James Mews, Counsel
Jersey is meeting the latest international standards with the creation of a new Resolution Law, changes to the Deposit Compensation Scheme (the “DCS”) and to other areas of banking regulation.
The DCS’s mandate is set out in the Banking Business (Depositors Compensation) (Jersey) Regulations 2009 (the “2009 Regulations”). These provisions are being updated.
Since 2009 there has been an evolution of international best practice. Consequently the 2009 Regulations will be replaced by the Bank Depositors Compensation (Jersey) Law 201- (“Draft Law”). The Draft Law was lodged in December 2016 and is due to be debated by the States shortly. This article seeks to focus on the key areas where there are changes to the current DCS system.
10 Key points
1. The DCS will be able to pay more than £100 million in compensation but there will be no increase in the banking levy.
2. Bank levies will be repaid after compensation is paid in full.
3. Straight-Through Payout of compensation to depositors is introduced.
4. Time limits for paying compensation is reduced to 7 days from 3 months.
5. Deposit Data Format can be designated.
6. Banking groups provisions are amended to allow the separate treatment of group entities.
7. Annual reporting of key data by banks.
8. Bank inspection powers given to DCS.
9. Insolvency hierarchy which affects when banks are repaid levies.
10. Automatic vesting of depositors’ rights in the DCS Board may occur.
The big picture – DCS and Resolution – how do they fit together?
The DCS will sit alongside and complement the new resolution regime. The DCS is designed to pay compensation to individuals if a bank is insolvent. It acts as a safety net to protect people’s essential savings and to ensure financial stability. The resolution regime is designed to enable banks to be saved that are systemically important either to the jurisdiction or globally, thereby preserving financial stability. Systemically important banks are normally medium or large sized banking groups. Smaller banking groups are likely to be wound up using normal insolvency proceedings. Where insolvency is the preferred resolution tool, the DCS is activated and pays compensation to depositors. Therefore, the resolution regime and the DCS complement each other as two key strands of the financial safety net.
10 Key Points in more detail
1. Removal of £100 million limit on compensation payable by DCS
The upper limit on the payment of compensation will be removed. At present, the DCS is limited so that it can pay a maximum of £100 million compensation. The new DCS will be able to pay out more than £100 million in compensation in certain circumstances. Recoveries received by the DCS as a result of the insolvency process relating to the failed bank will be able to be paid over to depositors. Currently this could happen if compensation has been reduced rateably (e.g. because the £100 million was insufficient to pay all claims), but the ‘top up’ payments are not presently classified as ‘compensation’. The Draft Law will enable such ‘top up’ payments (whether funded from recoveries, loans or other sources) to be classed as compensation.
Other existing caps on compensation levies are retained. Currently, the DCS may not levy a banking group more than 0.3% of its eligible deposits in respect of any bank failure. Compensation levies continue to be capped at £10 million and £5 million over 5 years. These caps remain.
2. Repayment of Bank levies after depositors
The Draft Law changes the order of payments made in respect of any recoveries received by the DCS. Going forwards, the new order is payment of depositors, repayment of the States of Jersey loan and then repayment of any bank levies. Subject to the bank insolvency achieving a reasonable rate of recovery, a feature of nearly all recent cases, the DCS will be able to repay the bank levies.
3. New Straight-Through Payout system
Europe has introduced a system known as Straight-Through Payout. This will be introduced in Jersey. It allows the DCS to pay compensation without an application form being submitted, based on the deposit data of the failed bank. Straight-Through Payout will be used when the data from the failed bank is demonstrated to be accurate enough to be relied on without extra information from application forms.
In Jersey, it is intended that Straight-Through Payout will be limited to individuals and charities. It will be quicker than the current process that requires waiting for depositors’ claim forms to be submitted and reviewing each application. This should increase the confidence in the system of depositors who bank in Jersey.
4. Deposit Data format designated
Banks are currently expected to comply with a ‘preferred deposit data format’ so that deposit data can be supplied to the DCS in a form that is readily compatible with the DCS’s IT systems. The Draft Law allows the DCS to designate this preferred format as a matter of law. Banks will need to check that they comply with the new standard.
5. Banks’ annual reporting to DCS
Mirroring the status quo where banks give a statement of eligible deposits to the Jersey Financial Services Commission (the “JFSC”), an annual reporting requirement will be introduced in the Draft Law, requiring banks to inform the DCS of the amount of eligible deposits that they hold on an annual basis.
This will allow the DCS Board to periodically assess the sufficiency of coverage. These figures can be used in a default if fresh figures are not provided quickly by a bank following activation of the DCS.
6. New DCS powers of inspection
The DCS is given powers mirroring those of the JFSC under Article 26 of the Banking Business Law, in order to enable the DCS to obtain important information from banks. In particular, the DCS may wish to examine an ailing bank’s deposit data prior to the DCS being triggered, in order to ensure that this can be readily uploaded onto the DCS’s IT systems. Powers are exercisable on written notice to those affected.
7. Jersey banking groups changed
The Draft Law states that the Minister may group banks for the purpose of calculating the administration levy paid by banks. This is a change from the current position. Banks will be no longer grouped for the purpose of declaring a failure or the payment of compensation. This change removes the complication caused if banks within the same group are subject to different resolution processes. A consequence of the resolution process is that not all the parts of a banking group may become insolvent at the same time or at all. Ungrouping banks enables banks to be treated appropriately according to the resolution strategy applied in each case.
This creates a positive outcome for depositors as the amount of compensation paid could increase. The limit of £50,000 per depositor per bank will replace the limit of £50,000 per banking group. If a depositor had two deposits of £50,000 in different parts of the same banking group, his coverage would now be £50,000 per deposit not £50,000 across the banking group.
8. Insolvency and Priority
Deposit preference for certain types of deposits is already part of Jersey law – the change was made in 2012. Further changes are being made to depositor preference in the Resolution Law approved by the States Assembly in early 2017. Now overseas deposit compensation schemes holding rights in respect of deposits placed in overseas branches of Jersey subsidiaries rank equally with the Jersey DCS. This follows agreement reached with Guernsey and the Isle of Man in 2013 that all three islands would work together and implement similar rules with regard to deposit preference and the DCS operating in each Crown Dependency.
9. Consumer Focus - Time periods to pay compensation reduced
The Draft Law reduces time periods for paying compensation. Previously compensation needed to be paid within 3 months. The change to move to a Straight-Through Payout system means that the time taken to pay compensation may be reduced. Payment of compensation is required within 7 working days to meet the international standard as set out in the revised International Association of Deposit Insurers’ Core Principles. If the bank data is of sufficient quality, then payments can be made quickly. However, there are a number of caveats to the general rule allowing flexibility in appropriate cases. For example, delay may be justified where the bank data is of insufficient quality to enable the DCS to rely on it when making compensation payments.
10. Customer Focus - Automatic vesting of rights of customers in the DCS
Depositors’ rights may be automatically vested in the DCS on the activation of the DCS. This avoids the need for manual assignment of a depositor’s rights in exchange for the payment of compensation enabling Straight-Through Payout without a manual process. However, the DCS also has the right to require manual assignment by depositors in appropriate cases for example in order to deal with conflicts of law issues.
Conclusions regarding DCS Changes
There will be a substantial change to the DCS as a result of the Draft Law replacing the 2009 Regulations. These changes have an impact on banks and their customers. This briefing note is only a summary of the changes. To understand more about these changes and how they affect your business it may be useful to seek advice.
Pinel Advocates Banking and Regulatory Team
Pinel Advocates has unique experience of banking and regulatory matters including the Bank Depositors Compensation (Jersey) Law 201-. James Mews, Counsel, chaired the States of Jersey working parties developing the Deposit Compensation Scheme from 2007 to 2016. James also led the consultation process with the JFSC and the Jersey Bankers Association.
He has led and chaired working parties for the last ten years on other banking and regulatory developments including the Bank (Recovery and Resolution (Jersey) Law 2017, the Dormant Accounts (Jersey) Law 2017, amendments to the Banking Business (Jersey) Law in 2016 and sat on Jersey’s Financial Crime Strategy group considering changes to AML and terrorist financing laws.