CP4/25 – Depositor protection

Consultation paper 4/25
Published on 31 March 2025

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Responses in relation to the proposals in connection with the limit of protection available from the Financial Services Compensation Scheme are requested by 30 June 2025, while responses in relation to the proposals in connection with the implementation of the Bank Resolution (Recapitalisation) Bill are requested by 30 April 2025.

Responses may be shared with the Financial Conduct Authority, HM Treasury and the Financial Services Compensation Scheme, considering the relevance of the consultation proposals to those organisations.

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In the policy statement for this consultation, the PRA will publish an account, in general terms, of the representations made as part of this consultation and its response to them.  In the policy statement, the PRA is also required to publish a list of respondents to its consultations, where respondents have consented to such publication.

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Responses can be sent by email to: CP4_25@bankofengland.co.uk.

Alternatively, please address any comments or enquiries to:
Capital and Compensation Standards Team
Prudential Regulation Authority
20 Moorgate
London
EC2R 6DA

1: Overview

1.1 This consultation paper (CP) sets out the Prudential Regulation Authority’s (PRA) proposals in relation to the protection for deposits available from the Financial Services Compensation Scheme (FSCS), the UK’s Deposit Guarantee Scheme. Under the Financial Services and Markets Act 2000 (FSMA), the PRA is responsible for making rules in relation to depositor protection. The CP contains two sets of proposals. The first set proposes to increase the limits on the protection available to a firm’s depositors from the FSCS if the firm fails. The second relates to updates to the rules that would be needed to facilitate the implementation of proposals made in the Bank Resolution (Recapitalisation) Bill. The Bill proposes a new resolution tool enabling industry funds, provided via the FSCS, to be used to recapitalise a failing firm to support its sale or transfer to a bridge bank, where its use is judged to be in the public interest.

1.2 The proposals in connection with the limit of protection available from the FSCS include:

  • an increase in the deposit protection limit from £85,000 to £110,000;
  • an increase in the limit applicable to certain temporary high balance (THB) claims from £1 million to £1.4 million;footnote [1] and
  • the provision of a transitional period for firms to update disclosure materials relating to the protection limits and the availability of protection more generally.

1.3 These proposals would result in changes to:

  • the Depositor Protection Part of the PRA Rulebook (Appendix 1);
  • supervisory statement (SS) 18/15 (Appendix 2); and
  • the Deposit Guarantee Scheme statement of policy (Appendix 3).

1.4 The proposals concerning the Bank Resolution (Recapitalisation) Bill involve:

  • new and amended rules to enable the FSCS to fulfil its new functions under the proposed legislation.

1.5 These proposals would result in changes to:

  • the Depositor Protection Part of the PRA Rulebook (Appendix 4); and
  • the Deposit Guarantee Scheme statement of policy (Appendix 3).

1.6 Through its review of the Depositor Protection Part as part of these proposals, the PRA has identified certain provisions that are now spent and references that are no longer required. Accordingly, the PRA proposes the modification or deletion of certain chapters of the Rulebook containing spent provisions or unnecessary references.

Overview of proposals in connection with the limit of the protection available from the FSCS

1.7 The FSCS is the UK’s Deposit Guarantee Scheme. It protects eligible deposits if a firm fails, up to a limit set by the PRA. Following a review of the deposit protection limit carried out in accordance with the Deposit Guarantee Scheme Regulations (DGSR), the PRA proposes to increase the deposit protection limit from £85,000 to £110,000, with effect from 1 December 2025 (for firm failures occurring on or after this date). The proposed increase considers consumer price inflation since the limit was last changed in 2017 and is judged to help maintain consumer confidence by ensuring that the limit has not been eroded in real terms.

1.8 The PRA sees value in setting a limit that does not change regularly. That approach supports awareness and confidence and minimises the costs to firms associated with changes to the limit. The PRA would ordinarily expect to review the limit again in five years’ time, consistent with the DGSR.

1.9 As required under the DGSR, any change to the deposit protection limit is subject to the approval of HM Treasury (HMT). Accordingly, following consultation, if the PRA proceeded with a change to the deposit protection limit, it would seek approval from HMT before final rules were made.

1.10 There is a separate deposit limit for certain balances that are temporarily high because of specific ‘life events’ – for example, due to a residential property transaction. The PRA also proposes to increase the limit applicable to these THB claims from £1 million to £1.4 million, to account for the change in consumer price inflation since THB protection was introduced in July 2015. This would mitigate the effect of a real-terms reduction in the value of the THB limit and help ensure that the limit remains at a level sufficient to cover most of the life events covered by THB protection.footnote [2] Under the proposals, the new THB limit would also apply from 1 December 2025 (for firm failures occurring on or after this date).

1.11 To ensure that depositors have clear information about the protection available from the FSCS and the updated limits, the PRA proposes to change the information firms are required to disclose to depositors and other consumers. In addition to changes to reflect the proposed new limits, the PRA proposes more general changes to the disclosure materials to ensure they remain clear and easy to understand. The PRA also proposes that new depositor information should be displayed in third-party premises such as banking hubs, where several deposit takers may share one single location to deliver banking services. The PRA proposes a six-month transitional period until 31 May 2026 for firms to update their disclosure materials to allow them time to implement the proposed changes.

Overview of proposals in connection with the Bank Resolution (Recapitalisation) Bill

1.12 In recognition of the lessons learnt from the resolution of Silicon Valley Bank UK Limited, the Bank Resolution (Recapitalisation) Bill proposes a new resolution tool. This tool would enable industry funds, provided via the FSCS, to be used to recapitalise a failing firm. This would support the sale of all, or part, of the firm to a private sector purchaser or a transfer to a bridge bank, where its use is judged to be in the public interest. HMT consulted on these proposals in January 2024.

1.13 The proposals in the Bill would expand the FSCS’s functions to include making recapitalisation payments, where required to do so by the Bank acting as resolution authority, and levying firms to recoup those payments. To enable the FSCS to fulfil these proposed new functions, the PRA, as required by FSMA, must make consequential changes to the rules governing the operation of the FSCS.

1.14 The PRA is consulting on the proposals in relation to the Bank Resolution (Recapitalisation) Bill now on the assumption that the Bill remains in substantively the same form. This is necessary to ensure that the proposed PRA rule changes outlined in this CP can be made to implement the new mechanism as soon as possible. If the proposed legislative changes are not ultimately made, the PRA would not introduce the associated changes to the PRA rules or the Deposit Guarantee Scheme statement of policy set out in this CP.

Impact of the proposals

1.15 This CP is relevant to:

  • PRA-authorised UK banks, building societies and credit unions;
  • overseas firms with permission to accept deposits where the deposits are held by a UK branch or subsidiary of the firm;
  • the FSCS, as the administrator of the UK’s Deposit Guarantee Scheme; and
  • depositors.

1.16 The PRA has assessed the potential costs and benefits of these proposals. There would be some costs to deposit takers and to the FSCS to implement these proposals. However, the PRA considers that the costs would be outweighed by the benefits. These would include benefits to depositors and for the safety and soundness of firms and financial stability. Details of the PRA’s analysis of the potential costs and benefits are covered in the cost-benefit analysis sections in Chapter 2 and Chapter 3.

1.17 The PRA has a statutory duty to consult when changing rules (FSMA s138J). When not making rules, the PRA has a public law duty to consult widely where it would be fair to do so. 

1.18 The PRA is required to establish and maintain a Cost Benefit Analysis (CBA) Panel under section 138JA of the Financial Services and Markets Act 2000. The PRA consulted the CBA Panel in relation to the CBA that accompanies Chapter 2 of this CP regarding the limit of the protection available from the FSCS. The PRA did not consult the Panel in relation to the Bank Resolution (Recapitalisation) Bill aspects of the PRA’s proposals because these changes did not meet the materiality thresholds to be considered by the Panel. The Panel provided helpful feedback in relation to the CBA concerning the deposit protection limits, which has been incorporated in this CP. The key changes made include the following.

  • The CBA Panel suggested that the PRA further explore the expected impacts on competition. The PRA has expanded the discussion of the proposals’ impact on the PRA’s secondary competition and international competitiveness and growth objectives in paragraphs 2.31 and 2.32 of this CP. The CP makes clear that the proposed changes would be expected to have some positive impact on competition and international competitiveness and therefore have a positive effect on the level of economic output in the medium to long term.
  • The CBA Panel suggested that the PRA make clear that some costs for firms could be seen as benefits from a depositor’s perspective. The direct benefit to depositors is discussed in paragraph 2.38. The CP explains that depositors would benefit from the proposed adjustments to the protection limits as they would benefit from a higher level of protection if a PRA-authorised deposit taker that they deal with fails. The PRA has made clear that benefits fall to depositors who could be either individuals or companies and other entities.
  • The CBA Panel considered that the CBA could elaborate on what indicators would demonstrate the success of the policy. The CP now outlines how the PRA would monitor the effectiveness of the proposed policy changes, if implemented, in paragraph 2.29.
  • The CBA Panel suggested that the CP could ask a specific question on the CBA to elicit responses. Stakeholders are asked to provide comments on the overall consultation proposals set out in this CP, which includes the CBA. In paragraph 2.44, the CP now asks for specific feedback on the estimates of implementation costs that would fall to firms that are detailed in the CBA.
  • The CBA Panel commented on a number of presentational elements, highlighting the importance of setting out the CBA in a clear and objective way for all stakeholders. The CBA has been reviewed to ensure it represents an objective commentary of the costs and benefits and to address other points of feedback raised by the CBA Panel.

1.19 The PRA also consulted the PRA Practitioner Panel about the proposals in this CP relating to the protection available to depositors. The Practitioner Panel was broadly supportive of the PRA’s proposals, although encouraged the PRA to carefully consider the impact of the cost to firms of implementing changes to disclosure materials and suggested that the PRA should avoid frequent changes to the deposit protection limit to limit these costs. The PRA did not consult the Practitioner Panel in relation to the Bank Resolution (Recapitalisation) Bill proposals, in light of the limited scope for policy choices in connection with the FSCS-specific aspects of those proposals.

1.20 In carrying out its policymaking functions, the PRA is required to comply with several legal obligations. 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

1.21 Chapter 2 sets out the PRA’s proposals in relation to the deposit protection limit, the limit applicable to THB claims and updated disclosure requirements. Chapter 3 sets out the PRA’s proposals in connection with the Bank Resolution (Recapitalisation) Bill.

Implementation

1.22 The PRA proposes that the new deposit protection limits would apply from 1 December 2025 (for firm failures occurring on or after this date). Deposit takers would then have up to six months to make changes to disclosure materials, which would need to be completed no later than 31 May 2026. The PRA expects to confirm the final rules in November 2025, in light of consultation feedback received, including the final implementation dates.

1.23 If a new deposit protection limit is introduced, firms would be required to update their single customer view (SCV) systems – which provide information about eligible deposits to enable the FSCS to quickly compensate depositors in the event of a firm’s failure – to reflect the new limit from 1 December 2025. This is to ensure that the FSCS could effectively respond to a deposit-taker failure once the new limit is in place. This is in keeping with the depositor protection rules and the PRA’s former guidance that firms should ensure their systems are flexible enough to accommodate limit changes quickly (see paragraph 2.14 for further background). Accordingly, it is important that firms ready themselves now for a potential change to the deposit protection limit on 1 December 2025, including by ensuring that they can readily adjust their SCV systems to account for a change to the limit. In paragraph 2.5, the PRA also reminds firms of the importance of ensuring that contact details held within the SCV are kept up to date, including email addresses, to support faster payments to depositors. There are no specific system implications arising from the proposed increase in the THB limit (as THBs are confirmed, in accordance with PRA rules, after the failure of a firm).

1.24 Subject to consultation responses, the PRA proposes to make the rules and Deposit Guarantee Scheme statement of policy changes in relation to the Banking Resolution (Recapitalisation) Bill once the relevant provisions have received royal assent and are in force.

Responses and next steps

1.25 This consultation closes:

  • On 30 June 2025 for proposals related to the FSCS protection limits.
  • On 30 April 2025 for proposals related to the Bank Resolution (Recapitalisation) Bill. The shorter, one-month consultation period is to ensure that the necessary rule changes can be made in time to allow the FSCS to fulfil its new functions should the Bill receive royal assent.

1.26 The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to CP4_25@bankofengland.co.uk.

1.27 When providing your response, please tell us whether or not you consent to the PRA publishing your name, and/or the name of your organisation, as a respondent to this CP.

1.28 Please also indicate in your response if you believe 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.

1.29 The PRA expects to publish a policy statement in relation to the proposals in connection with the limits of the protection available from the FSCS in November 2025. Timings for a policy statement in relation to the proposals in connection with the Bank Resolution (Recapitalisation) Bill would depend on when it receives royal assent.

2: The PRA’s proposals in relation to the deposit protection limit, the THB limit and associated information requirements

Depositor protection

2.1 The FSCS was established in 2001 under FSMA as a unified compensation scheme. As the administrator of the UK’s Deposit Guarantee Scheme, the FSCS protects eligible deposits if a firm fails. Knowledge of the deposit protection limit provides depositors with confidence that their deposit balances up to the limit are protected, helping to increase consumer confidence in the financial system and reducing the likelihood of runs on deposit taking firms. Depositor protection, therefore, advances the PRA’s general objective of promoting the safety and soundness of PRA-authorised firms by reducing the adverse effects that the failure of firms – or potential failure of firms – could be expected to have on the stability of the UK financial system. This helps to increase confidence in the system.

2.2 Eligible deposits are protected up to the deposit protection limit that is in effect at the time of the failure of a PRA-authorised deposit taker. The protection is provided per depositor, per firm. Depositors can fully protect their deposits by spreading their funds across different authorised firms.footnote [3] Additional protection is available in certain situations connected with prescribed ‘life events’, which might result in deposit balances being temporarily high – for example, in connection with a residential property transaction. To maintain depositors’ confidence, it is important that these limits are appropriate and can be updated to reflect changes in the economy and financial system.

2.3 Before the UK withdrew from the European Union (EU), depositor protection was subject to the EU’s Deposit Guarantee Schemes Directive (DGSD), which required the deposit protection limit to be set at €100,000, or the equivalent under a member state’s currency. Considering this requirement, following a review,footnote [4] the limit in the UK was set at £85,000 from January 2017. Since the UK left the EU, the PRA has been able to set the limit in accordance with the UK’s DGSR, subject to HMT approval. Under the DGSR, the PRA is required to review the deposit protection limit at least every five years, with the first review since withdrawal from the EU due by December 2025.

2.4 While there have not been any major deposit-taker failures in the UK in recent years, the FSCS has dealt with a number of credit union failures and one small bank insolvency.footnote [5] Furthermore, the events of 2023 in the banking sector, including the failure of Silicon Valley Bank UK Limited, while not requiring FSCS involvement, highlighted the importance of depositor protection in supporting confidence in the financial system. Accordingly, the need for robust depositor protection that underpins confidence in the financial system remains a key element of the regulatory framework to minimise the impact of banking failures. In addition, the events of 2023 led to the enhancements to the resolution regime proposed under the Bank Resolution (Recapitalisation) Bill (discussed in paragraph 1.12 and Chapter 3). Those enhancements would further strengthen the powers available to the Bank as resolution authority, to enable continuity of access to deposits and help to ensure failures can be dealt with in an orderly way, to further support the financial stability of the UK.

2.5 Alongside these proposals and enhancements, recent work progressed by the FSCS as part of the Bank’s ‘Improving Depositor Outcomes in Bank Insolvency’ initiativefootnote [6] will also deliver better outcomes for depositors in the event of a bank or building society insolvency. This work includes a new online portal, which allows the FSCS to quickly make compensation payments to an alternative account held by the depositor, rather than making payment by cheque. This system is reliant on the quality of data maintained by firms in their SCV, including up-to-date email addresses. Firms are asked to ensure the integrity of the information held in the SCV, which will support faster payments to depositors. Further information about the need to update SCV processes in light of the proposals covered in this CP is included in paragraph 2.14.

Overview of consultation proposals

2.6 The proposals in this chapter aim to ensure that an appropriate level of depositor protection is maintained that balances the needs of depositors and the costs to the deposit takers that fund the FSCS. The proposals in this chapter focus on the amount of compensation available in the case of deposit-taker failures and do not represent a holistic review of the overall depositor protection framework.

2.7 This chapter sets out the PRA’s proposals to:

  • Increase the deposit protection limit from £85,000 to £110,000 with effect from 1 December 2025 (for firm failures occurring on or after this date). Firms would be required to update their SCV systems to reflect the new limit by this date.
  • Increase the limit applicable to certain THB claims from £1 million to £1.4 million with effect from 1 December 2025 (for firm failures occurring on or after this date).
  • Require firms to update disclosure obligations and deposit compensation information by 31 May 2026.
  • Update SS18/15 – Depositor Protection with the PRA’s expectations in relation to the proposed rule changes to correct references and delete expired text, with effect from 1 December 2025.
  • Update the Deposit Guarantee Scheme statement of policy to reflect the proposed rule changes, with effect from 1 December 2025.

2.8 The proposed amendments to the Depositor Protection Part are contained in Appendix 1, the amendments to SS18/15 are contained in Appendix 2 and the updated statement of policy is contained in Appendix 3. A summary of the key proposed amendments to the Rulebook are included in Table 1. In addition to the amendments summarised, historic references to the DGSD are also proposed to be removed, as they are no longer required.

Table 1: Summary of key proposed amendments to the Depositor Protection Part in relation to the limit of the protection available from the FSCS

Chapter or Annex

Summary of proposed amendments

1 – Applications and definitions

Amendments to definitions.

4 – Limits on compensation payable

Updated to reflect proposed new deposit protection limit and THB limit.

5 – Calculating compensation

Minor clarificatory amendments.

9 – Time limits

Simplification of Depositor Protection Part 9.3 to remove references to historic time periods that are no longer relevant.

10 – Temporary high balances

Minor clarificatory amendments.

12 – Single customer view requirements

Minor clarificatory amendments.

14 – Single customer view and exclusions view reporting

Minor clarificatory amendments.

16 – Firms’ disclosure obligations – information and exclusions

Removal of a notification requirement.

23 – Deposit compensation information – branches and websites

Amendments to compensation information requirements in relation to the ‘compensation sticker’ and ‘compensation poster’.

53 – Transitional provisions – application of COMP

Deletion of spent provisions.

54 – Transitional provisions - firms' additional disclosure obligations

Transitional disclosure obligations that would apply from 1 December 2025 to 31 May 2026.

57 – Transitional provisions – withdrawals

Deletion of spent provisions.

Annex 1 – Information Sheet (Chapter 16)

Changes to reflect the new deposit protection limit and THB limit and to generally ensure it remains clear and up to date.

Annex 2 – Content of compensation stickers and posters (Chapter 23)

Changes to ensure that the materials refer to the proposed new deposit protection limit.

Annex 3 – Exclusion list (Chapter 16)

Changes to ensure that the list of exclusions remains clear and up to date.

Proposed increase in the deposit protection limit

2.9 Following a review carried out in accordance with the DGSR, the PRA proposes to increase the deposit protection limit from £85,000 to £110,000. This proposed change takes account of consumer price inflation since the limit was last changed in 2017 and, more generally, reflects developments in the banking sector and the UK economic and monetary situation. It also places weight on the importance of having a ‘round’ number for the limit, which is likely to be more memorable and so raise awareness amongst depositors, building confidence.

2.10 As the deposit protection limit is set in nominal terms (ie as a set monetary amount), the amount of protection that it provides – in terms of the goods and services that those deposit savings can buy, for example – can ‘tighten’ over time as prices in the economy rise. The resulting real-terms reduction in the limit could lead to lower depositor confidence in the limit. It can also mean that the proportion of depositors protected can change, in ways which may not be in line with the PRA’s risk appetite. As a result, the PRA considers that the effect of consumer price inflation is an important factor to consider when reviewing the deposit protection limit, to ensure that the limit remains broadly stable in real terms.

2.11 The DGSR requires that the PRA, if adjusting the limit in accordance with inflation, considers changes to the Consumer Prices Index (CPI), as published by the Office of National Statistics. Based on changes to CPI, £85,000 in January 2017 has increased to £113,669 in December 2024 in real terms. It is proposed that this figure is rounded to a revised deposit protection limit of £110,000, considering the benefits of having a round figure. The PRA judges that £110,000 is likely to be easier for depositors to remember than another figure around £113,669. This is important as depositor awareness is a key factor in maintaining confidence in the deposit protection framework.

2.12 Data obtained from the FSCS show that the proportion of depositors fully protected by the current deposit protection limit (ie with deposits within the £85,000 limit) has fallen marginally since the limit was last changed.footnote [7] In 2018 (the year after the £85,000 limit was introduced), around 98% of depositors were fully protected by the limit. However, by 2024, this had fallen to 97% of depositors. The PRA considers that this reduction in the proportion of depositors fully protected may, at least in part, reflect the effect of inflation over the period. The FSCS data shows that a limit of £110,000 would mean that around 99% of depositors would have been fully protected in 2024, even absent any changes in behaviour (for example, consumers adjusting their deposit balances to keep deposits within the potential new limit).footnote [8]

2.13 In reviewing the deposit protection limit, the PRA has considered alternative options. The PRA could choose to leave the limit at £85,000, on the basis that most depositors are fully protected by the current limit and it is at an amount that many depositors are familiar with.footnote [9] However, not increasing the limit for inflation could be seen as a tightening of the PRA’s risk appetite, which is not the policy intention. The PRA could also look to increase the limit more materially. However, the PRA considers that there is not a case to increase the limit markedly at this time, considering the high proportion of depositors that would be protected by the proposed £110,000 limit, and given the extra prospective burden on firms associated with a higher increase.

2.14 It is proposed that the new limit would apply from 1 December 2025, for deposit-taker failures occurring on or after that date. To ensure that the FSCS has the information that it needs to deal with claims against firms that fail effectively, it would be imperative that SCV data maintained by firms correctly reflects the new limit. Accordingly, if, following this consultation, the PRA proceeds with a change to the deposit protection limit, the PRA would require firms to update their SCV systems to account for the new limit on 1 December 2025 (but not before that date). This is consistent with Depositor Protection rule 12.7, which places an obligation on firms to ensure that their SCV systems automatically identify the amount of covered (ie FSCS protected) deposits and any portion of deposits that are over the protection limit. Further, the PRA previously stated, in a former version of SS18/15, that firms should ensure their systems are flexible enough to accommodate limit changes, for example if the protection limit is changed at short notice.footnote [10] The PRA is proposing to reintroduce this expectation as part of this consultation. SS18/15 also confirms that the PRA does not consider that the implementation of an adjustment to the deposit protection limit represents a material change for the purposes of Depositor Protection 14.3 and 15.3, therefore firms are not required to notify the PRA (or the FSCS) of such a change to their SCV systems. As firms would have eight months following this CP before a potential change in the limit could take effect, the PRA considers that firms would have sufficient time to ensure that their systems can be adapted to account for a new limit. As explained in paragraph 1.22, the PRA expects to confirm the final rules in November 2025, in light of consultation feedback received, including the final implementation dates.

2.15 In developing these proposals in connection with the deposit protection limit, the PRA has engaged with the Financial Conduct Authority (FCA). The FCA is responsible for FSCS protection in relation to certain regulated activities, including investment provision and distribution, home finance, debt management, funeral plan provision and insurance distribution. The FCA has no immediate plans to make similar changes to the compensation limits it is responsible for but will keep this under review while continuing to focus on preventing firms from failing without paying their redress liabilities.

2.16 The PRA considers that there is benefit in having an enduring limit that does not change regularly. This helps to maintain confidence in – and awareness of – the limit, while limiting the cost to firms associated with changes to the limit. Accordingly, the PRA expects to review the deposit protection limit every five years, in accordance with the requirement of the DGSR.

Proposed increase in the limit applicable to certain THB claims

2.17 Protection for THB claims was introduced from July 2015 to provide depositors with additional protection when their balances might be temporarily high because of certain events. Currently, protection of £1 million is available for a period of six months from the point of deposit for certain qualifying life events, such as residential property transactions or insurance payouts (although, no monetary limit applies for THBs arising from a payment in connection with personal injury or incapacity).

2.18 The limit for THB claims is not subject to the periodic review requirement under the DGSR. Nonetheless, the PRA considers that it would also be appropriate to increase the limit applicable to these claims to account for consumer price inflation since THB protection was introduced in July 2015. This would mean that the THB limit has not been eroded in real terms since it was last changed and ensure that the limit remains at a reasonable level to cover most of the types of life event covered by THB protection.

2.19 Based on changes to CPI from July 2015 to December 2024, an increase in the THB limit from £1 million to £1.4 million would account for consumer price inflation over this period, while also maintaining a round number for the limit. The PRA has considered whether alternative indices would be appropriate for calculating an inflation-based increase to the THB limit. While an index connected with house price inflation (such as the UK House Price Index) may be appropriate for some categories of THB claim (for example, claims in connection with residential property transactions), such an index would not be appropriate for other categories of THB claim (for example, claims connected to insurance payouts or redundancy payments). On balance, the PRA considers that the CPI represents a reasonable index that is relevant to many categories of THB claim. It would also be consistent with the index used to calculate the increase to the deposit protection limit.

2.20 When the PRA originally consulted on proposals to introduce protection for THBs in 2014,footnote [11] the PRA noted that, based on 2013 property data from the Land Registry, a £1 million limit would cover approximately 99% of house sales (a key THB category) in England and Wales. Based on Land Registry price paid data for 2024, the current £1 million THB limit covered 97% of property sales, while the proposed £1.4 million limit would have covered 98.5% of sales. Hence, most property sales would remain covered by the proposed new THB limit, and the increase in the limit would return the proportion covered to close to that at the time the limit was introduced. While this measure relates to just one type of transaction that is covered by THB protection, the PRA considers that it provides a reasonable indication that the proposed revised THB limit would continue to cover many of the specific life events that an average depositor could experience.

Proposed changes to disclosure obligations and deposit compensation information

2.21 To support the proposed changes to the deposit protection limit and THB limit, and to ensure that disclosure materials available for depositors remain clear and up to date, the PRA proposes to revise the following disclosure materials:

  • Information sheet: Firms are required to provide depositors with an information sheet in certain circumstances. The PRA is proposing to amend the information sheet to reflect the new deposit protection limit and THB limit and to generally ensure it remains clear and up to date. The proposed changes would reduce the length of the information sheet, which may reduce the cost to firms of providing the information.
  • Compensation sticker and compensation poster: Firms are required to display a compensation sticker or compensation poster in certain circumstances. Consequential changes would be required to these materials to ensure that they refer to the proposed new deposit protection limit.
  • Exclusions list: Firms are required to provide depositors with an exclusions list in certain circumstances. The PRA is proposing to amend the exclusions list to ensure that it remains clear and up to date. The proposed changes include amendments to simplify the exclusion in relation to credit institutions and clarify references to small companies, although they do not represent changes to the eligibility requirement as set out in Chapter 2 of the Depositor Protection Part.

2.22 Before leaving the EU, the disclosure materials were subject to harmonised requirements and prescribed language under the DGSD. Now that the UK has left the EU, the PRA is able to amend the language to make it more appropriate for customers of UK deposit taking firms. The PRA considers that its proposals simplify the text, making it easier for both depositors and deposit-taking firms to understand.

2.23 It is proposed that firms should implement changes to the above disclosure materials as soon as possible after 1 December 2025, when the new limits are proposed to be introduced, and in any event by 31 May 2026. The PRA accepts that this would mean that depositors could continue to receive information referring to the previous limits for up to six months after the proposed limits are introduced. However, the PRA considers that there is minimal risk to depositors who receive information about the former, lower, limits (as they would not be expected to lose out financially upon the failure of a deposit taker as a consequence of not being immediately aware of the new limit).

2.24 In addition to the requirements for firms to communicate the proposed new deposit protection limit, the FSCS would also take steps to raise awareness of the revised limit, including through awareness campaigns, refreshed disclosure materials and industry engagement. The PRA will work with the FSCS to ensure that awareness of depositor protection remains at an appropriate level.

2.25 In developing these proposals, the PRA has considered the implications for deposit takers that use third-party premises such as banking hubs. These are places where several deposit takers deliver banking services from a single location. To ensure that depositors receive appropriate information about depositor protection when using such third-party premises, the PRA proposes to clarify the information that firms should ensure is displayed in such premises. The PRA would also work with the FSCS to ensure that appropriate materials are available for firms to use.

Proposed changes to SS18/15 and the Deposit Guarantee Scheme statement of policy

2.26 As a result of the proposals set out in this chapter, the PRA proposes to update SS18/15 with the following changes included in Appendix 2:

  • Chapter 2: Clarification of eligibility of deposits held on behalf of beneficiaries;
  • Chapter 3: Clarification of responsibility for producing the information sheet and other disclosure materials and updated description of the information sheet;
  • Chapter 8: Clarification on Single Customer View requirements, including the importance of collecting up-to-date email addresses to support faster payout;
  • Chapter 12: Transitional arrangements in relation to the proposed change to the deposit protection limit; and
  • further minor amendments.

2.27 The PRA proposes to update the Deposit Guarantee Scheme statement of policy with the following changes included in Appendix 3:

  • Chapter 1: Amendments to reflect FSCS’s proposed role in making recapitalisation payments (in connection with the proposals in Chapter 3 of this CP);
  • Chapter 3: Confirmation that the FSCS may make available information on its website about the use of an FSCS ‘badge’ in relation to depositor protection;
  • Chapter 4:
    • removal of section regarding interim compensation payments, as relevant rule expired at the end of 2023;
    • amendment to make clear that, for claims that cannot be paid within seven days, the FSCS should aim to pay the claim as soon as possible, and within three months where possible; and
    • amendment to make clear that the FSCS may not be able to make compensation payments within the required time period due to an inability to obtain the necessary data;
  • Chapters 5 and 6: Various amendments to reflect proposed new deposit protection limit and THB limit;
  • Chapter 7: Amendments to reflect funding for recapitalisation payments; and
  • further minor amendments, including updated template with changes made to previous paragraph numbering.

2.28 The changes to the supervisory statement and statement of policy would apply from 1 December 2025.

Monitoring effectiveness

2.29 If changes are made following this consultation, the PRA would monitor the ongoing effectiveness of the changes by considering:

  • the proportion of depositors protected by the deposit protection limit (with reference to SCV data, as explained in paragraph 2.12) to ensure the proportion protected remains at an appropriate level;
  • public awareness of the protection available for deposits (with reference to FSCS research data, as explained in paragraph 2.24) to ensure awareness remains at an appropriate level; and
  • the outcome of actual deposit-taker failures that may occur in the future to consider relevant lessons to be learnt from the events.

Monitoring these measures would enable the PRA to consider implications for the next review of the deposit protection limit and the appropriate timings for that review.

PRA objectives analysis

2.30 The PRA considers that depositor protection increases consumer confidence and reduces the likelihood of depositor runs on firms. The proposed depositor protection changes would advance the PRA’s general objective of promoting the safety and soundness of PRA-authorised firms by reducing the adverse effects that the failure and resolution of firms could be expected to have on the stability of the UK financial system, and thereby helping to maintain confidence in the system.

2.31 In light of the PRA’s secondary objectives (relating to competition and international competitiveness and growth), the PRA has assessed whether the proposals set out in this chapter facilitate effective competition, the international competitiveness of the economy and the growth of the economy in the medium to long term. The proposed changes could lead to some increase in the deposits held with individual firms as depositors manage their deposits up to the proposed new limit and have better information about the protection available to them. This would have a positive impact on competition, which could benefit smaller firms – for example, if depositors feel confident placing greater deposits with these firms. The PRA would expect that depositors would seek to place their deposits in accounts paying a higher level of interest, in addition to being influenced by considerations such as brand and quality of service. This could increase competition by giving firms greater incentive to improve rates or standard of service because it would be easier for customers to put more deposits with firms where they get the best price and service.

2.32 In relation to the international competitiveness and growth secondary objective, the proposed changes might have a marginal positive impact by helping to maintain confidence in UK-authorised deposit takers, in comparison with the protection that is available in other jurisdictions. An increase in the deposit protection limit to £110,000 would compare with the €100,000 that applies to Member States in the EU and the $250,000 that is available from the Federal Deposit Insurance Corporation in the United States.footnote [12] These combined factors should have a positive effect on the level of economic output in the medium to long term.

Cost benefit analysis (CBA)

2.33 In this section, the PRA has identified the benefits to depositors and the financial system arising from the proposed changes to the depositor protection rules, along with the costs that deposit takers and the FSCS would be subject to. In summary:

  • Ensuring the limits are kept at an appropriate level would be expected to help maintain confidence in the financial system and therefore reduce the likelihood of runs on firms. This would further the PRA’s objective of promoting the safety and soundness of PRA-authorised firms, which has benefits to financial stability and the UK economy (see paragraphs 2.34 to 2.37). There would also be direct benefits to depositors if their deposit taker fails where they hold deposits above the current deposit protection limit (see paragraph 2.38). These benefits are largely unquantifiable but are judged to be important.
  • The costs of increasing the limits include the implementation costs that would fall to firms – which are estimated to total approximately £44.2 million – and to the FSCS – of approximately £0.2 million (see paragraphs 2.40 to 2.43). In addition, firms could be exposed to greater costs if a deposit taker fails (see paragraphs 2.45 to 2.51). There could also be some indirect costs to the economy in connection with moral hazard risk (see paragraph 2.52).
Benefits

2.34 As explained in paragraph 2.1, the deposit protection limit provides depositors with confidence that balances up to the limit are protected in full. This helps to increase consumer confidence in the financial system and reduces the likelihood of depositor runs on deposit-taking firms. In the event of concerns about a particular deposit taker’s solvency, awareness of the deposit limit can help encourage depositors not to withdraw their deposits, which can help to contain risks to individual firms and the financial system. Increasing the limit would reduce the amount of uncovered deposits, which depositors are likely to have a higher propensity to withdraw if there are concerns about a particular deposit taker’s solvency. One regulatory metric of liquidity risk attaches a higher probability to outflows from uncovered than covered deposits (which is consistent with what happened during past episodes of banking turmoil). The PRA’s analysis suggests that the increase in covered balances resulting from the proposed limit change could lead to a reduction in liquidity risk.footnote [13] This reduction could help to ensure that deposit takers remain resilient during a stress, by reducing outflows firms experience relative to the liquid assets they hold. In addition, publicity around the change in the deposit limit would be expected to enhance depositors’ awareness of FSCS protection, which could further lower liquidity risk.

2.35 This view of the benefits of depositor protection is supported by a range of research and analysis. For example, the US’s Federal Deposit Insurance Corporation (FDIC) published a paper in 2018 that found that the existence of the FDIC and other deposit guarantee schemes significantly reduced the withdrawals of depositors in response to ailing bank health.footnote [14] Moreover, a 2021 paper published by the National Bureau of Economic Research (NBER) described deposit protection as ‘a crucial pillar of financial regulation in most economies’ that has contributed to a reduction in bank failures.footnote [15]

2.36 Without adjustments to the deposit protection limits for inflation, the protection provided would be eroded over time, which could adversely impact depositor confidence, and their willingness to leave deposits in banks during a stress. The NBER paper highlights how, in the US, the real value of the deposit protection limit was eroded by 50% between 1980 and the financial crisis of 2008, after which the limit was increased by 100%. Periodic updating of limits for inflation aims to prevent material gaps in coverage from arising. Accordingly, the proposed increase in the deposit protection limit would help to maintain depositor confidence in deposit taking firms by ensuring that the level of protection has not been reduced in real terms. It would also reduce the proportion of depositors with balances above the deposit protection limit. As a result, increasing the amount of depositor protection could reduce the likelihood of deposit takers failing, lowering the probability of instability in the UK financial system.

2.37 As explained in paragraph 2.31, there would also be benefits arising from these proposals advancing the PRA’s secondary competition and international competitiveness and growth objectives. In particular, the proposed changes would be expected to have some positive impact on competition, international competitiveness and the level of economic output in the medium to long term. Additionally, increased confidence to make deposits in UK-authorised deposit takers and a lower likelihood of firm failures could help to support lending by UK firms, which could have some positive impact on economic output.

2.38 Moreover, depositors would benefit from the adjustment to the protection limits as they could benefit from a higher level of protection if a PRA-authorised deposit taker that they hold deposits with fails. Depositors with more than £85,000 in eligible deposits with one deposit taker would benefit from an increased £25,000 of protection, should their deposit taker fail. There may also be secondary benefits to depositors. For example, a depositor with significant deposits above the deposit protection limit may be able to spread their deposits across a smaller number of banks while remaining fully protected, so reducing the costs (or inconvenience) of staying within the protection limits. The proposed increase in the deposit protection limit would also benefit depositors who are not individuals, for example, certain businesses (even though the average deposit held by businesses is likely to be higher than the average deposit held by individuals). The increased limit for THBs would benefit individuals, if they were to hold deposits that qualify as a THB and were greater than the current £1 million THB limit.

Costs

2.39 There are essentially two categories of cost that could arise due to the proposed changes:

  • implementation costs that would be incurred by deposit takers and the FSCS in relation to changes to systems and information materials; and
  • higher FSCS compensation costs that could arise in the future if a deposit taker fails with protected claims above the current protection limits.

Any costs incurred by the FSCS would fall to deposit takers in the first instance, as they fund the FSCS’s compensation payouts through a levy. Ultimately these costs – and the costs incurred directly by deposit takers – may be passed on to customers of these firms in the form of reduced interest or increased fees.

Implementation costs

2.40 Deposit takers would incur one-off direct implementation costs as a result of the proposed rule changes. These include:

  • familiarisation costs connected to understanding the changes that need to be implemented;
  • the operational costs of amending disclosure materials (ie the information sheet, exclusions list, compensation sticker and poster that set out information about the FSCS limit to depositors) and any firm-specific promotional materials that state the deposit protection limit;
  • the cost of amending SCV systems to reflect the new deposit protection limit; and
  • the cost of training staff about the new limits.

The PRA has estimated the implementation costs that deposit takers may incur based on assumptions of expected costs for firms of different scales and the time taken to make the changes listed above.footnote [16] The total costs are set out in Table 2, which shows that total implementation costs are estimated to be approximately £44 million in aggregate across all Deposit Guarantee Scheme members. (This is based on the 2023 population of deposit takers where ‘Category 1’ firms are the most significant in terms of their potential disruption to the UK financial system, and tend to be very large, while ‘Category 4’ firms are judged very unlikely to cause disruption, and tend to be small.)

Table 2: Estimated implementation costs

Potential Impact Category of the firm(a)

Estimated cost per deposit taker (£ million) 

Approximate total cost across deposit takers (£ million) 

Category 1

£0.56 

£17 

Category 2

£0.31

£13

Category 3

£0.06

£14

Category 4

<£0.01

£1

Total

£44.2

Footnotes

2.41 While these implementation costs may be significant for some firms, the PRA expects that these costs would vary and may ultimately not be material for some firms (for example, those with systems designed to readily deal with a change to the deposit protection limit). Accordingly, the actual costs may be lower and the estimates in Table 2 are considered conservative. The estimated total implementation cost would represent approximately 0.04% of the relevant set of firms’ annual net income.footnote [17] As explained in paragraph 2.16, the PRA expects to review the deposit protection limit every five years. This review timetable will limit the cost to deposit takers associated with changes to the deposit protection limit.

2.42 The proposals would also require the FSCS to update its systems and amend its awareness activities to reflect the new protection limits. The costs to the FSCS are estimated to be approximately £200,000, which would be passed on to firms as part of the annual levy.

2.43 Accordingly, total implementation costs, including those falling to deposit takers and the FSCS, would be expected to amount to around £44.4 million. As commented on in paragraph 2.39, costs incurred by firms due to the adjustment to the deposit protection limit may ultimately be passed on to depositors. However, given the relatively low cost – for example when compared to firms’ annual net income – the PRA does not expect these effects to be material. Nor does the PRA expect the costs to be large enough to affect firms’ behaviour and the volume, quality or variety of deposit products or related services available to consumers.

2.44 The PRA invites firms to provide feedback as part of their consultation responses on the estimates set out in this section and provide further information about the implementation costs they expect to face because of the proposals.

Potential impact on compensation costs

2.45 The proposed changes may impact the amount of levies that firms must pay to the FSCS to cover the cost of any future failures of deposit takers. The Deposit Guarantee Scheme is funded on an ex-post ‘pay as you go’ basis, whereby an industry levy is raised for compensation costs that have already been incurred or are reasonably foreseeable. Deposit Guarantee Scheme members (ie certain deposit takers) are required to contribute to the levy based on the proportion of the total FSCS covered deposits in the system that they hold. A risk overlay reflects a degree of risk differentiation between firms – with firms that are at higher risk of failure paying somewhat more than those that are at lower risk.footnote [18] An increase in the protection limits would increase the costs that could fall to Deposit Guarantee Scheme members to the extent that depositors of a failed deposit taker have – at the point of failure - eligible deposits above the current deposit protection limits. Accordingly, in the event of a firm failure, there is likely to be a greater amount of deposits in total to be covered by the FSCS’s levy following an increase in the protection limits.

2.46 The allocation of the levy could also change for different firms, to the extent that the increase in the limit alters the proportion of total covered deposits that they account for. For example, where a deposit taker has a relatively large number of depositors with deposits between £85,000 and £110,000, the firm’s levy base would increase as a result of the proposed adjustment to the limit. The deposit taker would hold a proportionally higher share of total industry covered deposits, which could result in an increase in the proportion of overall FSCS levies met by the firm. However, the proportion of overall levies would go down for other firms that have a relatively low number of deposits between £85,000 and £110,000.

2.47 The PRA has modelled the impact of the proposed new limit based on the failure of a hypothetical deposit taker exhibiting the following characteristics:

  • protected deposits of £300 million under the current £85,000 limit; and
  • protected deposits of £360 million under the proposed £110,000 limit.

This is to provide an indication of the additional costs that levy payers could be exposed to in relation to the increase in the deposit protection limit from £85,000 to £110,000. This hypothetical firm is considered to be a reasonable representation of a medium-sized deposit taker that could be subject to a modified insolvency procedure involving an FSCS payout, although this is a conservative example. For example, it is much larger than any deposit taker the FSCS has declared in default in recent years, with a relatively high proportion of depositors above the current deposit protection limit.footnote [19] It is therefore intended to represent an extreme but plausible failure scenario. In the event of the failure of this hypothetical deposit taker, the total levy across all firms would be £60 million (20%) higher under the proposed £110,000 limit than under the current £85,000 limit. This additional £60 million hypothetical liability would represent around 0.06% of levy payers’ annual net income.footnote [20]

2.48 Based on the model used to apportion FSCS levy costs, the average, one-off cost for different categories of firm arising from this hypothetical deposit-taker failure is shown in Table 3 (where, as above, ‘Category 1’ firms are the most significant firms, in terms of their potential disruption to the UK financial system, and tend to be very large, ‘Category 4’ firms are judged very unlikely to cause disruption, and tend to be small). The table shows how the increased hypothetical levy liability that could arise as a consequence of increasing the deposit protection limit could be apportioned across different categories of firm. It highlights how larger deposit takers would pay a higher proportion of the costs (which is consistent with them accounting for a greater proportion of aggregate covered deposits).

Table 3: Estimated cost to deposit takers in relation to a hypothetical firm failure

Potential Impact Category(a)

Average per firm levy liability under £85,000 limit (based on £300m hypothetical liability) (£ million)

Average per firm levy liability under £110,000 limit (based on £360m hypothetical liability) (£ million)

Difference in potential average per firm levy liability if limit is increased (£ million)

Category 1

£7.11

£8.53

£1.42

Category 2

£1.29

£1.54

£0.26

Category 3

£0.13

£0.16

£0.03

Category 4(b)

<£0.01

<£0.01

<£0.01

Footnotes

  • (a) Categorisation of firms by impact, as defined in the PRA’s approach to banking supervision.
  • (b) The estimated liability figures for Category 4 firms (including the smallest deposit takers, such as credit unions) are too small to be shown in the table. They are estimated at around £1,500 under the £300 million scenario and around £1,800 under the £360 million scenario.

2.49 While this hypothetical example shows a potential upper end estimate of the impact on the levy of the proposed changes to the limits, recent levies related to deposit-taker failure have been much lower. The FSCS has confirmed that it paid a total of £10.1 million in deposit claims over 2021/22, 2022/23 and 2023/24. Most claims related to credit union failures and all deposit balances were within the current £85,000 limit. Therefore, had the proposed limit of £110,000 applied to these claims, no additional compensation would have been payable, and the levies on firms would have been the same.

2.50 The PRA is not able to estimate what the impact on compensation costs could be as a consequence of the proposed increase in the THB limit from £1 million to £1.4 million, although it is not expected to be material. THB claims are, by their nature, circumstance specific and time dependent and are therefore unpredictable. The FSCS has only paid two THB claims since THB protection was introduced in 2015, and none in the last three financial years, highlighting that the payment of THB claims has not been a regular occurrence.

2.51 The maximum aggregate amount of Deposit Guarantee Scheme compensation costs, legacy costs and specific costs for which the FSCS can levy Deposit Guarantee Scheme members in any one financial year is limited to £1.5 billion. The PRA does not propose to change this levy limit in light of the proposed increase in the deposit protection limit or THB limit. Therefore, the maximum potential annual exposure of Deposit Guarantee Scheme members to FSCS levy costs will not change as a consequence of the PRA’s proposals.

Indirect costs

2.52 The PRA has considered whether the proposed increase in the deposit protection limit could increase moral hazard – which is the risk that FSCS-covered depositors do not pay sufficient attention to the solvency of firms when deciding with which deposit taker to make deposits. In turn, this could reduce the market discipline on deposit takers to manage their risks appropriately to ensure they can continue to attract deposits. At the margin, the increase to the limit could increase this risk. However, as noted in paragraph 2.12, this proposal would have a small impact on the proportion of depositors who would be fully protected and the PRA therefore judges that this cost would be small.

Overall assessment of costs and benefits

2.53 While the value of the benefits of a higher level of depositor protection cannot be quantified, the PRA’s judgement is that the benefits that would arise because of the proposed changes are likely to outweigh the costs. By preventing the erosion of the value of depositor protection over time, the proposed increases in the limits in line with consumer price inflation should help to maintain consumer confidence, with benefits to firms, financial stability and the UK economy. The PRA judges the implementation costs of the new limit and the additional estimated costs of a hypothetical deposit-taker failure – even in quite a conservative case – to be proportionate to the reduction in risks to confidence in, and the stability of, PRA firms and the financial system.

Have regards’ analysis

2.54 In developing the proposals in this chapter, the PRA has had regard to the FSMA regulatory principles and the aspects of the Government’s economic policy set out in the HMT recommendation letter from November 2024. The following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposals set out in this chapter:

  • The principle that a burden or restriction which is imposed on a person, or on the carrying on of an activity, should be proportionate to the benefits which are expected to result from the imposition of that burden or restriction (FSMA regulatory principle): The proposals would introduce a requirement for firms to update disclosure materials to reflect the revised deposit protection limit and to generally improve the clarity of standard wording. In addition, firms would be required to update their systems for producing SCV files. In the event of the failure of a deposit taker holding deposits above the current deposit protection limit, levy payers would then be required to meet higher compensation costs (which are apportioned across levy payers based on the proportion of the total covered deposits in the system that they hold and accounting for a risk overlay). The cost of these requirements is judged to be commensurate to the benefits, particularly in terms of maintaining consumer confidence in PRA-authorised deposit takers. The PRA expects to review the deposit protection limit every five years, which will limit the costs to firms associated with changes to the limit.
  • The desirability of exercising the PRA’s functions in a way that recognises differences in the nature of, and objectives of, businesses carried on by different persons (FSMA regulatory principle): The proposals do not have a significantly differential impact on particular types of deposit takers – including mutual societies – compared to other authorised firms. While some categories of firm may be more likely to be declared in default by the FSCS (ie smaller firms) and some firms may be less likely to have deposits above the current deposit protection limit (for example, credit unions), all firms benefit from depositor protection, which contributes to the maintenance of orderly markets in which consumers have confidence. As above, compensation costs are apportioned across levy payers based on the proportion of the total covered deposits in the system that they hold and accounting for a risk overlay. This means that those firms holding higher proportions of overall covered deposits, and higher risk firms, would pay a higher proportion of overall levy costs.
  • The general principle that consumers should take responsibility for their decisions (FSMA regulatory principle): The proposed increase in the deposit protection limit, and the THB limit, would not change the expectation that consumers take responsibility for ensuring their deposits are placed with appropriate, authorised, firms and that their deposits are kept within the appropriate limit (although, as commented on in paragraph 2.52, the PRA considers the proposed increase in the deposit protection limit would have minimal impact on moral hazard). Disclosure requirements and FSCS awareness activities would ensure that consumers have appropriate information to make informed decisions.
  • Contribution to growth and international competitiveness (2024 HMT recommendation letter to PRC): As explained in paragraph 2.31, the proposed changes set out in this chapter would be expected to have some positive impact on competition and international competitiveness. The proposals would contribute to a regulatory environment that facilitates growth and supports financial inclusion and should have a marginal positive effect on economic output in the medium to long term.

2.55 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

2.56 The PRA considers that the relative impact of the proposed depositor protection rule changes on mutuals is expected to be no different from the impact on other firms. Nonetheless, a mutual may have fewer depositors with balances between £85,000 to £110,000, in which case it may have a proportionally smaller share of the tariff base for calculating compensation levies, so could have to pay less in the event of a firm’s failure in future.

Equality and diversity

2.57 In developing its proposals in connection with the protection available to depositors, the PRA has had due regard to the equality objectives under s.149 of the Equality Act 2010. The PRA considers that the proposals do not give rise to equality and diversity implications because depositors that fall within the protected characteristics would be treated equally under the policy proposals.

3: The PRA’s proposals in relation to the Bank Resolution (Recapitalisation) Bill

The UK’s Special Resolution Regime

3.1 The UK’s Special Resolution Regime, implemented in the Banking Act 2009, provides a set of options and powers to stabilise banking institutions that fail. It aims to protect financial stability and depositors and maintain confidence in the financial system. The Bank is the UK’s resolution authority, and works closely with the PRA, HMT, FCA and the FSCS to manage failures.

3.2 Following the failure of Silicon Valley Bank UK Limited in March 2023, the Bank used its powers under the Special Resolution Regime to write down the firm’s sole equity shareholder and its regulatory capital, and transfer ownership of the entity to HSBC UK Bank Plc. This delivered a positive outcome, protecting financial stability, customers and taxpayers.

3.3 Since that episode, the Bank, PRA, FCA, FSCS and HMT have worked together to consider lessons that can be learnt, including how to best manage the potential failure of smaller banksfootnote [21] in future and to seek to ensure the continued effectiveness of the UK’s resolution regime. The work sought to ensure that the UK continues to have the best possible arrangements in place to maintain financial stability, enhance confidence in the financial system and protect depositors, while minimising risks to public funds. This prompted the development of a targeted enhancement to the Special Resolution Regime to provide increased flexibility to manage the failure of small banks effectively. The proposals arising from this work were set out in HMT’s January 2024 consultation, Enhancing the Special Resolution Regime, and are currently being considered by Parliament under the Bank Resolution (Recapitalisation) Bill.

3.4 The PRA is consulting on the proposals in relation to the Bank Resolution (Recapitalisation) Bill now on the assumption that the Bill remains in substantively the same form. This is necessary to ensure that PRA rule changes to implement the new mechanism set out under the Bill can be made as soon as possible should the Bill receive royal assent. If the proposed legislative changes are not ultimately made, the PRA would not introduce the associated changes to PRA rules or the statement of policy.

The Bank Resolution (Recapitalisation) Bill

3.5 The Bank Resolution (Recapitalisation) Bill proposes that FSCS funds be used to recapitalise a failing firm to support the sale of all or part of the firm to a private sector purchaser or a transfer to a bridge bank, where it is judged to be in the public interest. The proposals in the Bill are designed to provide the Bank with greater flexibility to manage the failure of small banks effectively and meet the Bank’s special resolution objectives. These include, among others, protecting public funds and ensuring continuity of banking services and critical functions.

3.6 Under the proposed new mechanism, the FSCS would make funding available, as required by the Bank, to be used to meet the costs of recapitalising the failed bank, operating a bridge bank where needed, and any associated costs to HMT and the Bank. The FSCS would ultimately provide these funds through an ex-post levy on deposit takers, in a similar manner to how compensation payments to depositors are currently funded under a bank or building society insolvency procedure (but with credit unions excluded). The funding gap arising while the levy is collected would be met using the FSCS’s existing commercial borrowing facility or, as a last resort, through borrowing from the National Loans Fund.

3.7 To enable this, the Bank Resolution (Recapitalisation) Bill proposes an expansion of the statutory functions of the FSCS and its levy-raising powers, to include making recapitalisation payments and levying firms (other than credit unions) to recoup those payments for this new purpose. The Bill also proposes that the FSCS could potentially receive recoveries from the sale of a failed bank, which would then be repaid to levy-payers or used to offset future levies.

Proposed changes to the Depositor Protection Part

3.8 The PRA has a statutory duty under FSMA to ensure the FSCS is able to fulfil its functions. The PRA is therefore required to make rules that enable the FSCS to fulfil the new responsibilities proposed under the Bank Resolution (Recapitalisation) Bill. Details of the amendments proposed by the PRA to facilitate this are set out in this section.

3.9 The PRA proposes to make separate provisions for recapitalisation within the Depositor Protection Part, adding new rules for recapitalisation, which sit alongside, but separate from, those relating to compensation. The PRA considers this approach preferable to merging provisions relating to recapitalisation with existing compensation provisions as it provides greater clarity and reduces complexity. This is also consistent with the Bill, which proposes recapitalisation as a new power separate to compensation in the legislation. The Bill provides a proposed legal framework for recapitalisation payments, including for the PRA to make rules in relation to levies to recoup recapitalisation payments. The PRA’s proposed new rules primarily relate to the powers of the FSCS in relation to levies in respect of recapitalisation payments and detail the circumstances in which they can be used.

3.10 Where elements of the existing rules relating to compensation levies remain relevant for recapitalisation, such as those relating to the timing and payment methods, the PRA proposes that these be mirrored in new rules relating to recapitalisation levy payments. Where new arrangements have been necessary due to the differing nature of recapitalisation, or due to prescriptions in the Bill, specific new rules have been proposed to accommodate this.

3.11 A summary of the proposed amendments to the PRA Rulebook is set out in Table 4 below.

Table 4: Summary of key proposed amendments to the Depositor Protection Part to facilitate the Bank Resolution (Recapitalisation) Bill

Amendment

Summary

Add the concepts of a recapitalisation payment and levy

Define recapitalisation payment as a payment the FSCS is required to make under s214E FSMA and define a recapitalisation payment levy.

Create a new class of levy payer

The introduction of a new class of levy payer, class A1, defined as Deposit Guarantee Scheme members that are not credit unions.

Amend process for the management of recoveries

Amendments to specify that any recoveries made by the FSCS in relation to DGS compensation costs or recapitalisation payments should be held to the credit of class A or A1 (as appropriate) levy payers.

Removal of Depositor Protection Part provisions 34.4 and 34.5 as they are not required given the provisions elsewhere in the Rulebook.

General amendments to ensure whole package works together

Amendments to ensure that existing constructs, such as the management expenses levy – which sets the FSCS’s operational budget – and limits on the maximum amount that can be levied on firms annually, include costs related to recapitalisation payments and levies. Amendments to replicate the calculation method for levy contributions across firms for recapitalisation payment levies (with credit unions excluded) and ensure rules relating to overpayment, deferral, the payment process and timelines, and arrangements in the case of assumptions of liability, apply to recapitalisation levies.

General amendments to remove spent provisions

The removal of references to legacy costs (those relating to failures associated with the banking crisis in 2008). These costs have been repaid, making these rules defunct. The removal of rules relating to cross member state acquisitions, which are no longer relevant following the UK’s exit from the EU.

PRA objectives analysis

3.12 The Bank Resolution (Recapitalisation) Bill proposes to expand the functions of the FSCS to include making recapitalisation payments and levying firms to recoup those payments. The PRA has a statutory duty to ensure the FSCS is able to fulfil its functions. Therefore should the proposals in the Bill become law, the PRA would be required to facilitate this through amendments to PRA rules. As such, PRA discretion in relation to the content of these rules is limited. The PRA considers that the proposed approach to the design of the rules would enable the fulfilment of the FSCS’s functions, which support the PRA’s primary and secondary objectives in a way that is as clear and simple as possible.

3.13 The PRA is supportive of the new mechanism the Bill introduces and has been closely involved in its development. The PRA considers that facilitating the proposed new mechanism would advance its general objective of promoting the safety and soundness of PRA-authorised firms. The new mechanism enhances the UK’s resolution regime, expanding the set of options available to manage firm failure. This would improve the ability of the Bank, as resolution authority, alongside HMT, the PRA, FSCS and FCA, to manage the failure of deposit takers and limit adverse effects to the stability of the UK financial system. This would be helpful in maintaining confidence in the system, in turn supporting the safety and soundness of other firms in the market.

3.14 The PRA also considers that the proposed enhancements to the UK’s resolution regime could support its secondary objectives in relation to competition and international competitiveness and growth. A strong resolution regime supports financial stability, enhancing consumer and market confidence. This may encourage depositors to feel more confident placing deposits with smaller firms, supporting competition. This may also increase the attractiveness of the UK financial sector, encouraging increased investment, which could support both international competitiveness and growth.

3.15 In the event of a failure where the proposed new mechanism is used, these proposals would impose a cost burden on firms. This would withdraw funds from the banking sector that may otherwise be used to support lending, which in turn could support growth. However, as set out in the Cost Benefit Analysis section below, it is expected that a similar, if not greater, quantity of funds would be required under a bank or building society insolvency procedure, the likely alternative should the new mechanism not be used. The new mechanism would only be used where the Bank, in its capacity as resolution authority, judged that resolution is in the public interest by reference to its broader resolution objectives. As FSCS levies are split based on the relative size and riskiness of firms, this cost burden is unlikely to have any adverse impact on competition.

Cost Benefit Analysis (CBA)

3.16 As noted, should they become law, the PRA would be required to facilitate the proposals in the Bill through amendments to PRA rules. PRA discretion is limited to the design of the amendments made to the Rulebook to fulfil its statutory responsibilities – set out in Table 4.

3.17 While this CP is only concerned with the implementation of the new mechanism in PRA rules, the rest of this section provides a summary of the key points identified in the CBA previously published by HMT on the proposals underlying the Bill. The PRA’s involvement in the development of the Bill included working with the Bank, HMT, FSCS and FCA to produce this CBA, which was published by HMT in July 2024.footnote [22] That CBA estimated that, in many cases, the proposals would reduce costs to the FSCS and levy payers in comparison to the counterfactual of insolvency. Overall, the CBA judged the costs of the proposals to be proportionate to the public policy benefits of limiting risks to financial stability and taxpayer funds. The PRA does not consider that, in exercising its limited discretion, it would create costs or benefits beyond those identified in HMT’s CBA.

Bank Resolution (Recapitalisation) Bill: Summary of HMT Cost-Benefit Analysis

Direct impacts on firms

3.18 The new resolution mechanism proposed by the Bank Resolution (Recapitalisation) Bill is expected to be used to support the resolution of smaller banks. In the event of a failure requiring the use of the new mechanism, all PRA-authorised deposit takers other than credit unions would be required to contribute to FSCS levies to recoup any funds used for recapitalisation.

3.19 The costs and benefits of managing a bank failure are highly case-specific. Assessing the cost of the new mechanism requires comparison with the alternative option at the time of a failure, which in most cases would be a bank or building society insolvency procedure. As such, one important assumption relates to the relative value of recapitalising a firm compared with the cost of compensating for covered deposits, which would be required in insolvency. The analysis estimated the median recapitalisation cost for a small bank to be approximately £50 million.footnote [23] If the largest three small banks failed simultaneously the recapitalisation costs were estimated to be approximately £2.5 billion.footnote [24] In comparison, the implied cost of deposit payout under existing insolvency arrangements, allowing for future recoveries, were estimated by HMT to be £4.6 billion.footnote [25] These figures do not consider any cash outflows during the stress period preceding a bank’s failure. Additional assumptions were also made regarding the annual cap on levies for the banking sector, the cost of lending to fund the recapitalisation or insolvency in the short term and likely proceeds from the sale of a bank in resolution or recoveries in insolvency.

3.20 The cost-benefit analysis undertaken concluded that, in general, expected lifetime costs for levy payers would be lower under the new mechanism than under an insolvency with depositor payout. This was due to both the lower nominal level of funding needed to achieve recapitalisation relative to paying out compensation for FSCS covered deposits, as well as a shortened timeline for repayment of FSCS borrowing, resulting in a lower interest cost. However, it was noted that the new mechanism would not necessarily have a lower direct cost in all circumstances. Any decision to use resolution powers would require the Bank, in consultation with the PRA, FCA and HMT, to determine that the use of stabilisation powers is in the public interest, and that a bank insolvency would not achieve the resolution objectives to the same extent.

Direct impacts to the PRA, Bank and FSCS

3.21 The FSCS would incur minor operational and administrative costs in deploying the mechanism set out in the Bill, but these are not expected to be significant. Administrative and operational costs to the FSCS are expected to be much lower than under insolvency where the FSCS must manage compensation claims. The new mechanism is also not expected to create significant additional operational costs for the Bank or PRA, relative to the costs they might experience in the counterfactual scenario.

Indirect impacts

3.22 There is an opportunity cost in the event of failure, of industry contributing funds to an FSCS levy that could instead be used to support lending or other activities. However, it is important to note again that the use of the new mechanism would generally be expected to incur lower levy costs in comparison to the counterfactual scenario where a bank or building society insolvency procedure is used, due to the reduced amount of funding required and shorter timelines for repayment of FSCS borrowing. Operational and administrative costs to the FSCS are also expected to be significantly reduced. Consequently, the additional indirect cost of the mechanism relative to the counterfactual may be negative or neutral, depending on the circumstances. Even where that is not the case, for the new mechanism to be used the Bank as resolution authority would have ultimately judged that resolution is in the public interest by reference to its broader resolution objectives.

3.23 It is also important to consider that insolvency can be highly disruptive both for the estate of the firm concerned, through generating additional deadweight losses, and for its customers and creditors, such as depositors that do not benefit from FSCS protection. For instance, for many, it would imply a near immediate cessation of certain banking services. Any significant period of disruption could cause a wider loss of confidence in the banking system (as seen internationally during the period of banking sector stress in 2023), creating a broader set of negative economic and financial consequences. Further, the new mechanism also reduces an implicit risk to public funds, which would otherwise be deployed to support the provision of public services.

‘Have regards’ analysis

3.24 In developing the proposals in this chapter, the PRA has had regard to the FSMA regulatory principles and the aspects of the Government’s economic policy set out in the HMT recommendation letter from November 2024. The following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposals set out in this chapter:

  • The principle that the regulators should exercise their functions as transparently as possible (FSMA regulatory principle): This CP sets out the PRA’s proposals and provides stakeholders with an opportunity to comment on the proposals. The rule changes have been designed to be as clear as possible.
  • The Legislative and Regulatory Reform Act (LRRA) principles of good regulation, specifically that (a) regulatory activities should be carried out in a way that is transparent, accountable, proportionate and consistent, and (b) regulatory activities should be targeted only at cases in which action is needed: The proposals made in this section are required for the PRA to fulfil its statutory duties. The PRA considers that these proposals are proportionate and consistent with PRA objectives.

3.25 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

3.26 The proposals have a differential impact on mutual societies compared to other authorised firms due to the exclusion of credit unions from contributing to, or being resolved, using the new tool. This exclusion is mandated in the proposed primary legislation. Due to the comparatively small share of protected deposits held by credit unions, this is unlikely to have a significant impact on the contributions made by other authorised firms.

Equality and diversity

3.27 In developing its proposals in connection with the Bank Resolution (Recapitalisation) Bill, the PRA has had due regard to the equality objectives under s.149 of the Equality Act 2010. The PRA considers that the proposals do not give rise to equality and diversity implications.

  1. PRA policy statement 6/15 confirmed the introduction of rules to allow for THB protection, with effect from 3 July 2015. The rules extended FSCS coverage to £1 million for a period of six months from the point of deposit for certain qualifying life events. The qualifying life events include residential property transactions and benefits payable under insurance policies. The six-month period allows time for depositors to appropriately protect these funds by spreading the risk between firms. No monetary limit applies for THBs arising from a payment in connection with personal injury or incapacity.

  2. Under Chapter 10 of the Depositor Protection Part, the qualifying life events include residential property transactions, benefits payable under insurance policies and redundancy payments.

  3. The FSCS can pay up to the deposit protection limit per person per authorised firm. Some banking brands share the same authorisation, which means a depositor would be protected only once across those brands, up to the deposit protection limit.

  4. PRA policy statement 1/17 – Deposit protection limit, January 2017.

  5. Over the three financial years 2021/22, 2022/23 and 2023/24, the FSCS declared 11 credit unions in default along with one small bank. The FSCS paid compensation of £10.1 million in relation to deposit claims over the period.

  6. Improving depositor outcomes in bank or building society insolvency, April 2023.

  7. FSCS data are based on SCV files submitted to the FSCS by certain deposit takers. The FSCS tests a sample of SCV files from a selection of deposit takers on an ongoing basis. While the data do not cover all deposit takers, they provide a reasonable representation of the market. In the absence of data covering all firms and depositors (and to avoid the cost associated with a data request covering all deposit takers), the PRA considers these data from the FSCS are appropriate to inform its review of the deposit protection limit.

  8. Further data held by the PRA, in relation to UK incorporated banks that focus on UK business, indicates that the proportion of covered deposits protected by the deposit protection limit was stable over a similar period.

  9. FSCS research in 2024 indicated that there is some awareness of FSCS protection, with 36% of adults surveyed aware that protection is available in the event of the failure of an authorised firm. Of consumers who were aware of the FSCS, 53% were aware that the protection limit for deposits was £85,000. 

  10. PRA supervisory statement 18/15 – Depositor and dormant account protection, March 2021 (superseded).

  11. PRA consultation paper 20/14 – Depositor Protection, October 2014.

  12. See the European Banking Authority’s Deposit Guarantee Schemes Directive webpage and the Federal Deposit Insurance Corporation’s Deposit Insurance FAQs.

  13. Liquidity risk can be measured by the Liquidity Coverage Ratio (LCR), which compares the net outflows firms may experience during a stress to the amount of high-quality liquid assets they have to meet those outflows. The impact would depend on the amount of deposits that exceed the current deposit protection limit, which would be protected by the new, proposed, deposit protection limit compared to total LCR net outflows. Based on a sample of 51 firms and using 2023 data, the PRA’s analysis shows that the proposed increase in covered deposits could lead to around a 0.3% increase in the LCR for the larger firms. The median increase across the sample population was 4%. This is indicative of a likely reduction in the liquidity risk of these deposits.

  14. Martin, C, Puri, M and Ufier, A (2018), Deposit Inflows and Outflows in Failing Banks: The Role of Deposit Insurance, page 3.

  15. Dávila, E and Goldstein, I (2021), Optimal Deposit Insurance, page 2.

  16. In particular, using standard assumptions and other information available to the PRA, the PRA has accounted for estimated average staff salary costs (based on annual salaries ranging from £40,000 for the smallest firms to £100,000 for the largest firms), senior management costs (from £40,000 to £230,000), project management costs (from £40,000 to £110,000), and technology change costs (from £1,000 to £550,000).

  17. Based on the population of 2023 FSCS levy payers, where net income data is available.

  18. PRA statement of policy – Calculating risk-based levies for the Financial Services Compensation Scheme deposits class, June 2023.

  19. As the UK resolution authority, the Bank is responsible for developing a strategy for how it would manage the failure of every deposit taker in its remit. A number of UK firms would be subject to a modified insolvency procedure, which means that, in the event of failure, FSCS would pay compensation to eligible depositors. Other resolution strategies are available for larger firms that generally use shareholder and creditor funding rather than FSCS funds.

  20. Based on the population of 2023 levy payers, where net income data is available.

  21. For the purposes of this section of the CP, the phrase ‘small banks’ or ‘smaller banks’ refers to the population of banks and building societies that are not required to hold the Minimum Requirement for own funds and Eligible Liabilities (MREL) above minimum capital requirements. MREL is the minimum amount of equity and subordinated debt a firm must maintain to support an effective resolution.

  22. Bank Resolution (Recapitalisation) Bill Cost-Benefit Analysis.

  23. For the purposes of HMT’s assessment, it was assumed the recapitalisation amount of a failed bank would be equal to minimum capital requirements. In practice, the recapitalisation amount for an individual specific failing bank may be less than or greater than the equivalent of its minimum capital requirement. This is because the actual amount required would be dependent on the quantum of losses recognised at the point of resolution (and consequently the extent of capital depletion), the resources available to write down, and the amount of capital required to secure continuous PRA authorisation of and ongoing market confidence in the bank.

  24. Calculated based on banks’ total capital requirements as at end 2023. This assumes total interest expenses of 17% of the capital borrowing by FSCS, in line with the total interest incurred on FSCS borrowing following the Global Financial Crisis. This is a highly conservative estimate: the total interest incurred under the new mechanism is likely to be lower, given the much smaller initial borrowing requirement and that repayment would be likely to be completed much faster.

  25. Although not a scenario considered probable, estimates have been provided for the failure of the three largest small banks to give a sense of scale in various scenarios and to avoid solely providing analysis based on one firm to offer a richer view of the data. Protected deposits data was provided by the FCA and is as at end 2022. See the guidance sent to firms when requesting protected deposits.