Deposit Guarantee Scheme and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018

Lord Bates Excerpts

Tuesday 6th November 2018 Lords Chamber

Moved by

[Lord Bates]

That the draft Regulations laid before the House on 9 October be approved.

[The Minister of State, Department for International Development (Lord Bates) (Con)]

My Lords, this SI also forms part of the work being delivered to ensure that there continues to be a functioning legislative and regulatory regime for financial services in a scenario where the UK leaves the EU without a deal or an implementation period.

In this instance, the SI will fix deficiencies to legislation on the UK’s deposit guarantee scheme and in certain areas of financial services legislation such as the Financial Ombudsman Service, to ensure that they continue to operate effectively post Brexit. The approach taken in this legislation aligns with that of other SIs being laid under the EU withdrawal Act, providing continuity by maintaining existing legislation at the point of exit but amending it where necessary to ensure that it works effectively once the UK has left the EU.

Deposit guarantee schemes are an integral part of enhancing financial stability. They protect people’s savings and deposits up to a certain level if their firm fails. Many noble Lords will be familiar with the Financial Services Compensation Scheme, known as the FSCS. It is the UK’s deposit guarantee scheme, which compensates savers up to £85,000 per person when their bank, building society or credit union is unable to repay their deposit.

The EU deposit guarantee schemes directive, which was adopted in the UK in 2014, sets the level of deposit protection across the EU at €100,000 and empowers the European Commission to review the protection level every five years. Non-euro countries can convert the €100,000 into the equivalent amount of their national currency. The directive also stipulates that deposit guarantee schemes such as the FSCS protect their members’ deposits in other member states. This means, for example, that a UK bank’s operations in the EEA will be FSCS-protected, and vice versa—when an EEA firm fails, the customers of its UK business are protected by the relevant EEA scheme.

An administrative arrangement in the directive builds on this co-operation. Currently, if an EEA-authorised firm were to fail, the FSCS would administer compensation to UK depositors on behalf of the EEA protection scheme. This occurs only after the EEA scheme has provided the FSCS with the funds to be transferred. In a no-deal scenario, the UK would be outside the EEA and outside the EU’s legal, supervisory and financial services regulatory framework. The Deposit Guarantee Scheme Regulations 2015, which were part of the UK’s transposition of the directive, need to be updated to reflect this and ensure that the provisions work properly in a no-deal scenario.

These draft regulations make two amendments to the Deposit Guarantee Scheme Regulations 2015. They will transfer the power to set the maximum deposit protection level from the EU to the United Kingdom’s Prudential Regulation Authority. This approach retains the principles of the current arrangement by giving the power to a technical body that is best placed to make that judgement. The PRA is the appropriate body to take on this role as it has the required level of technical expertise and resource to do such a task. Indeed, it already has an existing role under the EU framework in setting the sterling deposit protection level in accordance with the EU level.

This arrangement also mirrors the domestic process for setting the coverage level for insurance and investments whereby the regulators are responsible for making a technical judgment, balancing factors such as consumer protection, financial stability and costs to firms. However, given the importance of deposit protection for the wider economy and the public interest, any changes to the protection level will be subject to approval from the Treasury. In addition, the Prudential Regulation Authority is required to consult on any changes to the level.

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[Lord Tunnicliffe (Lab)]

My Lords, unlike with the previous SIs, I feel that I actually understand what the regulations do, and the Minister has said nothing to shake my faith in that belief. They seem to have fallen within the overall government assurances, in introducing no policy change but smoothing the scenario, and I have nothing more to add.

[Lord Bates]

I suppose it passes as a small victory for the Front Bench when it is said that they have not actually said anything to shake the confidence of the spokesman for Her Majesty’s loyal Opposition. That is how we want to keep it: we want to keep the confidence of all parties that we are prepared and ready for all eventualities through this complex process of negotiation.

The noble Baroness, Lady Kramer, asked for some points of clarification. She asked how the €100,000 actually corresponds across. She said that there had been a devaluation of sterling, but that was not an instrument of government policy; it may be something that happened over time, as currencies fluctuate. The Prudential Regulation Authority already has a role in setting and keeping track of that link between the guarantee sums, and we envisage that that will continue. She asked how the Financial Services Compensation Scheme protection will be affected in general by EU exit and whether anyone will lose. The SI does not deal with consumers who are protected by the FSCS. However, I can confirm that FSCS protection for customers here in the UK being served by businesses of a UK-authorised firm will not change as a result of exit. What will change is deposit protection for customers in the EEA who have business with EEA branches of UK firms in future. It will be the relevant EEA authorities who are responsible for ensuring that these customers are protected. Details of the scope of FSCS coverage are set out in the rules by the PRA and the FCA.

The noble Baroness asked about our plans to keep ourselves in line with the level set for deposit guarantees. There are no plans for the coverage level to depart from the current level. The PRA stands ready to review in the event of any urgent circumstances which make such a review necessary. With those brief clarifications, I thank noble Lords again for their contributions.

Motion agreed.