Improving depositor outcomes in bank or building society insolvency

The Bank, as Resolution Authority, has published an update on work launched in December 2021 to improve depositor outcomes in the event of bank or building society insolvency.

Published on 18 April 2023

Update 15 October 2024: FSCS has delivered a digital payment portal, concluding IDOBI. As well as existing cheque payments, the digital payment portal can be used to facilitate electronic transfers into an alternative bank account for customers of the failed bank or building society, provided that the necessary information (e.g., a valid email address to which to send a notification) is available in the appropriate form. This means, in some instances, FSCS may be able to offer digital payment as an alternative to a cheque and therefore faster compensation for these customers. Taking into account IDOBI and wider factors in the banking sector, the Bank considered changes to the transactional accounts thresholds. The Bank's proposals are set out in its consultation paper on amending its approach to setting MREL, which was published on 15 October 2024. The deadline for responses is 15 January 2025.

Statement

Background

This statement sets out how financial authorities and industry are working together to deliver better outcomes for depositors in the event of a bank or building society insolvency. The changes will not only improve our ability to protect depositors following a bank or building society failure, but also support a diverse and competitive banking sector in the UK.

Following the Bank of England’s Policy Statement^{footnote [1]} on its review of its approach to setting a minimum requirement for own funds and eligible liabilities (MREL), published in December 2021, the Bank started work to consider whether recent innovations in technology in the banking system may afford opportunities to mitigate disruptions that may occur in the insolvency of a failing mid-tier firm whose business model is dominated by transactional account banking.

The Financial Services Compensation Scheme (FSCS) aims to pay out covered deposits within seven days of a bank or building society failing. This will usually be paid by cheque, which needs to be banked and cleared before the depositor can use the funds to buy goods and services.

Even with compensation within FSCS coverage limits^{footnote [2]} being paid within this time, some customers may need to open another account to continue to access their funds. While an FSCS pay-out is underway, depositors may experience a period in which they temporarily lose access to their funds at the bank or building society in insolvency.

The Bank, working with other authorities, industry, and other stakeholders, has been exploring opportunities to minimise the disruption caused by insolvency to those depositors who are protected by the FSCS but are reliant on their accounts with the failed firm for day-to-day banking and access to money.

As well as the benefits to depositors of these improved outcomes in insolvency, this work could have broader benefits for the UK banking sector. These changes, if successfully implemented, will reduce risks to depositors and the financial system that could arise due to the failure of a firm, by minimising disruption and providing efficient access to funds.

Proposals

UK authorities have identified three initial areas that could better support timely payout of eligible depositors’ covered balances and improve continuity of payments and other banking services. We are proposing to take these forward as a potential solution, underpinned by three component parts to minimise the disruption caused by a bank or building society insolvency procedure (‘BIP’). They are:

an online portal, enabling depositors to provide alternative account details so that the FSCS can electronically transfer the covered balance of their deposit at the failed firm to another bank or building society. Electronic transfer would therefore replace cheques as the primary means of payout. Such electronic payout mechanisms already exist and have been successfully used in a number of other countries following the failure of small banks.
improved continuity of banking services potentially utilising the infrastructure used to support the sharing of payment information and redirection of payments made to/from the insolvent institution when a customer moves banks^{footnote [3]}, enabling the transfer of certain payment information such as direct debits and standing orders.
for those depositors who need to open a new bank account to achieve continuity, exploring better operational support and capacity at receiving banks, especially where there are challenges to opening a current account for the depositor.

This work remains at an early stage, and the authorities and other stakeholders continue to explore the feasibility, costs, and timelines for these three component parts. UK authorities are agreed on the need to make meaningful progress towards a solution in 2023.

Next Steps

Each part of the solution continues to evolve. The Bank is working with other UK authorities to develop as quickly as possible the most innovative, cost-effective, and efficient solution to reduce payout times and reduce operational risk. In the meantime, the Bank will continue to set resolution strategies in line with the existing framework, to help ensure resolution arrangements remain fit and ready. This work pre-dates, but aims to incorporate lessons learnt from, the resolution of Silicon Valley Bank UK. This work is a priority for the UK authorities, and industry innovation and support will be key to reducing disruption to depositors by successfully developing and implementing solutions. Further progress updates will be published in due course.

The Bank remains interested in hearing from anyone, not limited to the financial sector, who may be able to support innovative, cost-effective, and efficient solutions in this work; please contact resolution.enquiries@bankofengland.co.uk.