Documents considered by the Committee on 24 November - European Scrutiny Committee Contents

7 Financial services




+ ADDs 1-2

COM(10) 368




+ ADDs 1-2

COM(10) 371

Draft Directive on deposit guarantee schemes (recast)

Draft Directive amending Directive 97/9/EC on investor compensation schemes

Legal baseArticle 53(1) TFEU; co-decision; QMV
DepartmentHM Treasury
Basis of considerationMinister's letter of 9 November 2010
Previous Committee ReportHC 428-iii (2010-11), chapter 7 (13 October 2010)
To be discussed in CouncilNot known
Committee's assessmentPolitically important
Committee's decisionNot cleared; further information requested


7.1 The Deposit Guarantee Schemes Directive, Directive 94/19/EC, as amended, governs the operation of statutory deposit guarantee schemes in the European Economic Area, including the UK's Financial Services Compensation Scheme. The Directive was amended, following the financial crisis, in March 2009, by Directive 2009/14/EC. The main change was to increase the coverage level to €100,000 (£83,490) by 31 December 2010 — under the earlier legislation Member States operated widely differing levels of coverage. When proposing the 2009 Directive the Commission said it would undertake a fuller review of the Deposit Guarantee Schemes Directive.

7.2 The Investor Compensation Schemes Directive, Directive 97/9/EC, ensures compensation for clients receiving investment services from investment firms (including credit institutions) in specific circumstances where the firm is unable to return money or financial instruments that it holds on the client's behalf because it is in default. Examples of where compensation may occur are in cases of theft, embezzlement, fraudulent misrepresentation, unintentional errors, negligence or breakdown in systems and controls. If the firm is unable to pay compensation itself due to insolvency national schemes pay compensation on eligible claims. The Directive does not cover investment risk.

7.3 The draft Directive, document (a), is to recast, that is revise and consolidate, the Deposit Guarantee Schemes Directive, with the aim of improving protection for depositors and further harmonising the rules governing schemes. The second draft Directive, document (b), is to amend the Investor Compensation Schemes Directive. It aims to:

  • increase the protection provided under the present Directive and strengthen confidence in the use of investment services;
  • address regulatory loopholes and problems experienced in the operation of national schemes; and
  • reflect changes in the regulatory framework, both as the present Directive was modelled on the Deposit Guarantee Schemes Directive, which has since been amended and for which further changes are proposed, as in document (a), and as it complemented the Investment Services Directive, which has now been replaced by the Market in Financial Instruments Directive regulating provision of investment services in the EU.

7.4 The Commission published at the same time as these documents a White Paper on insurance guarantee schemes, which we have reported on separately.[18]

7.5 We considered these documents in October 2010 — in relation to the draft Directive to recast the Deposit Guarantee Schemes Directive, document (a), we heard that the Government believed that compensation plays a vital role in ensuring ongoing depositor confidence and that recent events had highlighted the importance of this, that the UK's Financial Services Compensation Scheme leads the way in the EU and already goes further in many areas than required by the current Directive, such as aiming to pay out within seven days, implementing single customer view and having the capacity to pay out on behalf of another scheme and that the Government therefore fully supported the principle of improving EU-wide depositor protection by raising minimum standards of deposit guarantee schemes across the EU, but that it would not support further EU harmonisation if this were to lead to a reduction in protection currently offered to UK depositors.

7.6 On the second draft Directive, document (b), to amend the Investor Compensation Schemes Directive, we heard a Government stance that was very similar to that in relation to the other draft Directive, document (a). We learned also that the Government supported the principle of updating the Investor Compensation Schemes Directive in the light of changes in the past thirteen years, although it planned to argue for continued national discretion in the operation of compensation schemes, that it would seek important improvements to the draft Directive during Council negotiations to ensure that it would avoid imposing unnecessary burdens on the EU investment industry, while at the same time delivering improvements to investor protection and confidence.

7.7 We said we were concerned that some provisions in the two draft Directives might not accord with the principle of subsidiarity. We thought that:

  • such provisions risk introducing moral hazard — that is a scheme could undertake inappropriate, careless or risky action because it was relying on a fail-safe mechanism;
  • to avoid introducing moral hazard it would be better not to have recourse to other Member States' schemes, but to have each Member State ensure that members of a scheme take full responsibility themselves; and
  • in other words the draft Directives, would not, as they stand in relation to this aspect of the proposals, produce a result that was, in the words of Article 5 TEU, "better achieved at Union level" and therefore do not meet the principle of subsidiarity.

We noted that the deadline for submission of a Reasoned Opinion on the draft Directive to recast the Deposit Guarantee Schemes Directive had expired and so our Chairman would write to the presidents of the three EU institutions concerned to draw their attention to our view.[19] However the deadline for a Reasoned Opinion on the draft Directive to amend the Investor Compensation Schemes Directive had not expired and we invited the House to agree a resolution on a Reasoned Opinion.[20]

7.8 As for the other issues related to the draft Directives we said that, whilst we noted the Government's support in principle for the proposals we wished to consider the documents further in the light of information from the Government about progress in negotiating the problems it had identified to us, about the outcome of its consultations it was undertaking and about any impact assessments it developed. Meanwhile the documents remained under scrutiny.[21]

The Minister's letter

7.9 The Financial Secretary to the Treasury (Mr Mark Hoban), noting that the issues of subsidiarity in relation to the draft Directive to amend the Investor Compensation Schemes Directive have already been fully debated, first comments on our decision to write to the Presidents of the EU institutions on issues of moral hazard and subsidiarity in relation to the draft Directive to recast the Deposit Guarantee Schemes Directive. He tells us that:

  • as he said in the European Committee debate of 21 October 2010, the Government does not think that either of the Commission's proposals would create additional moral hazard risk given that some schemes, including the UK's Financial Services Compensation Scheme, have access to additional sources of liquidity;
  • in any case, any risk of moral hazard is minimised by the boundaries imposed by the Commission on mutual borrowing;
  • the Government is strongly of the view that the principle of subsidiarity is one of the key checks and balances on the Commission's competence to propose draft EU legislation and it is committed to ensuring the principle is respected and adhered to; but
  • as with the draft Directive to amend the Investor Compensation Schemes Directive, the Government does not dispute the Commission's general position that the draft Directive to recast the Deposit Guarantee Schemes Directive is consistent with the principle of subsidiarity.

The Minister continues, on the Commission's proposals for mutual borrowing, that the Government believes that:

  • the strongest arguments against are those that are grounded in policy rather than the legal interpretation of subsidiarity;
  • the inclusion of mutual borrowing in both draft Directives presents an unpredictable and unacceptable fiscal risk to the UK Exchequer; and
  • for these reasons, the Government opposes this aspect of the proposals.

7.10 On the progress of negotiations the Minister says that there have been two Council working group meetings on each draft Directive and that:

  • as well as strong opposition to mutual borrowing, many Member States joined the UK in voicing their opposition to the high levels of pre-funding required in both proposals;
  • on deposit guarantee schemes, Member States are particularly supportive of the confirmation of the increase in the protection limit to €100,000 and general proposals for improved consumer protections;
  • however, many Member States have voiced their opposition to the reduction to seven days of the deadline for schemes to payout to depositors in the event of a bank failure;
  • on investor compensation schemes, the Commission has thus far unsuccessfully attempted to address the queries and issues raised by the UK and other Member States on the proposal to extend the scope to third parties and undertakings for collective investments in transferable securities depositaries;
  • there is further widespread concern for the feasibility of introducing partial compensation for investor claims;
  • there is more work to be done to understand Member States' positions on the compensation level, as most of the discussions have centred on funding and scope;
  • the Government will continue to argue against maximum harmonisation of the compensation level at €50,000 and any provisions that would cause a decrease in the cover afforded to UK investors;
  • no compromise texts have as yet been put forward, despite the widespread opposition to the funding provisions in both proposals, but the Belgian Presidency has promised more meetings before the end of the year and has given an initial date of 23 November for a meeting on the deposit guarantee schemes proposal;
  • no further meetings have yet been scheduled for the investor compensation schemes proposal;
  • the Government has also submitted written comments to the Presidency on the deposit guarantee schemes proposal; and
  • the European Parliament is due to commence shortly with its examination of the proposals.

7.11 Turning to the Government's consultations the Minister says that:

  • the Government has found support for the principle of compensation schemes, but also concern about the increased costs the proposals would bring;
  • the industry is particularly concerned that excessive pre-funding would extract capital from firms which they could otherwise use to strengthen their businesses and this could increase the risk of failure;
  • there is also concern that the investor compensation scheme proposals may reduce cover for investors;
  • working with the industry, the Financial Services Authority, the Financial Services Compensation Scheme and the Bank of England, the Government has been analysing the impacts to ensure the its response to the proposals is based on careful analysis of the potential costs to the financial services industry and that the right outcome is achieved; and
  • the Government will continue to consult with the industry and consumer organisations as negotiations progress in order to develop impact assessments for these proposals.


7.12 We are grateful to the Minister for this account of where matters stand on these two documents. However we note that there has been little progress yet on the full range of issues the Government originally drew to our attention. So before considering the documents again we will await a further report from the Minister about developments, including progress on its impact assessments. Meanwhile the documents remain under scrutiny.

18   (31843) 12360/10 + ADDs 1-8: see HC 428-iii (2010-11), chapter 7 (13 October 2010). Back

19   The Chairman wrote on 13 October 2010: see Back

20   A Reasoned Opinion was adopted and forwarded to the Commission on 25 October 2010: see Gen Co Deb, European Committee B, 21 October 2010, cols. 3-18 and HC Deb, 25 October 2010, col. 26. Back

21   See headnote. Back

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