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Across the EU, the Deposit Guarantee Schemes Directive1 (DGSD) requires member states to operate at least one scheme to provide protection for deposits with regulated financial institutions within their jurisdiction. The schemes are aimed primarily at "consumer" accounts (some include protection for Small and Medium (SME) businesses), and currently require guarantees for up to €100,000 (or rough equivalent in local currency for members that are not part of the Single Currency) per person, per financial institution (for joint accounts, the limit is doubled).

The UK's scheme is the Financial Services Compensation Scheme2 (FSCS) which protects consumer deposits with recognised financial institutions up to a maximum of £85,000 per person per institution (again, double for joint accounts).

How will the protection offered by these schemes be affected by the United Kingdom's withdrawal from the European Union ("Brexit")?


1 Originally introduced under European Union directive 94/19/EC; later repealed and recast by directive 2014/49/EU.

2 Operated by the FSCS and regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).

3

Disclaimer: This is neither financial nor legal advice. This answer reflects my reading of pertinent information as at April 2018. Reality's reading may be different.


TL,DR: No Change at Present; No Change (in Protection) Likely

As of April 2018, nothing has changed. The UK is still subject to all EU directives, and the laws enabling the creation of the FSCS are still in force, as are the rules governing the scheme. Neither the referendum, the triggering of Article 50 nor the ongoing negotiations have any (immediate) effect on the situation. Similarly, the schemes currently in force in the other EU member states remain the same.

While one cannot be certain about the future once the UK has left the EU, it seems likely that the fundamentals of the various schemes across the EU and within the UK will not change – at least because of Brexit. Any future changes (e.g. to the levels of compensation) are more likely to be influenced by economic factors than by Brexit itself.

What could change is the the ease with which financial institutions (in either the UK or the remainder of the EU) can operate across both the EU and UK, and the freedom members of the public have to choose where to deposit their money. However, where such deposits are allowed, they are highly likely to be under similar levels of protection as at present.


Current Situation (April 2018)

Nothing that has happened so far has either altered the applicable laws of the United Kingdom, or altered our obligations under the Treaties of the European Union. In particular:

  • The referendum held on Thursday 23 June 2016 did not have the power to change any laws; in fact, it had no binding powers at all:

    this [was] a type of referendum known as pre-legislative or consultative, which enables the electorate to voice an opinion which then influences the Government in its policy decisions

    Source: Wikipedia on the Limitation of the European Referendum Act, 2015

  • The triggering of Article 50 on 29 March 2017 to begin the UK's withdrawal from the European Union had no immediate effect on our laws nor our obligations under the Treaties of the EU:

    The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after [the date of notification], unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period.

    Source: Wikipedia on the Procedure for Withdrawal from the European Union

    Even if a withdrawal agreement is not agreed before the deadline (29 March 2019, unless extended), all that will happen is that the provisions of the Treaty will no longer apply – that is, the UK will no longer be bound by the EU to have a Deposit Guarantee Scheme in place. However, as such a scheme is already in place, it would require additional UK legislation to cancel the scheme or to make substantial alterations to the rules of the scheme.

While the negotiations over the withdrawal agreement are taking place, there appears to have been little in the way of official announcements about the future of the FSCS within the UK, although what there has been maintains the status quo:

  • On 24 June 2016 (the day after the referendum, once the result was known) the FSCS issued a short statement:

    Following the vote by the electorate for the United Kingdom to leave the European Union, the FSCS scope and coverage remains unchanged.

    Source: Financial services: Regulation tomorrow website

    Note: the link on Regulation Tomorrow site to the FSCS annoncement itself no longer works.

  • The only comments from the Bank of England/Prudential Regulation Authority I have found imply "business as usual". In an article following the announcement in November 2016 of the raising of the FSCS limit back to £85,000 following the referendum and triggering of Article 50:

    The Bank of England say that - barring any further unforeseen circumstances - they don't intend to make any further adjustments [...]

    Source: FSCS protection to increase to £85,000

    A letter of 20 December 2017 from the BoE/PRA to various financial institutions discusses preparations for the UK leaving the EU. Mostly this is about whether, and under what circumstances, EU-based firms will need to seek PRA authorisation to carry on business in the UK (become "inbound firms"). While the outcome of these discussions may affect whether (and how) such firms can operate in the UK, and whether deposit protection will fall under the auspices of the FSCS (or remain with their home-country scheme), there is no suggestion of alteration to the FSCS itself.

Therefore, at present, all protections of the FSCS and similar schemes in other EU-member states remain in force.


Once the UK Leaves the EU

Assuming no material changes are made to relevant EU or UK legislation during the withdrawal negotiations, the protections on offer are likely to be essentially the same as today. However, from where you get protection may well change: see The Loss of Passporting below.

From the UK's perspective, the main change following withdrawal is that it will no longer be bound by Treaties of the European Union and the directives it has, or will, issue. Although this removes the legal compulsion to have a scheme like the FSCS in place, it will have no (direct) impact on the scheme that is already in place.

Similarly, the schemes already in place in other EU countries will remain in force (but in their case, so too will the compulsion to keep such a scheme in place).

It is therefore necessary to look in more detail at how such schemes currently work.

Who Offers Me Protection?

Essentially, it is the country that is the primary regulator of a financial institution that is responsible for providing the deposit guarantee. For example:

RCI Bank is authorised and regulated in France by the Autorité de Contrôle Prudentiel et de Résolution (ACPR), and subject of limited regulation by the UK regulators the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). For more information see our regulators page.

Source: "How is RCI Bank regulated?", RCI website

and:

Your eligible deposits with RCI Bank are protected up to a total of €100,000 by the FGDR (Fonds de Garantie Dépôts et de Résolution), the French deposit protection scheme, and are not protected by the UK Financial Services Compensation Scheme. Any deposits you hold above the €100,000 limit are not covered.

Source: "Our Deposit Guarantee Scheme", RCI Website

This is because RCI Bank1, while it offers services to residents of the UK, does not have a separate legal presence in the UK. If there were such a presence (as a legally separate entity, primarily regulated by the UK authorities), then the UK's FSCS would apply. This is explained more fully by the FAQ of the French deposit guarantee scheme (FGDR):

4 - ARE FOREIGN BANKS OPERATING IN FRANCE COVERED BY THE FGDR?

  1. If a foreign bank, regardless of its country of origin, operates in France in the form of a subsidiary, i.e. a company legally separate from its shareholder, the subsidiary operates in France as a French bank and is covered by the FGDR.

  2. If the foreign bank has its head office in another country of the European Economic Area (EEA) and operates in France through a branch (or a sales office, i.e. a physical place of business that is not legally separate from its parent company), the foreign branch is covered by the Guarantee scheme of the country of the parent company.

FOREIGN BANK COVER: PRINCIPLES

Conversely, if a French bank operates in another EEA country through a branch (or a sales office, i.e. a physical place of business that is not legally separate from its parent company) that European branch is covered by the FGDR, the parent company's guarantee scheme.

Within the European Union, guarantee schemes cooperate to compensate customers under the best conditions.

  1. If the foreign bank has its head office outside the European Economic Area and operates in France through a branch or sales office, the branch in France is covered by the FGDR unless equivalent coverage is provided by the guarantee scheme of the country of the parent company.

Source: FAQ of the FGDR

Who is Protection Offered To?

As far as I can see, anyone who (presumably, legally) has an account with an institution covered by the various Deposit Guarantee Schemes will be covered by the appropriate scheme. Again, from the French FGDR:

As a general rule, all bank customers are covered by the deposit guarantee including:

  • natural persons whether minors, adults under guardianship or represented by a third party;

  • companies (limited companies (SA), limited liability companies (SARL), one-person limited liability companies (EURL), ... of any size, regardless of their status;

  • associations and other professional groups, non-trading partnerships, foundations and groups of any kind;

  • public institutions, local governments and their own institutions.

Source: French Deposit Guarantee Scheme

Similarly, the rules set out by the FCA governing the FSCS over who is eligible for protection only seem to cover which categories of sole-traders, small businesses and the like are covered. Neither makes any mention of the account holder having to be a resident of either any specific country, nor of the EU/EEA in general.

(All schemes across the EU cover personal, "retail" customers; none cover "large, corporate" customers; what is covered "in between" may vary between the schemes).

Thus, whether the UK is in the EU or not does not appear to affect (a) whether its citizens gain the benefit of any EU-wide protection scheme, nor (b) whether EU citizens get benefit from the FSCS.


The Loss of Passporting

At present, anyone in the EU can pretty freely move their money anywhere within the EU. They can deposit their money both with financial institutions in (and regulated by) their home country, and with institutions located in (and regulated by) other EU members. This is enshrined in the EU's "passporting" rules:

The EU passporting system for banks and financial services companies enables firms that are authorised in any EU or EEA state to trade freely in any other with minimal additional authorisation. These passports are the foundation of the EU single market for financial services

Source: "What is ‘passporting’ and why does it matter?", BBA

The immediate effect of the UK withdrawing from the EU is that this freedom to operate throughout the EU will be removed. As the same document states:

  • In principle, it would see the branches of UK-based banks in the rest of the EU revert to the status of ‘foreign’ bank branches, with potentially restrictive implications for how they are regulated, what they can do and what prudential requirements they are subject to. This would also be the case for branches of EEA banks in the UK.

  • In principle, it would see the branches of EEA banks in the UK lose their own passporting rights back into the EU single market. Given that many of these branches have been established to help EU customers’ access London capital and securities markets, this would have a material impact on the ability to serve clients across the EU.

Source: ibid

Not surprisingly, this is one of the areas being discussed during the withdrawal negotiations. The Bank of England / PRA letter mentioned earlier includes:

  1. In the absence of continued passporting rights post-Brexit, firms currently exercising those rights to establish a branch or provide services into the UK (‘inbound firms’) will need to seek PRA authorisation to carry on PRA-regulated activities in the UK.

  2. The recent European Council meeting on 14-15 December yielded welcome positive results, including agreement of the need to negotiate an implementation period during which firms could be able to continue undertaking cross-border activity between the UK and EU in much the same way as today

Source: Letter from BoE/PRA 20 December 2017

So it seems at least plausible that some replacement scheme may be put in place to ease the situation post-Brexit.

However, even if nothing is done to ameliorate the effects of losing passporting, the knock-on effects will mainly be on how companies operate (the regulatory hurdles they have to jump through to operate across the UK and the EU) and the freedom of customers to choose where to put their money (i.e. all the avenues that are open today may not be open in the future).

One Possible Need for Caution

Currently, a company primarily regulated and operating in France is regarded (thanks to "passporting") as "sufficiently" regulated in the UK: deposits from someone in the UK are allowed and are covered (by the French scheme).

The question is: what would happen if that company did not get appropriate UK regulation (as an "inbound firm") once the UK has withdrawn from the EU? The FSCS would not protect it, because the company would not be regulated in the UK. The French scheme may not apply because the company may no longer be allowed to do business in the UK.

For a new depositor, this is not a problem: they can make an informed choice, based on whether protection does apply or not.

What is not clear at the moment is what would happen to existing deposits with that company once the UK has left:

  • The "worst-case" scenario is that such deposits would lose all protection and that customers concerned about this would need to move them to a regulated firm before the UK finally leaves the EU.

However, from the above Bank of England letter, it seems that they are aware of this possibility:

  1. We welcome today’s announcement from HM Treasury that the government will act if necessary to mitigate risks to the continuity of EEA firms’ outstanding contracts in the UK [...]

and that all parties see a need for a "transition" period (see paragraph 6 quoted earlier). Also, there appear to be moves towards a "simplified" regulation model ("authorisation as branches") that seem to preserve some of the benefits of "passporting":

  1. The outcome of the negotiations between the UK and EU is of course relevant in this context. It is therefore premature for the PRA to reach a final view in these areas, particularly for the most systemically important firms. However, given progress to date in the Brexit negotiations, for the present firms may plan on the assumption that these requirements will be met, and therefore that they may apply for authorisation as branches unless they are conducting material retail business. This assumption may be revisited as Brexit negotiations proceed.

Conclusion: If you currently have money deposited in a non-UK-regulated institution, then keep an eye on its status as the date for leaving approaches, and consider moving the money elsewhere if necessary.

My personal opinion is that the EU/UK won't let such deposits suddenly lose protection: rules and/or agreements will be put in place so that either deposits continue to be protected by the non-UK scheme, or the FSCS would assume protection for at least a reasonable period to give people time to move the money elsewhere.


An Unknown (but Largely Unchanging) Future

The main reason I believe the fundamentals of the various Deposit Guarantee Schemes will not change with the UK leaving the EU is that the reason for these schemes has little, if anything, to do with the EU – its role has been limited to harmonising the schemes that were already in place (and ensuring one is in place if one did not already exist).

First, the origin of such schemes long predates the EU:

Deposit insurance was formed to protect small unit banks in the United States when branching regulations existed. Banks were restricted by location thus did not reap the benefits coming from economies of scale, namely pooling and netting. To protect local banks in poorer states, the federal government created deposit insurance.

Source: _Wikipedia on Deposit Insurance

It also notes that (as of January 2014) 113 countries around the world had such schemes in place, with 41 others considering the implementation of such schemes. This implies the benefits of, or perceived need for, such schemes is global, and not limited to the EU.

As such, it seems very unlikely that either (a) the EU will drop the requirement for its remaining members to operate such schemes (or allow them to radically alter the terms of those schemes), or (b) the UK will drop its existing scheme or radically alter it.

Of course, global (or local) economic factors may alter the details of such schemes (such as the limit on compensation; whether individuals only, or sole-traders, small businesses etc. are covered).


1 Disclaimer: I have used RCI Bank as an example source because (at the time of writing) I am a customer of theirs. However, their mention should not be taken as either an endorsement or promotion of their services.

  • Absolutely brilliant research! I remember the last crisis and when various banks got govt/EU bailout loans to keep afloat. For example KBC got a multi-billion dollar loan from the Belgian govt., but KBC owns a whole raft of banks across the EU. I think in this case when the parent bank is being kept alive by a particular member state (in that case Belgium), some of the ambiguities will suddenly become a clear-cut situation of 'us first, the other account holders from abroad last' – Sentinel Apr 11 '18 at 19:23

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