The European Union (Deposit Guarantee Schemes) Regulations 2015 (the “Regulations”) entered into force on 20 November 2015 and transpose Directive 2014/49 on deposit guarantee schemes (“DGS”) into Irish law (the “Directive”). The Regulations’ overall objective is to ensure that depositors are protected up to an amount of €100,000 in the event of a credit institution (eg a bank, building society or credit union) authorised under Irish law being unable to repay deposits.
The first DGS Directive 94/19 and its amending legislation (the “Original Directive”) was implemented into Irish law by the European Communities (Deposit Guarantee Schemes) Regulations 1995, the European Communities (Deposit Guarantee Schemes) (Amendment) Regulations 2009 and the Financial Services (Deposit Guarantee Scheme) Act 2009.
In July 2010 the EU Commission proposed a comprehensive review of the Original Directive, which sought to consolidate the existing legislation and to further harmonise the requirements in areas such as the products and depositors covered; DGSs’ funding mechanisms; risk-based contributions and the level of coverage. It also sought to permit a DGS to be used in a resolution context. This review resulted in the adoption of the Directive, which was required, for the most part, to be transposed into Irish law by 3 July 2015. See our previous briefing note (available here). briefing In May 2015 the Department of Finance issued a consultation on the Directive (the “Consultation Paper”), partially for information purposes, and partially to consult with stakeholders as to how the various discretions contained in the Directive should be applied.
As mentioned, the Regulations entered into force on 20 November. Those Regulations revoke the two earlier Regulations mentioned above. For its part, the 2009 Act has been amended by the Finance (Miscellaneous Provisions) Act 2015 (as amended, the “2009 Act”), in order to put in place a transitional funding arrangement for the new DGS contributory scheme and to provide a means for the Central Bank to recoup from the Exchequer where the Central Bank contributes its own resources towards a DGS compensation event.
The 2015 Regulations
As was previously the case, the Regulations protect all eligible deposits of each depositor up to an aggregate amount of €100,000. As compared to the earlier legislative framework, key changes relate to deposit eligibility criteria, temporary high balances, payment compensation deadlines, depositor information and funding.
The Regulations protect all deposits held by individuals and companies, subject to certain exclusions (“excluded deposits”). Under the earlier legislative framework, there was some debate as to whether structured products, which are a combination of a deposit and an investment product, fell within the definition of a “deposit”. The Regulations clarify this issue by introducing a new definition of the term “deposit” according to which a structured product will qualify as a deposit as long as the funds are left in an account and the principal is repayable at par.
The Regulations also streamline the deposits protected under the DGS (“eligible deposits”) as well as the excluded deposits. The Regulations maintain the previous discretionary exemption for small selfadministered pension schemes, meaning that such schemes continue to be treated as eligible deposits. However, deposits held by a credit union with a bank are no longer protected by the DGS: regulation 10(1)(a) specifically lists a deposit made by a credit institution as an excluded deposit (subject to certain exceptions) and the definition of a credit institution for the purpose of the Regulations includes a credit union.
The Regulations provide that set-off may take place in the case of amounts which are due in circumstances where it is possible under the statutory and contractual provisions governing the contract between the credit institution and the depositor.
Temporary High Balances
The Regulations guarantee certain deposits, referred to as a “temporary high balance” up to a limit of €1 million. This guarantee is for a six month period after the relevant type of deposit has been credited to an account or from the moment it becomes legally transferable. To qualify, the part of the eligible deposit in excess of the normal €100,000 limit must:
- relate to a real estate transaction (a purchase, sale or equity release) relating to a private residential property;
- comprise sums paid to the depositor in respect of benefits payable under an insurance policy, a compensation claim for personal injury or wrongful conviction, State benefits paid in connection with disability or incapacity, a compensation claim for unfair dismissal, redundancy, marriage, divorce, and retirement;
- comprise sums paid to the depositor in respect of death benefits, compensation in respect of a person’s death, or inheritance; or
- be held in an account on behalf of a depositor in his or her capacity as personal representative of a deceased person for the purpose of realising and administering the deceased’s estate.
Payment Compensation Deadlines
As compared to the previous payout period of 20 working days, the Regulations provide for a phased introduction of a shorter period which will see most depositors receiving compensation within seven working days by 1 January 2024. During the transitional period, the following repayment periods will apply:
- 20 working days until 31 December 2018;
- 15 working days from 1 January 2019; and
- 10 working days from 1 January 2021.
Credit institutions are required to provide customers with information about deposit protections under the Regulations, including prospective customers prior to taking any deposits from them. They must also confirm that deposits are eligible deposits on their depositors’ statement of account and provide depositors with the DGS’s website address.
The DGS will be financed by the deposit guarantee contributory fund (the “Fund”), which the Central Bank will manage and administer. According to the Regulations the amount in the Fund must, by 3 July 2024, equal at least 0.8% of the amount of covered deposits of all credit institutions authorised in the State.
The Fund is to be financed primarily by exante contributions from credit institutions authorised under Irish law. The Central Bank will determine the level of ex-ante contributions annually, and the level may vary between credit institutions depending on:
- the percentage held by the relevant credit institution of the aggregate covered deposits held by all credit institutions authorised in the State; and
- the risk incurred by the credit institution.
The ex-ante contribution must be made largely in the form of payments although the Central Bank may permit institutions to meet up to 30% of their contribution through payment commitments, subject to the fulfilment of certain criteria. For the purpose of the Regulations, a payment commitment must be fully collateralised and the collateral must consist of low-risk assets, be unencumbered by any third-party rights and be at the DGS’s disposal.
The Central Bank may also require Irish authorised credit institutions to pay an extraordinary ex-post contribution, in the event that the Fund’s available means are not sufficient to cover its losses, costs or other expenses.
The Regulations provide for certain alternative funding means. In particular, the Central Bank may provide finance to the Fund on a short-term and urgent basis, subject to the fulfilment of certain conditions. It may also borrow on behalf of the Fund.
In order to ensure a smooth transition from the previous funding arrangements, the 2009 Act provides for the establishment of a legacy fund consisting of funds transferred from a credit institution’s existing deposit protection account (“DPA”) to the amount of 0.2% of covered deposits. The legacy fund will cease to operate when it no longer has any funds as a result of compensation payments, or on the expiry of a three year period which commenced on 20 November 2015.
Comment and Next Steps
The Regulations introduce a number of changes to the pre-existing DGS framework, which have consequential implications for credit institutions. These relate in particular to the DGS’s funding arrangements.
As mentioned above, under the Regulations, payments will be made from the Fund and will be financed by contributions from authorised credit institutions. In contrast, under the previous framework each credit institution was required to maintain a DPA and where a payment was made in a DGS event, the funding came from the DPA balances, for example following the appointment of special liquidators to IBRC Ltd. A practical consequence of this change is that whereas the DPA was considered as an asset on a credit institution’s books, the new arrangement under the Regulations give rise to a cost.
In addition, the method of calculating the new contribution is significantly different as is the amount of funding required. Previously, each credit institution was required to maintain a balance in its DPA account equal to 0.2% of its total covered deposits, with a minimum amount of €50,000 (except in the case of credit unions). As discussed above, the Fund will be calculated on a different basis including the percentage held of the aggregate amount of covered deposits held by Irish authorised credit institutions, and risk. As this stage, it is too early to say in terms of an individual credit institution what its contribution to the Fund is likely to be. However, it is noteworthy that, according to the Consultation Paper, a target level of 0.8% will result in a fund of approximately €680 million, which is significantly larger than the amount of €390m held in the DPA.