Q: In the Explanatory Memorandum, you say: “ … this SI makes amendments to transfer from EU institutions to the Prudential Regulation Authority (PRA) the power to set the maximum compensation payable by the Financial Services Compensation Scheme (FSCS). The PRA will have the power to review, adjust and set the deposit coverage level with approval from HM Treasury. The government views the PRA as the most appropriate body to review and adjust the deposit coverage limit in light of the PRA’s technical expertise and understanding of wider market conditions.” Under the Deposit Guarantee Schemes Directive, what factors have influenced the EU institutions when they review and adjust the deposit coverage limit? Will the PRA’s review be influenced by the same factors, or will it have a different approach? Is the process of review - both by EU institutions now, and the PRA in future - a continuous process, or is it undertaken at discrete intervals (annually)?
A: EU institutions have not reviewed or adjusted the deposit coverage limit since the Deposit Guarantee Scheme Directive (DGSD) came into force. This because, as stated in article 6(6) of the DGSD, “the first review shall not take place before 3 July 2020 unless unforeseen events necessitate an earlier review”. No unforeseen events have necessitated an earlier review by EU institutions. In January 2017, the PRA adjusted the UK’s deposit protection limit (having notified the Commission) due to unforeseen events such as currency fluctuations, as required under Art 6 DGSD to maintain the limit equivalent to EUR100k. In the consultation, the PRA considered developments in financial markets following the UK’s referendum to leave the European Union, including with respect to the GBP/EUR exchange rate but also noted the benefits of a stable deposit protection limit for depositors, firms and for the overall stability of the financial system.
We expect future PRA reviews to take account of all the factors it considers relevant at the time in accordance with its objectives. This includes, but is not limited to, the matters specified in the SI: “developments in the banking sector and the economic and monetary situation in the United Kingdom”. These factors are the same as those specified in the DGSD in order to maintain consistency with the existing process as far as possible whilst providing the PRA with the appropriate flexibility to adjust the coverage level in light of all relevant factors and future developments. We expect that in practice the PRA will monitor the suitability of the coverage level on a continuous basis and that it will carry out a formal review no less often than every five years.
12 October 2018