Documents considered by the Committee on 9 March 2011, including the following recommendation for debate: Use of Passenger Name Records for law enforcement purposes - European Scrutiny Committee Contents

5 Financial services: compensation and guarantee schemes



European Central Bank Opinion on a draft Directive on deposit guarantee schemes (recast) and on a draft Directive amending Directive 97/9/EC on investor-compensation schemes

Legal base
Document originated16 February 2011
Deposited in Parliament23 February 2011
DepartmentHM Treasury
Basis of considerationEM of 7 March 2011
Previous Committee ReportNone
To be discussed in CouncilNot known
Committee's assessmentPolitically important
Committee's decisionNot cleared; further information awaited


5.1 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.

5.2 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.

5.3 In July 2010 the Commission presented two draft Directives. The first was 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 was to amend the Investor Compensation Schemes Directive in order 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 in the first draft Directive, 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.

5.4 When we last considered these two proposals, in November 2010, we noted that there had been little progress on the full range of issues the Government had originally drawn to our attention. So we said that before considering the documents again we would await a further report about developments, including progress on the Government's impact assessments. Meanwhile the documents would (and still) remain under scrutiny.[26]

The document

5.5 In September 2010 the Council asked the European Central Bank (ECB) for formal Opinions on the two draft Directives. This document is the ECB's response to those requests. It does not provide detailed comments on the Investor Compensation Scheme proposal, though it does say that it considers it important that the regulatory framework continues to be based on different risk profiles of depositors and investors.

5.6 In relation to the draft Deposit Guarantee Schemes Directive the ECB:

  • does not support the reduction of the payout deadline to seven days after a bank failure on the grounds that it is too soon after the original reduction to 20 working days, which had to be implemented by Member States by the end of 2010;
  • recommends, instead, that the Commission prepares a review on the introduction of the 20 day target and on the basis of the results prepares proposals on a possible additional reduction of the payout deadline;
  • welcomes, in connection with funding aspects of the draft Directive, the ten year phase in period for achieving the pre-funding target level proposed by the Commission;
  • says that this is on the grounds that it wants to alleviate the strain put on credit institutions that have not been obliged to pay the levy before, such as mutual and voluntary schemes which will be brought into scope of the revised Directive;
  • welcomes the proposal for an introduction of an explicit funding level target of 1.5% of eligible deposits over ten years;
  • argues, however, that the funding level should be based on 'covered' rather than 'eligible' deposits, on the grounds that it would more adequately reflect the level of deposit guarantee scheme liabilities;
  • recommends, in commenting on risk-based levy proposals, that the calculation methodology be specified through technical standards and guidelines developed by the European Banking Authority;
  • notes, on mutual borrowing proposals, that cross-border borrowing arrangements might lead to cases where a lending deposit guarantee scheme is later faced with having to cover its own repayment needs or where the borrowing deposit guarantee scheme has a wider range of functions than the lending scheme, as it will then have the capacity to engage its bank resolution powers;
  • recommends prerequisites for activating the mutual borrowing facility relating to the exhaustion of financing by the borrowing deposit guarantee scheme and conditions under which a loan may be extended, including repayment safeguards for the lending deposit guarantee scheme;
  • thinks that bank resolution issues should be discussed within the framework of the Commission's Communication An EU framework for crisis management in the financial sector;[27]
  • recommends that when a credit institution moves from one deposit guarantee scheme to another, the requirement to transfer funds should only consist of that institution's paid contributions to the scheme and should not include extraordinary contributions paid to cover the original deposit guarantee scheme's insufficient resources; and
  • welcomes that the supervision of deposit guarantee schemes will be enhanced by stress tests and will be subject to peer review.

The Government's view

5.7 The Financial Secretary to the Treasury (Mr Mark Hoban) says that the Opinion of the ECB requires no action and therefore does not have any direct policy implications for the UK. He adds, however, that the Council and the European Parliament may consider these amendments during discussion of the draft Directives and that the Government's views on the individual amendments proposed by the ECB are:

  • the Government supports the Commission's proposal for a reduction in the payout deadline from 20 working days to seven days, as part of its support for faster payout for depositors;
  • it does not, therefore, agree with the ECB's opinion that it is too soon after the original reduction to 20 working days to reduce the deadline further and the Government will continue to push for a reduction to seven days in a majority of cases;
  • it supports the ECB's view that the funding target level should be based on 'covered' rather than 'eligible' deposits;
  • the Government does not support the Commission's risk-based levy or the mutual borrowing proposals — as a result it does not agree with the ECB's comments on these issues; and
  • it, like the ECB, supports the additional requirements for stress testing and peer review of schemes as outlined in the draft Directive.

5.8 The Minister, repeating that the ECB Opinion will be taken into consideration during discussions on both draft Directives, which are currently being negotiated in the Council working group and in the European Parliament, tells us that both proposals are scheduled for discussion at the June 2011 ECOFIN Council, with a view to agreement on a general approach.


5.9 We note both that these suggestions from the European Central Bank will be taken into account during discussion of the draft Directives on deposit guarantee and investor compensation schemes and the Government's comments on the suggestions. We should like to hear about any developments on the Bank's proposed amendments when the Minister responds to our request for further information about developments on the draft Directives themselves. Meanwhile this document also remains under scrutiny.

26   (31816) 12386/10 + ADDs 1-2 (31836) 12346/10 + ADDs 1-2: see HC 428-iii (2010-11), chapter 7 (13 October 2010) and HC 428-ix (2010-11), chapter 7 (24 November 2010). Back

27   (32108) 15375/10: see HC 428-viii (2010-11), chapter 14 (17 November 2010). Back

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