Rulebook (DP), delete the Dormant Account Scheme Part of the PRA Rulebook, and make minor amendments to the PRA’s Supervisory Statement 18/15 on ‘Depositor and dormant account protection’ (SS18/15), the PRA’s Statement of Policy on ‘Deposit Guarantee Schemes’ (SoP – DGS), and the PRA’s SoP on ‘Calculating Risk-Based Levies for the Financial Services Compensation Scheme deposits class’ (‘SoP – RBL’).

1.2 The proposals in this CP would result in changes to the Dormant Account Scheme Part of the PRA Rulebook (DAS), DP rules, SS18/15, SoP – DGS, and SoP – RBL. More details on the structure of this CP, including where the proposed changes are located, are set out in paragraph 1.10.

1.3 This CP includes proposals to:

Delete and/or amend the following rules from the PRA Rulebook:

• Delete the rules in DP 13.4 – 13.8 and amend the rules in DP 15.2 – 15.4 and 15.7, together the Continuity of Access Rules (‘CoA Rules’)^{footnote [1]} (Continuity of Access Rules section); and
• Delete the DAS chapter from the PRA Rulebook and make other necessary consequential amendments^{footnote [2]} (Dormant Account Scheme section).

These proposals are subject to a 4-week consultation period to allow the COA Rules to be revoked before the current waiver by consent expires on 1 December 2022.

Amend the rules in:

• DP 10 to confirm that a trust can hold monies that fall within the scope of the temporary high balance (THB) regime and set out when a joint account holder is entitled to THB protection^{footnote [3]} (Temporary high balances section);
• DP 6.2 to protect eligible customers of e-money institutions, authorised payment institutions, small payment institutions, and credit unions (in respect of e-money), if a credit institution holding such firms’ safeguarded funds were to fail^{footnote [4]} (Protection for deposits that are safeguarded funds section);
• DP 3.2 to set out that depositors of overseas firms that have their Part 4A permission removed and exit the UK market do not continue to benefit from Financial Services Compensation Scheme (FSCS) protection^{footnote [5]} (FSCS protection for firms in default section);
• DP 19.1(2) to provide that depositors only have a right of withdrawal, without penalty, when a deposit taker merges with or transfers their deposits to another deposit taker, if the operation results in a reduction in FSCS protection^{footnote [6]} (Withdrawal rights on deposit transfer section); and
• DP 17.1(3) so that the annual FSCS notification requirement for depositors does not apply to depositors that are not entitled to FSCS protection by virtue of their legal personality^{footnote [7]} (FSCS notification requirements section).

Due to the more complex nature of these proposals, they are subject to a 12-week consultation period.

Delete PRA Rules and amend and update existing policy documents:

• Update SoP – RBL to account for changes made to reporting requirements and the leverage ratio (Risk based levies section);^{footnote [8]} and
• Delete PRA Rules in DP 17.3 and 20.3 as given the period of time since IP Completion Day, the Rules are now spent and amend and update SS18/15, SoP – DGS SoP, and SoP – RBL to reflect the UK’s withdrawal from the EU, expired transition periods, and rules that may be removed pending the outcome of this CP (Consequential amendments to PRA rules, Supervisory Statements and Statements of Policy section).^{footnote [9]}

These proposals are subject to a 12-week consultation period.

1.4 The purpose of the proposals in this CP is to ensure that the deposit protection framework provides for an effective compensation scheme for deposits which minimises the adverse effect that the failure of an FSCS member could be expected to have on the stability of the UK financial system. The PRA has identified a number of areas where rules are no longer achieving the expected benefits and so need to be revoked, are redundant so need to be deleted, or require amendment to ensure they reflect the original policy intent.

1.5 Following the UK’s withdrawal from the EU, the PRA has increased flexibility to amend rules. In this CP, the PRA has used this flexibility to reduce costs to firms by amending rules that it considers disproportionate to the benefits they provide (Withdrawal rights on deposit transfer and FSCS notification requirements sections) while increasing consumer protection (Temporary high balances section). At the same time, the proposals are designed to provide firms with a better understanding of the PRA’s expectations and policy with regards to the DP rules (Risk based levies and Consequential amendments to PRA rules, Supervisory Statements and Statements of Policy sections). Finally, the PRA has taken the opportunity to remove rules that it no longer considers appropriate (Continuity of Access rules, Dormant Account Scheme and, Consequential amendments to PRA rules, Supervisory Statements and Statements of Policy sections) and amend rules to ensure that they accurately reflect the policy intent (Protection for deposits that are safeguarded funds, FSCS protection for firms in default and, Risk based levies sections).

1.6 The proposals in this CP are relevant to the FSCS and different types of firms as follows:

• The Continuity of Access Rules section is relevant to all PRA-authorised UK banks and building societies, but not credit unions. It is also relevant to overseas firms with permission to accept deposits where the deposits are held by a UK branch or subsidiary of the firm.
• The Protection for deposits that are safeguarded funds section is relevant to e-money institutions, authorised payment institutions, small payment institutions, credit unions (in respect of e-money), and PRA-authorised credit institutions.
• The remaining sections are relevant to all PRA-authorised credit institutions and credit unions. They are also relevant to overseas firms with permission to accept deposits where the deposits are held by a UK branch or subsidiary of the firm.

1.7 The PRA considers that the proposals would have a minor, if any, impact on firms’ costs.

1.8 The PRA has a statutory duty to consult when introducing new rules and changing rules (FSMA s138J) or new standards instruments (FSMA s138S). When not making rules, the PRA has a public law duty to consult widely where it would be fair to do so. 

1.9 In carrying out its policy making functions, the PRA is required to comply with several legal obligations. Appendix 7 lists the statutory obligations applicable to the PRA’s policy development process. The analysis in this CP explains how the proposals have had regard to the most significant matters, including an explanation of the ways in which having regard to these matters has affected the proposals.

Structure of the CP

1.10 The proposals contained in this CP, the policy material they propose to change, and the appendices containing the draft amended policy, are listed in the table below.

Implementation

1.11 Subject to the responses to this CP, the PRA proposes that that the proposals have effect on the day immediately following the making of the relevant instrument. For the Continuity of Access and Dormant Account Scheme proposals the PRA intends that these come into effect on, or before, 1 December.

Responses and next steps

1.12 The consultation period for the Continuity of Access Rules and Dormant Account Scheme proposals closes on Friday 21 October 2022. The consultation period for the remaining proposals closes on Friday 16 December 2022. The PRA invites responses on the proposals set out in this consultation paper. Please address any comments or enquiries to CP9_22@bankofengland.co.uk. Please indicate in your response if you believe that any of the proposals in this consultation paper are likely to impact persons who share protected characteristics under the Equality Act 2010, and if so, please explain which groups and what the impact on such groups might be.

1.13 References related to the UK’s membership of the EU in SS18/15, SOP – DGS, and SoP – RBL covered by this CP have been updated as part of these proposals to reflect the UK’s withdrawal from the EU. Unless otherwise stated, any remaining references to EU or EU-derived legislation refer to the version of that legislation which forms part of retained EU law.^{footnote [10]}

2. Continuity of Access Rules

2.1 In this section, the PRA sets out its proposals to revoke the Continuity of Access (CoA) Rules by deleting Depositor Protection 13.4-13.8, and amending Depositor Protection 15.2-15.4 and 15.7 in the PRA Rulebook before the expiry of the current waiver by consent (WBC) on 1 December 2022.

Background

2.2 The CoA Rules were implemented in 2015 to support resolution and the PRA’s safety and soundness objective by reducing the adverse effects of firm failure on the stability of the UK’s financial system, as well as PRA Fundamental Rule 8.^{footnote [11]} The CoA Rules aimed to support continuity of covered deposits^{footnote [12]} by maintaining a depositor’s access to deposits and banking services while a deposit taker was undergoing resolution using a Bank Insolvency Procedure (BIP) or a Building Society Insolvency Procedure (BSIP), via a transfer of covered deposits to a purchasing institution.

2.3 Following the introduction of the CoA Rules, the Bank of England’s (‘the Bank’) approach to resolution evolved, causing the Bank to reassess the transfer of FSCS-covered deposits using CoA functionality. As a result, in advance of the 1 December 2016 effective date of the CoA Rules, the PRA provided a WBC to a broad set of firms. This WBC substantially narrowed the scope of application of the CoA Rules for three years to exclude small BIP/BSIP firms and bail-in firms and gave the Bank the opportunity to consider the longer-term policy requirements for transfer resolution strategies. The original WBC expired in 2019. This was extended for a further three years to 1 December 2022 due to the possible impact of the Bank’s review of its approach to setting a minimum requirement for own funds and eligible liabilities on the scope, functionality, and necessity of the CoA Rules. During this six-year period, at any one time, only around 13 firms have been required to comply with the CoA Rules. Approximately 140 firms currently hold a WBC.

2.4 The Bank, alongside the PRA, has recently initiated work to develop alternative solutions to reduce disruption to transactional accounts in the event of an insolvency procedure (See PRA statement – ‘Improving depositor outcomes in bank or building society insolvency’ (IDOBI)). This work will look to provide depositors with improved access to their deposits throughout such an insolvency procedure, and the PRA may consult in due course on proposed future rules in this area.

Proposals

2.5 The PRA is proposing to revoke the CoA Rules and amend other rules referring to CoA before the expiry of the current WBC and amend SS18/15 accordingly. The PRA considers that revoking the rules would ensure that, in the future, firms that would otherwise have had to develop systems to comply with the CoA Rules would not be disproportionately burdened by rules that are currently not being enforced for the majority of firms.

2.6 In addition to the proposal to revoke the CoA Rules, the PRA is also proposing that firms that have already developed CoA system capabilities should consider maintaining or archiving those systems. While the outcome of the IDOBI workstream is not yet known, it may lead to a consultation with proposed new rules that impose similar requirements to the CoA Rules. The PRA proposes that as part of this process, while such firms should maintain the capability to complete field 48 of the Single Customer View (SCV), which requires details of a customer’s transferable eligible deposits, when completing the SCV, firms should leave it blank so that it acts as a legacy field retained as a placeholder. This may reduce any future costs should the outcome of the IDOBI workstream require firms to develop systems with similar functionality.

2.7 The PRA has previously stated that it would ensure that firms had at least 18 months to implement changes in connection with the re-implementation of the CoA Rules. The 18 months’ notice period was designed to give firms sufficient time to build the required systems. As the PRA is revoking rather than imposing additional rules on firms, which is intended to prevent new firms in scope of the CoA rules from investing in building new systems that may turn out to be redundant, the PRA does not consider that firms would require 18 months’ implementation time.

PRA objectives analysis

2.8 The PRA has a statutory general objective of promoting the safety and soundness of PRA-authorised persons (firms). The PRA considers that the proposals set out in this section are consistent with this objective because they would align CoA Rules with the Bank’s changing approach to resolution and the FSCS’s faster payout capabilities.

2.9 When discharging its functions in a way that advances its general objective, the PRA has, as a secondary objective, a duty to facilitate effective competition in the markets for services provided by PRA-authorised persons. The PRA considers that the proposals in this section would facilitate effective competition by removing rules that impose a burden only on a subset of firms.

Cost benefit analysis (CBA)

2.10 This section sets out an analysis of the costs and benefits of revoking the CoA Rules.

Affected firms and markets

2.11 The proposals would affect all PRA-authorised UK banks and building societies. They are also relevant to overseas firms with Part 4A permission to accept deposits, where the deposits are held by a UK branch or subsidiary of the firm.

Benefits

2.12 These PRA proposals would reduce any future costs that firms (particularly firms that would have to implement the CoA rules but have not done so) might incur in complying with a rule that, because of the WBC, is not being enforced for the majority of firms. Ending the WBC regime for the CoA rules would remove uncertainty for firms that might be unsure as to whether the WBC criteria has changed and therefore whether they would need to develop capabilities to comply with the CoA rules rather than rely on the WBC. This would also ensure a more efficient use of the PRA’s resources.

Costs

2.13 The PRA does not anticipate that the proposals would lead to any additional costs for the majority of firms. For those firms that have incurred some costs in developing continuity of access system capabilities, the PRA considers that any costs of maintaining or archiving those capabilities would be outweighed by the future benefits of using those systems to comply with any future rules that might result from the IDOBI work or other policy initiatives to support faster payout.

‘Have regards’ analysis

2.14 In developing these proposals, the PRA has had regard to the FSMA regulatory principles, the aspects of the Government’s economic policy set out in the HMT Recommendations letter from 2021, and the supplementary Recommendations letter sent April 2022. The following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposals:

• The principle that a burden or restriction which is imposed on a person should be proportionate to the benefits which are expected to result from the imposition of that burden (FSMA regulatory principle): The PRA considers that the burdens imposed by the current CoA Rules are no longer proportionate, particularly given the large number of firms that benefit from the WBC. Therefore, the PRA proposes that the CoA Rules should be revoked.
• The need to use the PRA’s resources in the most efficient and economical way (FSMA regulatory principle): Firms would no longer need to apply for a waiver from the CoA Rules, thereby reducing the resource the PRA has to spend on assessing applications.
• Competition (HMT recommendation letter): The PRA considers that the proposals would remove ongoing costs for around 13 mid-sized firms that are currently not benefiting from the WBC. The PRA considers this would allow these firms to compete more effectively.
• Competitiveness (HMT recommendation letter): The PRA considers that this proposals would increase certainty for firms currently benefitting from the WBC, as they would no longer need to carry out an assessment to determine whether they meet the relevant thresholds to apply for the WBC. Therefore, these proposals would make the UK and London an attractive domicile for internationally active financial institutions.

2.15 The PRA has had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for these proposals, it is because the PRA considers that ‘have regard’ to not be a significant factor for this proposal.

3. Dormant Account Scheme

Background

3.1 The Dormant Account Scheme (the ‘Scheme’) was established under the Dormant Bank and Building Society Accounts Act 2008 and originally launched (in respect of dormant bank and building society accounts only) in March 2011. The Scheme enables money that is held in dormant accounts to be distributed for the benefit of the community, while protecting the rights of owners or beneficiaries to reclaim the value of their asset.

3.2 Under the Scheme, participating institutions can transfer money held in eligible dormant accounts to a dormant account fund operator. The dormant account fund operator manages the money received, so that it can meet repayment claims from owners or beneficiaries should they come forward in the future, and distributes surplus money for the benefit of the community.

3.3 Under section 213 of the Financial Services and Markets Act 2000 (FSMA) and the FSMA (FSCS) Order 2013 (S.I. 2013/598), the PRA was required to make rules establishing a scheme for compensating persons in cases where a dormant account fund operator is unable, or likely to be unable, to satisfy a repayment claim against it. These rules, which are set out in the Dormant Account Scheme Part of the PRA Rulebook (the ‘DAS Rules’), provide for FSCS compensation in respect of repayment claims made in connection with a dormant account fund operator that is in default.

3.4 The Dormant Assets Act 2022 (the ‘2022 Act’) modified and expanded the Scheme to cover additional assets such as insurance, pension, investment, and securities assets.^{footnote [13]} As part of the changes made by the 2022 Act, the 2013 Order was amended to exclude repayment claims made in connection with a dormant account fund operator that is in default from the scope of FSCS protection. Accordingly, the PRA no longer has the power to provide FSCS protection on repayment claims under the Scheme, and the DAS Rules have become obsolete.

3.5 Instead, HM Treasury is committed to ensuring consumer protection in the event a dormant account fund operator^{footnote [14]} is or looks likely to be unable to meet its liabilities, and to upholding the core principle of the Scheme (ie that owners or beneficiaries can reclaim the amount of their dormant asset balance owed to them at any time). In the event that there was a considerable risk that a dormant account fund operator could not fulfil its reclaim obligations, HMT would assess the most appropriate course of action in line with these principles, which may include the use of a loan to the dormant account fund operator.

Proposal

3.6 The PRA proposes to remove the DAS Rules from the PRA Rulebook, given that the PRA no longer has the power to provide FSCS protection of repayment claims under the Scheme. The deletion of the DAS Rules necessitates some consequential amendments to other Rulebook Parts which refer to the dormant account scheme.

3.7 Following removal of the DAS Rules from the PRA Rulebook, the FCA will be making associated changes to the Fees manual (FEES) in the FCA Handbook to remove obligations relating to dormant account fund operators and the Scheme.

PRA objectives analysis

3.8 There is no practical consequence of the PRA’s proposal to remove rules that are now defunct given the changes in legislation mentioned above and the fact that protection of the Scheme will be provided by HMT going forward. As such, the proposal in this chapter does not have an impact on the PRA’s general statutory objective to promote the safety and soundness of firms, nor on the PRA’s secondary objective to facilitate effective competition in the markets for services provided by PRA-authorised persons.

Cost benefit analysis (CBA)

3.9 This section sets out an analysis of the costs and benefits of removing the DAS Rules from the PRA Rulebook.

Affected firms and markets

3.10 The proposal would affect the FSCS, the reclaim fund, and firms that are Scheme members.

Costs and Benefits

3.11 The PRA does not anticipate that this proposal would lead to any additional costs for firms.

3.12 Instead, the changes in legislation mentioned above and consequential removal of the DAS Rules will reduce potential costs to the FSCS and firms by way of FSCS levies in the event of a failure of the dormant account fund operator. Additionally, the proposal will benefit firms by clarifying and simplifying the PRA Rulebook by removing rules which are now defunct.

‘Have regards’ analysis

3.13 In developing this proposal, the PRA has had regard to the FSMA regulatory principles, the aspects of the Government’s economic policy set out in the HMT Recommendations letter from 2021, and the supplementary Recommendations letter sent April 2022. The following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposal:

• The principle that a burden or restriction which is imposed on a person should be proportionate to the benefits which are expected to result from the imposition of that burden (FSMA regulatory principle): There is no benefit to retaining the DAS Rules as they are now defunct, and protection of the Scheme will be provided by HM Treasury going forward.
• The principle that regulatory activities should be carried out in a way which is targeted only at cases in which action is needed (Legislative and Regulatory Reform Act 2006): The PRA considers the DAS Rules are no longer needed as the purpose that they served in the regulatory framework was protection of the Scheme, and that protection will be provided by HMT going forward.
• The need to use the PRA’s resources in the most efficient and economical way (FSMA regulatory principle): The PRA considers the removal of the DAS Rules from the PRA Rulebook is the most efficient and economic course of action because the DAS Rules are now defunct. Additionally, because protection of the Scheme will be provided by HMT going forward, the PRA considers that retaining the DAS Rules or any similar scheme would be duplicative and inefficient.

3.14 The PRA has had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for this proposal, it is because the PRA considers that ‘have regard’ to not be a significant factor for this proposal.

4. Temporary high balances

Background

4.1 The PRA has become aware that the rules on Temporary High Balances (THB) in Depositor Protection 10 in the PRA Rulebook need to be amended to reflect the underlying policy intent and remove any ambiguity.

4.2 The PRA considers that the THB rules are unclear as to whether a trust can claim a THB on behalf of a beneficiary. When a trustee operates a bank account on behalf of a beneficiary, it is the trustee and not the beneficiary that is the legal account holder. The current definition of a THB refers to a ‘depositor who is an individual’. The PRA considers this could be interpreted to exclude corporate trustees and potentially all trustees from bringing a claim for a THB. This causes tension with the underlying policy intent as evidenced by the SoP – DGS which clearly envisages trustees being able to make a claim for THB protection on behalf of beneficiaries^{footnote [15]} and the ‘look through’ concept that applies to trusts in the context of the DP Part of the PRA Rulebook. Moreover, in the case of a trust, the policy intent is that it is the individual beneficiary rather than the account holder/depositor who is of relevance in determining whether or not the rules on THB apply.

4.3 The PRA also considers that there has been some confusion as to how the rules on THB apply to joint accounts, specifically when one of the account holders dies. The existing rules in DP 10.2 provide for the THB regime to apply to sums paid to a depositor connected to a person’s death or which are held in the account of a deceased’s personal representative. However, the PRA considers that they do not set out how the THB regime applies in the event of a death of a joint account holder.

4.4 Currently, joint account holders are each entitled to FSCS protection up to the relevant limit, either £85,000 or, if the deposit is attributable to a THB, up to £1 million (unless the THB relates to a payment in connection with personal injury or incapacity in which case there is no limit). This means, for example, that where there is a joint account with two account holders the account holders receive either £170,000 or £2 million FSCS protection in total. However, this protection is reduced to £85,000 or £1 million when one of those account holders dies, which means that if the firm then fails, the surviving account holder will have a substantial portion of their deposit not protected by the FSCS. This is not our policy intent.

Proposals

4.5 To ensure that FSCS protection continues to function in the way it was intended, the PRA proposes to amend the rules on THB to ensure that (i) trustees (whether individuals or corporate trustees) are able to claim on behalf of eligible beneficiaries and (ii) the criteria for determining whether the THB rules apply are assessed in relation to the individual beneficiary rather than the account holder/depositor. The PRA proposes that, in line with the existing rules in the DP Part of the PRA Rulebook, the trustee of a bare trust^{footnote [16]} would be able to bring a THB claim on behalf of each beneficiary, and the trustee of a discretionary trust^{footnote [17]} would be able to bring one THB claim per group of beneficiaries.

4.6 To remove the current gap in protection for joint account holders, the PRA proposes to amend the rules in DP 10.2 to explicitly cover situations where a joint account holder dies. The PRA proposes to amend the rules relating to THB to provide that for a joint account, the FSCS protection limits of the surviving account holders would be increased by an amount calculated by dividing between the surviving account holders the limit applied to the deceased account holder at the date of death. The table below provides an example of the proposed changes where one depositor dies.

The PRA considers that this would provide the surviving account holder(s) with THB protection for a period of six months, giving them time to arrange their financial affairs and transfer any amounts in excess of the relevant FSCS protection limit to another deposit taker.

PRA objectives analysis

4.7 The PRA has a statutory general objective of promoting the safety and soundness of PRA-authorised persons. The PRA considers that the proposals set out in this section are consistent with this primary objective as they seek to minimise the adverse effect that the failure of a PRA-authorised person may have on consumers, and so help promote the stability of, and confidence in, the UK financial system.

4.8 When discharging its functions in a way that advances its general objective, the PRA has, as a secondary objective, a duty to facilitate effective competition in the markets for services provided by PRA-authorised persons. The PRA considers that the proposals in this section do not have an impact on effective competition.

Cost benefit analysis (CBA)

Affected firms and markets

4.9 The proposals would affect the FSCS and all PRA-authorised deposit takers, including credit unions.

Benefits

4.10 By amending the rules on THB and expanding the circumstances in which consumers can have a claim for a THB, the PRA considers that the proposals would enhance consumer trust and confidence in the FSCS. In addition, the proposals would provide increased clarity on the scope of the THB regime to depositors, PRA-authorised deposit takers, and the FSCS.

Costs

4.11 The PRA anticipates that there may be a small increase in the number of consumers that would be able to claim under the THB rules. This may lead to an increase in FSCS compensation payments should a PRA-authorised deposit taker fail, thus potentially resulting in an increase in the levy payment by firms. However, given that the FSCS already uses its discretion to pay THB claims made by trusts, the PRA considers that any increase in the levy payment would be small and the benefits of these proposals outweigh the costs.

‘Have regards’ analysis

4.12 In developing these proposals, the PRA has had regard to the FSMA regulatory principles, the aspects of the Government’s economic policy set out in the HMT Recommendations letter from 2021, and the supplementary Recommendations letter sent April 2022. The following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposals:

• Better outcome for consumers (HMT recommendation letter): In general, the role of the FSCS is to provide compensation to consumers of financial products when authorised firms are unable, or likely to be unable, to meet their obligations. A compensation scheme provides a safety net, offering protection to consumers, which in turn leads to greater confidence in their dealings with financial services firms, benefiting all firms and leading to a stronger financial system. The PRA considers that the proposed amendments to the THB rules result in better protection for consumers and ultimately a stronger financial system.
• Competitiveness (HMT recommendation letter): The PRA considers that a compensation scheme that protects THB would enhance consumers’ trust in UK regulated firms. This would help ensure that the UK remains an attractive domicile for internationally active financial institutions, and that London retains its position as a leading financial centre.
• The need to use the PRA’s resources in the most efficient and economical way (FSMA regulatory principle): The PRA considers that the proposals would provide clarity and lead to fewer queries from firms on THB.

4.13 The PRA has had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for this proposal, it is because the PRA considers that ‘have regard’ to not be a significant factor for these proposals.

5. Protection for deposits that are safeguarded funds

Background

5.1 Under the Electronic Money Regulations 2011 (EMRs), the Payment Services Regulations 2017 (PSRs) and FCA guidance, e-money institutions (EMIs) and authorised payment institutions or small payment institutions (together PIs) and credit unions, in respect of e-money,^{footnote [18]} are required to safeguard funds received from customers. One commonly used method is to segregate the relevant funds from all other funds held by the firm and deposit the funds in a separate account with a PRA-authorised credit institution. While FSCS protection is not available in the event of a failure at the level of the EMI or PI, the PRA had historically considered that these firms’ safeguarded funds deposited into a PRA-authorised credit institution would fall within the scope of FSCS depositor protection if the credit institution were to fail, as eligible end customers of EMIs and PIs would be deemed to have absolute entitlement to those safeguarded funds via a statutory trust.

5.2 Following recent court cases,^{footnote [19]} it is harder for the FSCS to establish that the end customers of an EMI or PI have an absolute entitlement to the safeguarded deposits. This creates a risk that the FSCS is unable to provide compensation to end customers if a PRA-authorised credit institution were to fail while holding deposits safeguarded under the EMRs/PSRs, which was not the intention of the original policy.

Proposals

5.3 The PRA is proposing to amend its rules to make FSCS depositor protection available to eligible customers of an EMI/PI in respect of their relevant proportion of safeguarded funds should the credit institution holding the safeguarded deposits fail. The proposed amendments would provide protection to end customers in respect of safeguarded funds which the PRA had understood to have existed prior to the decisions in the recent court cases. Ensuring that safeguarded deposits are FSCS protected at the point of failure of the credit institution is consistent with the logic of safeguarding.

5.4 As is currently the case, the proposals would not provide FSCS protection in the event an EMI/PI itself were to fail in an event unrelated to the failure of a safeguarding credit institution.

Eligibility

5.5 The proposed rules allow a look-through to eligible end customers of financial institutions that, pursuant to the EMRs/PSRs, deposit safeguarded funds into PRA-authorised credit institutions. Existing eligibility requirements in PRA rules will apply at the level of the end customer so not all customers of EMIs/PIs will be entitled to receive FSCS compensation. Customers would also not be eligible if they are unidentifiable (eg the e-money is anonymous) or the customer cannot be verified under AML rules.

Payment options

5.6 The proposed changes are designed to create an entitlement to depositor protection in respect of safeguarded funds for end customers to avoid an almost complete loss upon failure of a safeguarding credit institution. The PRA recognises, however, that a failure of a safeguarding credit institution combined with a requirement that the FSCS pay compensation directly to the end customers of an EMI/PI could ultimately lead to the demise of the EMI/PI. While a consequential failure may be unavoidable in certain circumstances, allowing the FSCS an option to pay the compensation amount into a safeguarding account held by the EMI/PI with an alternative credit institution may minimise the impact of the credit institution’s failure on the EMI/PI as well as the end customers. Therefore, the PRA is proposing the FSCS can pay compensation either:

• into a new safeguarding account of the EMI/PI, provided the EMI/PI is not subject to a formal insolvency procedure and the FSCS is satisfied that each eligible end customer would be in no worse position than if the compensation was paid directly, or
• directly to the eligible end customers of the EMI/PI or to another person as directed by the end customer, if there has been an insolvency event at the EMI/PI.

5.7 The no worse off provision means that if the amount of compensation calculated by the FSCS is less than the total amount of safeguarded deposits shown in the failed credit institution’s exclusions view file (because, for example, there are customers that are ineligible for protection under PRA rules or amounts in excess of the deposit protection limit), the EMI/PI would need to contribute its own funds to make up the shortfall.

Calculating compensation

5.8 The calculation of compensation due to end customers of EMIs/PIs upon the failure of a safeguarding credit institution is challenging because of real-time transactions occurring at levels in the chain separate from the failed credit institution and possibly even after the time that the safeguarding credit institution has failed.

5.9 From the failed credit institution’s exclusions view file, the FSCS will know the amount of total safeguarded funds that were deposited in the failed credit institution. However, to compute the compensation due to EMI/PI customers, it also needs to receive customer data from the EMI/PI to determine the eligibility of end customers and each eligible customer’s proportion of the safeguarded funds.

5.10 Generally, depositor protection compensation is calculated by reference to eligible deposits held on the date the credit institution is in default. However, where the EMI/PI has also failed, and the FSCS compensation will go directly to the end customer rather than to a new safeguarding account, the FSCS will need to calculate entitlements to the amount of compensation on the date of the EMI/PI’s failure. This will allow for adjustments in the amount of compensation payable by the FSCS if the customer has spent some of its e-money in the intervening period, for example.

5.11 Each end customer would be considered against the eligibility requirements and eligible customers would be separately protected up to the deposit protection limit (£85,000).

Time limits and maintenance of customer details

5.12 In order for the FSCS to assess eligibility and operationalise pay-out on a timely basis, it would be important for EMIs and PIs to maintain up to date customer information in a usable format that can be transmitted to the FSCS quickly upon the failure of a safeguarding credit institution. While the PRA cannot make rules requiring such firms to maintain such customer details, it is in the EMI/PI’s interest to enable the FSCS to pay compensation quickly. The PRA considers that due to the lack of SCV requirements on EMIs/PIs, and the potentially large number of end customers due compensation, the pay-out timelines for FSCS will likely be longer than the targeted seven days for direct depositors. In recognition of the complexity of the determinations and reliance on third parties, the PRA proposes to amend DP 9.4 to allow the FSCS additional time to effect a pay-out in respect of safeguarded funds in the event that there is a delay, beyond the current payout timelines as provided for in DP 9.3, in the FSCS being able to determine the amounts to be paid to eligible customers.

Subrogation

5.13 In the event of a direct payment to the end customer, the PRA proposes to amend the subrogation rules in DP Chapter 28 to suspend an eligible end customer’s rights against the EMI/PI, in order to prevent double-recovery, ie both receiving FSCS compensation and exercising their contractual rights of repayment vis a vis the EMI/PI. The proposed rules would then extinguish the rights of customers against the EMI/PI when, and to the extent, the FSCS has made recoveries from the failed bank. These amendments are designed to preserve the effect of the anti-set off provisions in the EMRs/PSRs for the benefit of the FSCS during the failed credit institution’s insolvency process.

Additional changes

5.14 The proposed rules also amend DP 2.2 to make explicit the existing interpretation for looking-through credit institutions and investment firms to beneficiaries when depositors/account holders are not absolutely entitled to deposits. This amendment is for the avoidance of doubt to clarify existing treatment of beneficiaries given the changes to 2.2 needed to enable the look-through proposals regarding safeguarded funds.

5.15 Consistent with the policy outcome of protecting certain safeguarded funds, the PRA proposes to amend DP 43 to clarify that the Class A tariff base includes accounts holding safeguarded funds. The PRA considers this is also consistent with the treatment of funds that the account holder is not absolutely entitled to (eg, bare trusts).

Other types of segregated accounts

5.16 The PRA considers that similar types of segregated accounts may also need to be reviewed to determine whether end customers should also benefit from FSCS protection. The PRA welcomes responses as to whether there are similar accounts that are not already covered by PRA rules. However, the PRA acknowledges that a full review of the FSCS protection for other segregated accounts may take some time, and considers that such a review should not delay fixing this known gap in protection.

PRA objectives analysis

5.17 The PRA has a statutory general objective of promoting the safety and soundness of PRA-authorised persons. The PRA considers that the proposals set out in this section are consistent with this primary objective as they seek to minimise the adverse effects of a failure of a PRA-authorised firm, and so help promote the stability of the UK financial system as well as confidence in the UK financial system.

5.18 When discharging its functions in a way that advances its general objective, the PRA has, as a secondary objective, a duty to facilitate effective competition in the markets for services provided by PRA-authorised persons. The PRA considers that the proposals in this section do not have an impact on effective competition.

Cost benefit analysis (CBA)

Affected firms and markets

5.19 The proposals would affect PRA-authorised credit institutions that hold EMI/PI’s safeguarded funds, EMIs, PIs and credit unions (in respect of e-money) (and their customers), and the FSCS.

Benefits

5.20 The PRA considers that the proposals would increase consumer confidence in EMI/PIs by providing certainty on the availability of FSCS protection in the event of a failure of a UK based credit institution holding an EMI/PI’s safeguarded funds. The proposals would also reduce the risk of contagion between a failed credit institution and an entity depositing safeguarded funds in that credit institution, and the financial stability risks that might result.

Costs

5.21 The PRA does not consider that the proposals would increase costs to firms as the PRA’s proposals would provide the protection the PRA had understood to have existed prior to the court decisions. If firms have proactively changed their eligibility assessments, and removed safeguarded accounts from their exclusions view file, the PRA’s proposals would require them to revert and would increase the amount of deposits firms need to report under DP 43.1 (and therefore increase levies payable).

‘Have regards’ analysis

5.22 In developing these proposals, the PRA has had regard to the FSMA regulatory principles, the aspects of the Government’s economic policy set out in the HMT Recommendations letter from 2021, and the supplementary Recommendations letter sent April 2022. The following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposals:

• Better outcome for consumers (HMT recommendation letter): The proposals would amend the scope of the FSCS rules to confirm that eligible end customers of EMI/PI’s safeguarded funds can benefit from FSCS protection.
• Transparency (The Legislative and Regulatory Reform Act 2006 (LRRA)): Making amendments to confirm protection of safeguarded funds when held in UK based credit institutions would increase both transparency and consistency with statutory and express trust arrangements as well as solicitor client account rules and arrangements in accordance with the Client Asset Rules in the FCA Handbook.
• The need to use the PRA’s resources in the most efficient and economical way (FSMA regulatory principle): The proposals would amend the rules and lead to fewer queries from firms on the scope of FSCS protection.
• Competitiveness (HMT recommendation letter): The EBA has recommended that the EU Commission clarify the EU’s Deposit Guarantee Schemes Directive to ensure that client funds deposited with a credit institution by other credit institutions, PIs, EMIs, and investment firms are covered by a deposit guarantee scheme in case the credit institution holding client funds were to fail.^{footnote [20]} The PRA considers that a failure of the PRA to amend its rules as proposed could reduce the UK’s competitiveness in safeguarded accounts and e-money issuance markets.

5.23 The PRA has had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for these proposals, it is because the PRA considers that ‘have regard’ to not be a significant factor for these proposals.

6. FSCS protection for firms in default

Background

6.1 Where a firm with Part 4A permission to accept deposits has that permission restricted by the PRA and subsequently defaults, Depositor Protection 3.2 in the PRA Rulebook (DP 3.2) provides that eligible deposits accepted while the firm held its Part 4A permission continue to benefit from FSCS protection.

6.2 DP 3.2 was drafted when the UK was still a member of the EU and was intended to apply only where the PRA significantly restricts a firm’s Part 4A permission to accept deposits but remains PRA-authorised. The PRA considers that, following the UK’s withdrawal from the EU, there is a small risk that the rule could be interpreted as applying in another circumstance: where an overseas firm with a deposit taking permission in the UK surrenders their permission and PRA-authorisation (or their permission and PRA-authorisation lapses as a result of the expiry of the TPR or SRO), but the firm continues to hold deposits that it accepted in the UK. The PRA considers this uncertainty to be undesirable and that a potential unintended consequence of this ‘expansion of scope’ could be an increase in FSCS levy costs to industry.

Proposals

6.3 The PRA considers that deposits held by a UK branch of an overseas deposit taking firm that has had its Part 4A deposit taking permission and authorisation from the PRA removed should cease to benefit from FSCS protection. For example, DP 3.2 would not apply where the overseas deposit-taking firm transfers eligible deposits to an overseas branch before surrendering its Part 4A permission and PRA-authorised status. Following EU withdrawal, eligible deposits transferred from the UK to the EU by overseas firms should generally be covered by the firm’s home state deposit guarantee scheme under the Deposit Guarantee Schemes Directive (2014/49/EU).

6.4 The PRA proposes to amend DP 3.2 to reflect the original policy intent and remove any potential for ambiguity. The PRA proposes to make clear that a firm must be authorised by the PRA at the moment they default for their depositors to be eligible for compensation. The PRA considers that this would reduce both uncertainty and the risk of the rule being interpreted in a way that expands the scope of FSCS coverage and creates a potential increase in FSCS levy costs to industry.

6.5 The PRA proposes to add a new notification obligation on overseas firms, in similar terms to the notification obligation on them at the time of EU withdrawal, to ensure UK branch depositors are aware of the loss of FSCS coverage and are provided with information on whether and to what extent their deposits will be protected by another deposit guarantee scheme when the firm has its PRA authorisation cancelled.

PRA objectives analysis

6.6 The PRA has a statutory general objective of promoting the safety and soundness of PRA-authorised persons. These proposals are intended to give deposit takers further clarity on when deposits are subject to FSCS protection, thereby promoting the safety and soundness of firms.

6.7 When discharging its functions in a way that advances its general objective, the PRA has, as a secondary objective, a duty to facilitate effective competition in the markets for services provided by PRA-authorised persons. The PRA considers that the proposals in this section do not have an impact on effective competition.

Cost benefit analysis (CBA)

Affected firms and markets

6.8 The proposals would affect all overseas deposit taking firms who cease to be PRA authorised. They may have a minor impact on depositors that deposited monies at UK branches of these firms whose deposits have not been repaid before PRA authorisation ends. The PRA expects that the majority of these depositors would be afforded protection by the relevant deposit guarantee scheme applicable to the overseas deposit taking firm.

Benefits

6.9 The PRA considers that these proposals would provide clarity to overseas firms that surrender or lose their PRA authorisation, as well as their UK depositors. They would ensure that such firms can accurately inform depositors about the level of protection they would receive from the FSCS once they cease to be authorised to accept deposits in the UK. They would also reduce the FSCS levy costs to industry by not protecting deposit taking firms that may have very little remaining nexus with the UK.

Costs

6.10 The PRA considers that these proposals may reduce costs for both firms and the PRA, as queries from firms to the PRA, and depositors to firms, concerning the extent of FSCS protection for overseas firms that remove their deposit taking permission would either be reduced or answered quickly with minimal effort.

‘Have regards’ analysis

6.11 In developing these proposals, the PRA has had regard to the FSMA regulatory principles, the aspects of the Government’s economic policy set out in the HMT Recommendations letter from 2021, and the supplementary Recommendations letter sent April 2022. The following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposals:

• The principle that the PRA should exercise its functions as transparently as possibly (FSMA regulatory principle): The PRA considers that the proposals in this section are compatible with this principle as they seek to provide further clarity to firms as to the scope of FSCS protection.
• The need to use the PRA’s resources in the most efficient and economical way (FSMA regulatory principle): The PRA considers that the proposals would be compatible with this principle as it would amend the rules and lead to fewer queries from firms on the scope of FSCS protection.

6.12 The PRA has had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for these proposals, it is because the PRA considers that ‘have regard’ to not be a significant factor for these proposals.

7. Withdrawal rights on deposit transfer

Background

7.1 Depositor Protection 19.1 and 19.2 in the PRA Rulebook (‘DP 19’) require firms to notify depositors of a merger, conversion of subsidiaries into branches, transfer, or similar operation, and provides such depositors with a three-month withdrawal right. In this event, the withdrawal right allows the depositor to withdraw the amount of their deposit that exceeds the FSCS coverage limit at the time of the operation and, if desired, transfer it to another firm, without incurring any penalty. The policy intent behind this rule was to ensure that depositors could retain the same level of FSCS protection in the event their total protection would be less after the restructuring than before.

Proposals

7.2 The notification and withdrawal right is currently wider than it needs to be and applies regardless of whether the depositor would suffer a reduction in the total protection under the FSCS. If a depositor’s overall FSCS protection is not affected by the transaction, the PRA considers the withdrawal right is not achieving the purpose for which it was intended and is creating an unnecessary operational burden on, and cost to, firms.

7.3 The PRA proposes to amend DP 19.2 to set out that the withdrawal right would only apply if the level of a depositor’s overall FSCS protection is reduced by a restructuring operation. The PRA considers that depositors would still have a right to be informed that the entity that holds their deposit is undergoing some form of restructuring operation, and is not proposing to change the notification requirement. However, these proposals would reduce the operational burden on firms as they will no longer need to implement systems to comply with the obligations associated with the rule DP 19.2, unless there is a reduction in FSCS protection.

7.4 For example, if a merger of two unrelated entities reduces a consumer’s combined protection from £170,000 across the two entities to only £85,000 in the new merged entity, the withdrawal right would continue to allow withdrawal of up to £85,000 without penalty. But if there is no overall impact on the level of FSCS protection before and after the merger (for example, where entities in the same banking group merge, or if deposit accounts are transferred from one UK based entity to another UK based entity within the same banking group), there would be no withdrawal right.

PRA objectives analysis

7.5 The PRA has a statutory general objective of promoting the safety and soundness of PRA-authorised persons. The PRA considers that the proposals set out in this section have a neutral impact on the safety and soundness objective.

7.6 When discharging its functions in a way that advances its general objective, the PRA has, as a secondary objective, a duty to facilitate effective competition in the markets for services provided by PRA-authorised persons. The PRA considers that the proposals in this section do would not have an impact on effective competition.

Cost benefit analysis (CBA)

7.7 This section sets out an analysis of the costs and benefits of clarifying when the right of withdrawal in DP 19 applies.

Affected firms and markets

7.8 The proposals would affect all PRA-authorised deposit takers including credit unions. They are also relevant to overseas firms with Part 4A permission to accept deposits where the deposits are held by a UK establishment.

Benefits

7.9 The PRA considers that the proposals would remove rules that are no longer relevant in promoting the safety and soundness of firms since the burden to firms associated with the relevant notification rules are not proportionate to the benefit. It would also reduce the operational burden on firms.

Costs

7.10 The PRA does not anticipate that it would lead to any additional costs for firms. The costs imposed by the current DP 19 only materialise when a depositor exercises their right to withdraw a portion of their deposit. The PRA considers that if depositors are only entitled to withdraw their deposits without incurring any penalty if they suffer a reduction in their overall FSCS coverage, these costs would be reduced.

‘Have regards’ analysis

7.11 In developing these proposals, the PRA has had regard to the FSMA regulatory principles, the aspects of the Government’s economic policy set out in the HMT Recommendations letter from 2021, and the supplementary Recommendations letter sent April 2022. The following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposals:

• The principle that a burden or restriction which is imposed on a person should be proportionate to the benefits which are expected to result from the imposition of that burden (FSMA regulatory principle): The PRA considers that the proposals in this section are compatible with this principle as they reduce the operational burden on firms when they are carrying out a restructuring operation that does not result in a decrease in FSCS protection.
• The need to use the PRA’s resources in the most efficient and economical way (FSMA regulatory principle): The PRA considers that the proposals would be compatible with this principle as they would clarify the rules and lead to fewer queries from firms on these notification requirements.

7.12 The PRA has had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for these proposals, it is because the PRA considers that ‘have regard’ to not be a significant factor for these proposals.

8. FSCS notification requirements

Background

8.1 The Depositor Protection Part of the PRA Rulebook (‘DP’) contains various rules that require firms to notify depositors about the scope of FSCS protection arrangements. In particular, with respect of deposits that are not eligible for FSCS protection, DP 17 requires firms to provide annual information sheets and exclusions lists.

8.2 The PRA has become aware that this notification requirement is unduly burdensome to firms with depositors who are not entitled to FSCS protection by virtue of their legal personality.

Proposal

8.3 The current rules in DP 17 transposed the EU Deposit Guarantee Schemes Directive (DGSD).^{footnote [21]} Now that the UK has left the EU, the PRA considers that they should be amended to reduce both the operational burden on, and cost to, firms.

8.4 The PRA is proposing to remove the Chapter 17 annual notification requirement for depositors who are ineligible for FSCS protection by virtue of DP 2.2(4) (ineligible depositors). To ensure that such depositors are aware that they would not benefit from FSCS protection, the PRA proposes that firms would still be required to provide an information sheet and an exclusions list to each intending depositor, whether eligible or not, before entering into a deposit taking contract, in addition to complying with the other requirements as required under Chapter 16. This would ensure that depositors clearly understand whether or not they will benefit from FSCS protection.

PRA objectives analysis

8.5 The PRA has a statutory general objective of promoting the safety and soundness of PRA-authorised persons. The PRA considers that the proposal set out in this section has a neutral impact on the safety and soundness objective.

8.6 When discharging its functions in a way that advances its general objective, the PRA has, as a secondary objective, a duty to facilitate effective competition in the markets for services provided by PRA-authorised persons. The PRA considers that the proposals in this section do not have an impact on effective competition.

Cost benefit analysis (CBA)

8.7 This section sets out an analysis of the costs and benefits of removing the Chapter 17 notification requirement for depositors who are ineligible for FSCS protection by virtue of DP 2.2(4).

Affected firms and markets

8.8 The proposal would affect all PRA-authorised credit institutions and credit unions that have depositors that are ineligible for FSCS protection by virtue of DP 2.2(4). They are also relevant to overseas firms with Part 4A permission to accept deposits where the deposits are held by a UK establishment of the firm and who have depositors that are ineligible for FSCS protection by virtue of DP 2.2(4).

Benefits

8.9 The PRA considers that the proposal to remove the requirement to provide annual information would reduce the operational burden on firms.

Costs

8.10 The PRA does not anticipate that any increased costs associated with the proposed amendments to DP 17 would outweigh the benefits of removing the obligation to provide annual information to ineligible depositors.

‘Have regards’ analysis

8.11 In developing this proposal, the PRA has had regard to the FSMA regulatory principles, the aspects of the Government’s economic policy set out in the HMT Recommendations letter from 2021, and the supplementary Recommendations letter sent April 2022. The following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposal:

• The principle that a burden or restriction which is imposed on a person should be proportionate to the benefits which are expected to result from the imposition of that burden (FSMA regulatory principle): The PRA considers that the burdens imposed by the rules are no longer proportionate as they require firms to expend time and money to notify depositors who are not entitled to FSCS protection, and therefore proposes that these requirements should be removed for those depositors who are not eligible for FSCS protection.
• The need to use the PRA’s resources in the most efficient and economical way (FSMA regulatory principle): The PRA considers that the proposal would be compatible with this principle as it would clarify the rules and lead to fewer queries from firms on these notification requirements.

8.12 The PRA has had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for this proposal, it is because the PRA considers that ‘have regard’ to not be a significant factor for this proposal.

9. Risk based levies

Background

9.1 In this section, the PRA sets out its proposals to amend its Statement of Policy ‘Calculating risk-based levies for the Financial Services Compensation Scheme deposits class’ (‘SoP – RBL’) to account for changes made to reporting requirements and the leverage ratio.

Proposals

Amendments to the non-performing loans ratio calculation

9.2 The SoP – RBL sets out the methodology used to calculate Capital Requirement Regulation (CRR) firms’ and Credit Unions’ risk-based contributions to the FSCS. The calculation takes into account a number of metrics, including firms’ non-performing loans (NPL) ratios. Each NPL ratio is calculated using data from the FSA015 template, or where this is not available, the FINREP F18 template.

9.3 Under the PRA’s Policy Statement (PS) 18/17 ‘IFRS 9 Changes to reporting requirements’ (‘PS 18/17’), the requirements for a number of firms to report either the FINREP F18 or FSA015 templates were removed. As a result, the PRA has been unable to calculate the NPL ratio for this group of firms. As a temporary solution, these firms have since then been assigned the lowest possible risk score for this metric by the PRA – regardless of their riskiness. Since the overall amount levied across all firms is fixed, this means that these firms pay relatively less than before, and all others firms relatively more.

9.4 The PRA proposes to introduce a permanent solution to this issue and re-introduce the original policy intent by amending SoP – RBL to allow a proxy for the NPL ratio to be used for this group of firms. This proxy would use data from the FINREP F7 and FINREP F1 templates rather than the FSA015 or FINREP F18 templates. These firms would be ranked and rated separately to others for the purposes of calculating the NPL ratio, to maintain consistent treatment across the groups for which differing data is used. Please see Appendix 6 for full details of the proposed calculation.

Amendments to the leverage ratio calculation

9.5 Another metric used in the calculation of firms’ risk-based contributions to the FSCS is the leverage ratio. Currently SoP – RBL assigns firms an individual risk score (‘IRS’) of 0 if their leverage ratio, as defined in the CRR, is greater than 3%, and an IRS of 100 if it is equal to or below 3%. This threshold is now out of line with the PRA’s Supervisory Statement ‘The UK leverage ratio framework’ updated in October 2021 (‘SS45/15’).

9.6 To achieve consistency between the SoP – RBL and the leverage ratio framework set out in SS45/15, the PRA proposes to change the threshold in the SoP to 3.25% and to specify that the leverage ratio would be defined as in the PRA Rulebook. Full details of the proposed amendments are set out in Appendix 6.

PRA objectives analysis

9.7 The PRA considers that the proposals in this chapter support the operation of the FSCS. A functioning FSCS minimises the adverse effect of the failure of a PRA-authorised person on consumers and so helps promote the stability of the UK financial system as well as confidence in the UK financial system.

9.8 When discharging its functions in a way that advances its general objective, the PRA has, as a secondary objective, a duty to facilitate effective competition in the markets for services provided by PRA-authorised persons. The PRA considers that the proposals in this section do not have an impact on effective competition.

Cost benefit analysis (CBA)

Affected firms and markets

9.9 The proposals would affect all CRR firms.

Benefits

9.10 The proposed amendment to the reporting templates in the SoP – RBL would allow for greater accuracy and consistency in the calculation of firms’ contributions to the FSCS. Introducing the proxy calculation rather than assigning this group of firms a set score would ensure that the final risk scores firms receive are more reflective of their overall riskiness, as the SoP – RBL intends.

9.11 Updating the threshold used to score firms’ leverage ratios would achieve consistency with the rest of the UK leverage framework as set out in SS45/15.

Costs

9.12 The proposed amendments to the calculation of the NPL ratio for some firms would not change the overall levy. It would only affect its distribution across firms, but the PRA estimates that the impact of the redistribution is negligible. Using data as at Q4 2021, the group of firms who are not required to report FSA015 or FINREP F18 data, and therefore receive the lowest possible risk score, would experience an average increase in their levies of £704.29, based on an overall levy of £25 million. As a result, all other firms’ levies would reduce by an average of £121.59.

9.13 The firms for which the proxy is used would not be advantaged or disadvantaged compared to the groups of firms reporting NPL data through FSA015 or FINREP F15, since the intent of the proposals is to apply as equivalent methodologies as possible to each.

‘Have regards’ analysis

9.14 In developing these proposals, the PRA has had regard to the FSMA regulatory principles, the aspects of the Government’s economic policy set out in the HMT Recommendations letter from 2021, and the supplementary Recommendations letter sent in in April 2022. The following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposals.

• The principle that a burden which is imposed on a person should be proportionate to the benefits which are expected to result from that burden (FSMA regulatory principle): The PRA considers there would be no additional burden placed on firms as a result of these proposals, as firms are already required to report the templates the PRA propose to use. Further, the amendments would allow for greater accuracy, clarity and consistency in the calculation of firm’s contributions to the FSCS.
• That the PRA exercises its functions in a way that recognises differences in the nature of, and objectives of, businesses carried on by different authorised persons (FSMA regulatory principle): The separate ranking and rating of firms that report FINREP F18.00, FSA015 and FINREP F7/F1 takes account of differences in the size and nature of their business.
• The principle that the PRA should exercise its functions as transparently as possible (HMT recommendation letter): The identification of the regulatory reporting fields used for the risk-based levy calculation provides transparency to firms on how their FSCS levies are determined.
• The need to use the PRA’s resources in the most efficient and economical way (FSMA regulatory principle): The PRA is proposing to update the leverage ratio threshold in the SoP – RBL to align with the rest of the leverage ratio framework, as stated in SS45/15. This would be the most efficient way for the PRA to perform the calculation.

9.15 The PRA has had regard to HMT’s recommendations on aspects of the Government’s economic policy when considering these proposals. The proposals in this chapter are not expected to have an impact on the Government’s economic policy.

10. Consequential amendments to PRA rules, Supervisory Statements and Statements of Policy

Background

10.1 In this section, the PRA sets out its proposals to update SS18/15, SoP – DGS and SoP – RBL to ensure that they reflect the current PRA rules in force as well as the proposals in this CP and remove spent provisions from the PRA Rulebook.

Proposals

10.2 The PRA proposes to update SS18/15, SoP – DGS and SoP – RBL to:

• reflect the proposals consulted on in this CP, this will include changing the name of SS18/15 from ‘Depositor and dormant account protection’ to ‘Depositor protection’;
• reflect the UK’s withdrawal from the EU; and
• improve the clarity of drafting, for example by removing material that is no longer relevant, due to the expiry of the relevant transition period or the deletion of certain PRA rules.

10.3 The PRA also proposes to delete rules 17.3 and 20.3 in the Depositor Protection Part of the PRA Rulebook (the ‘Rules’) as, given the period of time since IP Completion Day, the Rules are now spent.

PRA objectives analysis

10.4 The PRA has statutory objectives to promote the safety and soundness of firms and to secure an appropriate degree of protection for policyholders. The PRA considers that the proposals outlined in this section would enhance the role of PRA policy material in advancing those objectives by providing firms with details on the PRA’s depositor protection policy and setting out the PRA’s expectations. Ensuring this guidance accurately reflects the current rules in force should help minimise the adverse effect that a failure of a PRA-authorised firm would have on consumers, and so help promote the stability of, and confidence in, the UK financial system.

10.5 When discharging its general functions in a way that advances its primary objectives, the PRA has, as a secondary objective, a duty to facilitate effective competition in the markets for services provided by PRA-authorised firms so far as is reasonably possible. The PRA considers that the proposals in this section do not have a significant impact on effective competition, as they do not materially change the PRA’s expectations.

Cost benefit analysis (CBA)

Affected firms and markets

10.6 The proposals would affect the FSCS and all PRA-authorised credit institutions and credit unions to which the rules in DP apply. They are also relevant to overseas firms with Part 4A permission to accept deposits where the deposits are held by a UK establishment.

Benefits

10.7 The PRA considers the benefit of its proposals arise from the additional clarity, relevance, and accessibility of the PRA’s policy materials and the PRA Rulebook.

Costs

10.8 The PRA does not expect its proposals to have any meaningful costs on firms or their activities, as the PRA considers the Rules and sections of SS18/15, SoP – DGS and SoP – RBL being deleted were either already redundant or would be made redundant by the proposals in this CP.

‘Have regards’ analysis

10.9 In developing these proposals, the PRA has had regard to the FSMA regulatory principles, the aspects of the Government’s economic policy set out in the HMT Recommendations letter from 2021, and the supplementary Recommendations letter sent April 2022. The following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposals:

• The need to use the resources of the PRA in the most efficient and economical way (FSMA regulatory principle): The PRA considers that improving the clarity and relevance of SS18/15, SoP – DGS and SoP – RBL, would reduce the time that its staff spend on their work as the PRA expects it would receive less queries from firms as a result.
• The principle that the PRA should exercise its functions transparently (FSMA regulatory principle): The PRA considers that the proposals are compatible with this principle, as they seek to ensure that SS18/15, SoP – DGS and SoP – RBL provide clear expectations and information on the PRA’s approach respectively, in order to help firms meet the PRA’s supervisory expectations.
• Competitiveness (HMT recommendation letter): The PRA considers that by increasing the clarity and transparency of the UK’s regulatory policies, these proposals would help the UK to remain an attractive place to do business.

10.10 The PRA has had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for these proposals, it is because the PRA considers that ‘have regard’ to not be a significant factor for these proposals. Impact on mutuals

10.11 The PRA considers that the impact of the proposed rule changes on mutuals is expected to be no different from the impact on other firms that are not subject to the proposals.

Equality and diversity

10.12 Following an equalities impact assessment, the PRA considers that the proposals do not give rise to equality and diversity implications under the Equality Act 2010. This is because the proposals are designed to clarify existing policy or remove rules which are no longer proportionate, therefore they are unlikely to have a material effect on any depositor whom they are designed to protect, including a depositor with protected characteristics under the Equality Act 2010.