On 14 April 2021, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) sent a “Dear CEO Letter” to the chief executive officers of banks and building societies regarding the use of deposit aggregators and how to mitigate some of the key risks (link). However, the regulators were also keen to point out that they do not want to stifle competition or innovation in what is an often innovative part of the industry that has been growing in popularity over the last five or six years in particular.
There are a number of different business models and use cases. Typically, a deposit aggregator (sometimes called a “deposit platform”) will either introduce clients to a third party deposit taker (i.e. a bank or a building society) so that they form a direct customer relationship, or instead aggregate deposits from multiple clients in a trust account held by the deposit aggregator with the deposit taker. In both cases this is usually done to achieve higher rates of interest than might otherwise be obtainable by individual clients making deposits on their own. Deposit platforms also typically offer tools to enable customers to manage and view their deposits in one place.
The Dear CEO Letter highlights some of the legal and regulatory issues that deposit takers should be aware of when conducting due diligence on deposit aggregators, including as to depositor protection, financial promotions and customer awareness of the basis on which their deposits are held and the relationships between the various parties involved. In this respect, the so-called Financial Services Compensation Scheme (FSCS) “look through” is often a key part of the analysis where a trust account held by the deposit aggregator with the deposit taker is used. The PRA has also recently made changes to its depositor protection rules to ensure that if a responsible person has not carried out identity verification in line with the anti-money laundering rules before the compensation date, it can be done retrospectively without affecting the eligibility of ultimate beneficiaries for FSCS protection (link).
The Dear CEO Letter also touches on the resolution and liquidity implications of the deposit aggregation model. The letter does not specify the liquidity treatment that may be applied to deposits sourced through deposit aggregators. However, whilst recognising the fact that deposits from deposit aggregators may come from a diversified client base, the PRA expects deposit takers to factor in any specific liquidity risks that the deposit aggregation model may create. In practice, deposit takers should ensure that these elements form part of their due diligence and senior management considerations, and that existing approaches are revisited to ensure they are appropriately justified. Overall, the regulators make it clear that senior managers should have appropriate oversight of relationships with deposit aggregators and set out next steps for deposit takers to review their arrangements.