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.
The SI will also remove the obligation on the FSCS to co-operate with EU protection regimes, given that EU schemes would in turn no longer be obliged to co-operate with the FSCS. After exit, EEA member states will become third countries and will be treated in the same way as existing third countries. Therefore, when an EEA firm fails, UK customers of EEA firms will need to seek compensation directly from the EEA protection scheme, rather than through the FSCS. In the unlikely event that an EEA firm fails just before exit day but a UK depositor has not yet received compensation after exit day, the SI will enable the FSCS to continue to administer payments to UK depositors on behalf of the EEA scheme. This is sensible, given that EEA protection schemes may not, for example, have initially put in place systems to deal with UK customers, such as advice or helplines in English.
Let me be clear that this provision and the changes in the SI will not directly affect the general UK population, the overwhelming majority of whom hold their deposits in the UK with authorised firms that are FSCS-protected. For firms such as Santander, which are UK-incorporated subsidiaries of EEA firms, their customers will continue to be FSCS protected, as they currently are.
The SI also removes provisions in UK legislation that continue to impose EU obligations on the UK. An example of such an obligation is the requirement on the PRA to notify the European Banking Authority every year of the total amount of protected deposits in the UK. It also fixes deficient definitions and legislative references relating to the Financial Ombudsman Service in the Financial Services and Markets Act 2000, which will have no impact on the operations of this body.
The Treasury has been working very closely with the PRA, the Financial Conduct Authority and the FSCS in drafting this instrument. It has also engaged the industry on the SI and will continue to do so. In advance of laying the instrument, the Treasury published it in draft, along with an explanatory policy note in August 2018 to maximise transparency to Parliament and to take the opportunity to consult with the industry. No concerns have been raised on the approach taken by the SI.
In summary, this gives the Government the legislation necessary to ensure that the rules governing the UK’s deposit guarantee scheme and the other elements mentioned function appropriately if the UK leaves the EU without a deal or an implementation period. I hope that noble Lords will join me in supporting these regulations and I commend them to the House.