5 Financial services: compensation and
guarantee schemes
| (32534)
6767/11
—
| 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
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| Legal base | —
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| Document originated | 16 February 2011
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| Deposited in Parliament | 23 February 2011
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| Department | HM Treasury
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| Basis of consideration | EM of 7 March 2011
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| Previous Committee Report | None
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| To be discussed in Council | Not known
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| Committee's assessment | Politically important
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| Committee's decision | Not cleared; further information awaited
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Background
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.
Conclusion
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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