PS2/23 – Depositor Protection

1. Overview

1.1 This Prudential Regulation Authority (PRA) policy statement (PS) provides feedback to part of the responses to the 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 (Appendix 1: Annex A).

1.2 This PS is relevant to e-money institutions, authorised payment institutions, small payment institutions, credit unions (in respect of e-money), and PRA-authorised credit institutions.

Background

1.3 In CP9/22, the PRA proposed to amend Rule 6.2 in the Depositor Protection Part of the PRA Rulebook (DP) and make other consequential changes to the DP rules. These amendments clarify that the Financial Services Compensation Scheme (FSCS) depositor protection regime covers FSCS eligible customers of e-money institutions, authorised payment institutions, small payment institutions, and credit unions (in respect of e-money) should a credit institution holding such firms’ safeguarded funds fail (the Safeguarding Rules proposal).

1.4 CP9/22 contained a number of other proposals that are not the subject of this policy statement and are not covered by the new rules. The other proposals have either already been the subject of a previously published policy statement^{footnote [1]} or will be covered in a separate forthcoming policy statement.

Summary of responses

1.5 The PRA received five responses to the Safeguarding Rules proposal. Respondents welcomed the proposal but made a few observations and requests for clarification that are set out in chapter 2.

Changes to draft policy

1.6 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 on mutuals is significantly different to: the impact that the draft rule would have had on mutuals; or the impact that the final rule will have on other PRA-authorised firms.

1.7 The PRA has made minor amendments to the rules as consulted. The PRA does not consider that these changes are significantly different to the consultation draft and have been made on the PRA’s own initiative following final PRA review of the final rules and engagement with the Financial Conduct Authority (FCA).

1.8 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 the Safeguarding Rules proposal in chapter 5, 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

1.9 The changes to DP 6.2 and consequential changes to the rules came into effect on 12 March 2023.

1.10 CP9/22 contained a number of additional proposals including minor consequential changes to PRA supervisory statement (SS) 18/15 – ‘Depositor and dormant account protection’ and the PRA’s statement of policy on Deposit Guarantee Scheme (SOP – DGS) to reflect the amended rules. The PRA has already published a PS on the CoA and DAS Rules^{footnote [4]} and, as noted above, will publish a further PS on the remaining proposals and consequential changes to SS18/15 and SOP – DGS in due course.

2. Feedback to responses

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

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

2.3 In CP9/22, the PRA proposed to amend DP 6.2 and make other consequential changes to the DP rules to protect eligible customers of e-money institutions (EMIs), authorised payment institutions or small payment institutions (together PIs), and credit unions (in respect of e-money), if a credit institution holding such firms’ safeguarded funds were to fail.

2.4 The respondents supported the Safeguarding Rules proposal; however, they made a few observations and requests for clarifications. The PRA’s response is set out below.

2.5 A few respondents were concerned that customers of EMI and PIs would not understand the nature of the FSCS protection, and this could lead to confusion. The PRA does not have the power to impose disclosure requirements on EMI/PIs and has raised this with the FCA.

2.6 One respondent suggested that the eligibility condition relating to the identification and verification of customers before funds are paid to them should be restricted to cases where e-money holders are compensated directly, and that the eligibility requirements are removed when the FSCS pays away compensation to another safeguarding account. The PRA considers that the proposed rules support the principles of depositor protection and ensure, where possible, that the FSCS is paying funds only where eligibility has been determined. The PRA considers that it is appropriate for eligibility to be determined to ensure that the costs of compensation, which are funded by levy payers, are appropriate.

2.7 One respondent was concerned that the proposals could result in credit institutions passing on increased costs to EMI/PIs who would in turn pass them on to their customers. Respondents also queried whether the current levy would be sufficient for a large EMI that safeguarded a high level of deposits in the UK. The PRA considers that the proposed rules should not result in an increase in costs faced by credit-institutions as they merely provide the protection the PRA had understood existed prior to certain court decisions. Credit institutions are already safeguarding funds and unless they have taken action to change their eligibility assessments and remove safeguarded funds from their exclusion view, the amount of deposits a credit institution is required to report under DP 43.1, which is used to calculate the FSCS levy, should not change. With respect to concerns around the amount of the current levy, the FSCS can raise additional funds above the annual levy threshold to deal with a failure should this be needed.

2.8 One respondent noted that the drafting of DP 2.2(5) would benefit from further consideration. The PRA considers that the proposals in the CP are deliberately very narrow and designed only to cover the situation where an EMI/PI deposits safeguarded funds with a PRA-authorised credit institution that then fails. Therefore, currently, the PRA does not propose to amend the wording of DP 2.2(5).

2.9 Respondents asked for a number of clarifications. We have listed the clarifications and the PRA’s response below.

Table: Summary of clarifications

2.10 Having considered the responses, the PRA has decided to implement the Safeguarding Rules proposal as set out in CP9/22 with some minor changes to the instrument to improve the clarity and effectiveness of the rules.