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This publication is available at https://www.gov.uk/government/publications/draft-deposit-guarantee-scheme-and-miscellaneous-provisions-amendment-eu-exit-regulations-2018/deposit-guarantee-scheme-and-miscellaneous-provisions-amendment-eu-exit-regulations-2018-explanatory-information
The European Union (Withdrawal) Act 2018 (EUWA) repeals the European Communities Act 1972 on the day the UK leaves the EU and converts into UK domestic law the existing body of directly applicable EU law. The purpose of the EUWA is to provide a functioning statute book on the day we leave the EU.
The EUWA also gives ministers powers to make statutory instruments (SIs) to prevent, remedy or mitigate any failure of EU law to operate effectively, or any other deficiency in retained EU law. We refer to these contingency preparations for financial services legislation as ‘onshoring’.
HM Treasury is using these powers to ensure that the UK continues to have a functioning financial services regulatory regime in any scenario.
This SI is part of the wider work the government is undertaking to prepare for the UK’s withdrawal from the EU. It is not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition. The changes made in this SI would not take effect on 29 March 2019 if, as expected, we enter an implementation period.
The attached draft SI is intended to provide Parliament and stakeholders with further details on our approach to onshoring financial services legislation. The draft instrument is still in development. The drafting approach, and other technical aspects of the proposal, may change before the final instrument is laid before Parliament.
3. Policy background and purpose of the SI
3.1 What does the underlying EU regulation and UK law do?
Deposit Guarantee Schemes (DGS)
DGS are an important mechanism for ensuring financial stability and confidence in credit institutions (e.g. banks, building societies and credit unions). DGS support orderly resolution and timely pay out of DGS-covered deposits to depositors. This is especially important during periods of financial stress where depositors can be sure that the money in their bank accounts is covered up to a certain limit, even if their bank, building society or credit union fails.
The Financial Services Compensation Scheme (FSCS) is the UK’s DGS and is responsible for paying compensation to depositors when an authorised UK credit institution has failed. The FSCS also provides compensation to customers of certain other types of firms e.g. insurers and investment firms. EU exit related changes to FSCS membership and rules are being made in the EEA Passport Rights (Amendment etc., and Transitional Provisions) (EU Exit) Regulations 2018 and UK regulators’ rulebooks.
The Deposit Guarantee Schemes Directive 2014/49/EU (DGSD), agreed in 2014, is an EU directive which harmonises the scope, eligibility, financing, and repayment times of deposit coverage in the European Union. Importantly, the directive sets the coverage level for deposits, which is currently €100,000 per individual per firm. The UK converts this level into sterling; the UK level is currently £85,000.
The DGSD empowers the European Commission to adjust and review the coverage level at least every 5 years.
The DGSD also includes provisions for cooperation between DGS in the European Union, for example so that depositors of an EEA branch of a UK credit institution operating in the EEA would be covered by the FSCS, and vice versa.
The UK transposed the DGSD through the Deposit Guarantee Schemes Regulations 2015, amendments to the Financial Services and Markets Act 2000 (FSMA) and via the Prudential Regulation Authority (PRA) rulebook.
The Financial Ombudsman Service (FOS)
The FOS is the UK’s alternative dispute resolution provider for the financial services industry. The policy intent behind the establishment of the FOS was to provide consumers with a free, independent service that enabled the fair, prompt and informal resolution of disputes with financial firms. It is designed as an alternative to resolution of cases through the courts, which can be expensive for consumers and delay redress. The FOS also satisfies the legal requirement for an alternative dispute resolution entity under European Law (ADR Directive).
The FOS is provisioned for in FSMA. More detailed rules on how the FOS operates, including the details of its jurisdiction, are determined by the FCA and the FOS and set out in the FCA Handbook.
4. Key deficiencies this SI remedies
4.1 The Financial Ombudsman Scheme – Part 2 of the statutory instrument
For FSMA’s provisions relating to the FOS
Schedule 17 to FSMA contains references to EU legislation (the ADR Directive 2013/11/EU). Part 2 of this SI amends these references to ensure they continue to function post-exit.
4.2 Deposit Guarantee Scheme – Part 3 of the statutory instrument
The power to set the deposit coverage level
Part 3 of this SI transfers coverage level setting power from EU institutions to UK institutions. The PRA will have the power to review, adjust and set the deposit coverage level with approval from HMT.
Cooperation between the FSCS and EEA Deposit Guarantee Schemes
This part of the SI also removes the arrangement whereby the FSCS administers compensation payments to depositors at UK branches of EEA credit institution on behalf of an EEA DGS (in essence, the FSCS will no longer serve as an intermediary). However, the SI also includes a transitional provision allowing the FSCS to continue after Exit to accept instructions and funds from EEA DGS in the event that an EEA firm operating in the UK fails immediately before the UK’s exit from the EU.
Requirement to notify the European Banking Authority (EBA)
This SI removes the requirement on the PRA to notify the EBA each year of the amount of deposits in the UK which are covered by the FSCS and the funding available to the FSCS. The PRA will also no longer have to notify the EBA of any agreements between the FSCS and other EEA DGS.
This SI also amends EU references and removes arrangements which will no longer be appropriate after withdrawal. For example, references to incoming EU firms in domestic legislation.
4.3 Relevant rulebook and binding technical standard changes
The PRA and FCA will be updating their rulebook and handbook respectively to reflect the changes introduced through this SI, and to address any deficiencies resulting from the UK leaving the EU. The PRA and FCA have confirmed their intention to consult on these changes in the autumn.
The changes in this SI will directly impact the PRA to whom a power is being transferred and who have been consulted in relation to this SI.
This SI does not include provisions that may be necessary to ensure Gibraltarian financial services firms’ continued access to UK markets in line with the UK government’s statement in March 2018, and other provisions dealing with Gibraltar more generally. Where necessary, provisions covering Gibraltar will be included in future SIs.
5. Next steps
HM Treasury plans to lay this instrument before Parliament in the autumn.
6. Further information
If you have queries regarding this instrument, email FSlegislationEUWA@hmtreasury.gov.uk.