PS7/23 – Depositor Protection

1. Overview

1.1 Readers should be aware that this Prudential Regulation Authority (PRA) policy statement (PS) implements the final rules following a consultation paper issued in September 2022 which closed in December 2022. These changes are unconnected to the consideration of the issues identified from the failure of Silicon Valley Bank (SVB). Work is ongoing to consider whether further changes are needed to the depositor protection regime, including in light of lessons learned from SVB.

1.2 This PRA PS provides the PRA’s response to the final part of the representation to consultation paper (CP) 9/22 – Depositor Protection. It also contains:

• the PRA’s final rules concerning the relevant amendments to the Depositor Protection Part of the PRA Rulebook (DP) (Appendix 1);
• the updated PRA supervisory statement (SS) 18/15 – Depositor and dormant account protection (SS18/15) (Appendix 2);
• the updated PRA statement of policy (SoP) – Deposit Guarantee Scheme (SoP – DGS) (Appendix 3); and
• the updated PRA SoP – Calculating risk-based levies for the Financial Services Compensation Scheme deposits class (SoP – RBL) (Appendix 4).

1.3 This PS is relevant to all PRA-authorised credit institutions and 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.

Background

1.4 In CP9/22, the PRA proposed to:

• amend the rules in:
  • DP 4 and 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 surviving joint account holder is entitled to temporary additional protection following the death of a joint account holder (Temporary high balances section);
  • DP 3.2 and 20 – to clarify that: (i) depositors of firms that have their Part 4A permission removed do not continue to benefit from Financial Services Compensation Scheme (FSCS) protection; and (ii) overseas firms must notify depositors that they are withdrawing from the UK and that any deposits held by the UK establishment of the overseas firm will cease to be covered by FSCS protection (FSCS protection for firms in default section);
  • DP 19.1(2) – to provide that when a bank is subject to a restructuring operation (such as a merger or conversion of subsidiaries into branches), depositors only have a right of withdrawal, without penalty, if the operation results in a reduction in FSCS protection (Withdrawal rights on deposit transfer section);
  • 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 (FSCS notification requirements section).
• revoke 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);
  • delete PRA Rules in DP 17.3 and 20.3 as given the period of time since the Implementation Period Completion Day (31 December 2020), these rules are now spent; and
  • amend and update SS18/15, SoP – DGS, and SoP – RBL to reflect the UK’s withdrawal from the EU, expired transition periods, and to reflect changes to the rules covered by the other proposals in CP9/22 (Consequential amendments to PRA rules, supervisory statements, and statements of policy section).

1.5 CP9/22 contained a number of other proposals that are not the subject of this PS and are not covered by the new rules as they have already been the subject of previously published PSs.^{footnote [1]}

Summary of responses

1.6 The PRA received five responses to the CP. Respondents welcomed the proposals but made a few observations and requests for clarification that are set out in chapter 2. There were no responses to the proposals relating to: (i) risk-based levies (chapter 9 of the CP) or (ii) consequential amendments to PRA rules, SSs and SoP (chapter 10 of the CP).

Changes to draft policy

1.7 Where the final rules differ from the draft in the CP in a way which the PRA considers significant, the Financial Services and Markets Act 2000 (FSMA)^{footnote [2]} requires the PRA to publish:

• details of the difference together with a cost benefit analysis; and
• a statement setting out in the PRA’s opinion whether or not the impact of the final rule is significantly different to: the impact that the draft rule would have had on mutuals; or the impact that the draft rule would have had on mutuals as compared with other PRA-authorised firms.

1.8 The PRA has made minor amendments to the rules as consulted on to make the rules relating to joint account and THBs clearer and easier to read. As a result:

• the provisions concerning the extension of a surviving joint account holder’s FSCS protection for a period of six months have been moved from chapter 10 to chapter 4 of the DP;
• a new rule, DP 10.1A, has been added – this new rule sets out who is a ‘relevant person’ for the purposes of the THB regime; this replaces the explanation set out in rules DP 10.2A and DP 10.2B of the consultation draft.

In addition, the PRA has also made some changes to the SOP – DGS and SS18/15 following an internal review. The PRA does not consider that these changes are significant as they do not impact the policy intent. They have been made on the PRA’s own initiative following a review of the final rules.

1.9 When making rules, the PRA is required to comply with several legal obligations, including publishing an explanation of the PRA’s reasons for believing that making the proposed rules is compatible with its objectives and with its duty to have regard to the regulatory principles.^{footnote [3]} In CP9/22, the PRA set out this explanation for each proposal in the relevant chapter, under the headings ‘PRA objectives analysis’ and ‘‘Have regards’ analysis’. The responses to the consultation supported the proposals; therefore, the analysis, as presented in the CP, remains unchanged.

Implementation and next steps

1.10 The amendments to the DP rules, SS18/15, SoP – DGS and SoP – RBL will come into effect on 1 July 2023.

1.11 References related to the UK’s membership of the EU in SS18/15, SoP – DGS, and SoP – RBL covered by the policy in this PS have been updated as part of this PS 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 [4]}

2. Feedback to responses

2.1 Before making any proposed rules, the PRA is required by FSMA to have regard to any representations made to the consultation, and to publish an account, in general terms, of those representations and its responds to them.^{footnote [5]}

2.2 The PRA has considered the representations received to the CP. This chapter sets out the PRA’s response, and its final decision.

2.3 The sections below have been structured broadly along the same lines as the chapters of the CP and cover:

• Temporary high balances;
• FSCS protection for firms in default;
• Withdrawal rights on deposit transfer;
• FSCS protection notification rights.

Temporary High Balances

2.4 The PRA proposed that: (i) trustees (whether individuals or corporate trustees) would be able to claim THB on behalf of eligible beneficiaries; and (ii) the criteria for determining whether the THB rules apply be assessed in relation to the individual beneficiary rather than the account holder/depositor. The PRA also proposed to amend the rules relating to compensation limits to provide that for a joint account, the FSCS protection limits of the surviving individual account holders would be increased temporarily by an amount calculated by dividing between the surviving account holders the limit applied to the deceased account holder at the date of death. 

2.5 One respondent was concerned that an increase in THB held by a firm would result in an increase in the covered deposits reported by the firm to the PRA. They also asked for confirmation that the determination of any THB would continue to be a matter for the FSCS following a default. For the purposes of reporting, the definition of covered deposits in DP 43.1 specifically excludes THBs. Firms are not required to report additional THB amounts as covered deposits. In addition, the PRA confirms that, as set out in SS18/15, the FSCS will remain responsible for determining THBs following a default.

2.6 One respondent was confused as to the level of FSCS protection given to surviving joint account holders when one account holder dies. The PRA confirms that, in the case of a joint account, surviving individual account holders split the deceased’s FSCS allowance between them. As a result, for a period of 6 months following the death of a joint account holder, the surviving individual account holders benefit from an enhanced level of FSCS protection. The drafting has been clarified in the final rules.

FSCS protection for firms in default

2.7 The PRA proposed to amend DP 3.2 to make clear that a firm must be authorised by the PRA at the moment it defaults for its depositors to be eligible for compensation.

2.8 One respondent requested confirmation as to whether the notification to depositors concerning the loss of FSCS protection would be an annual requirement or whether it would only apply where the cancellation of Part 4A permission has been submitted. The PRA confirms that it is a one-off notification to be given when the overseas firm is aware that within 12 months deposits will no longer be held by a UK establishment and therefore no longer subject to FSCS protection.

Withdrawal rights on deposit transfer

2.9 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.

2.10 One respondent wanted clarification on the circumstance in which the withdrawal right would apply. The PRA confirms that the withdrawal right applies where the restructuring involves two entities with separate banking licences becoming one firm with one banking licence. Such a change could reduce a depositor’s FSCS protection to a single £85,000 lump sum whereas prior to the restructuring they may have had two lots of FSCS protection giving them £170,000 of protection in total.

FSCS protection notification rights

2.11 The PRA is proposing to remove the DP Chapter 17 annual notification requirement for depositors who are ineligible for FSCS protection by virtue of DP 2.2(4) (ineligible depositors).

2.12 One respondent requested clarifications on: (i) whether a firm could still provide an Information Sheet and Exclusions List (ISEL) to ineligible clients if they wished; and (ii) when the information should be sent. The PRA confirms that firms are still able to send an ISEL if they wish, the new rule does not prohibit them from doing so. In addition, the information should be sent in accordance with the guidance set out in SS18/15.

2.13 Having considered the responses, the PRA has decided to implement the proposals as set out in CP9/22 with some minor changes to the instruments to improve the clarity and effectiveness of the rules.