The FSA has published a consultation paper (CP12/23) which aims to address the implications of non-European Economic Area (non-EEA) national depositor preference regimes (NDPR). NDPRs exist where the laws and regulations of a non-EEA country (the home country) provide that, in the event of a home country firm’s insolvency, the claims of depositors in that home country are to be preferred to those who have made deposits in branches outside the home country, for example, in the UK.
CP12/23 aims to level the playing field in respect of UK depositors and suggests that home country firms operating NDPRs should be prohibited from accepting deposits using a UK branch unless they implement measures to eliminate the disadvantages experienced by depositors of the UK branch in pursuing a claim against an insolvent home country firm. CP12/23 makes a number of proposals that will significantly affect NDPR operating firms, including requiring them to either:
- only accept deposits in the UK under a UK-incorporated subsidiary; or
- implement an alternative arrangement to ensure that UK depositors are no worse off than depositors in the home country if the firm fails.
The FSA has considered the following alternative measures:
- dual payability whereby, under the home country’s statute, firms should ensure that UK deposits are repayable in both the home country and in the UK; or
- ring-fencing of assets, whereby firms will safeguard the assets of the UK branch to meet its deposit liabilities.
CP12/23 also proposes that NDPR operating firms should highlight to new and existing depositors the fact that, in the event of insolvency, the claims of the UK branch customers will rank lower than the claims of depositors in the home country.
Will this affect Indian firms with UK deposit-taking branches?
NDPRs are known to operate in the United States, Australia, Singapore and Turkey and, if branches of banks which originate from these countries wish to maintain a deposit taking branch in the UK, they will have to abide by any new requirements that are brought in as a result of CP12/23.
Indian company law provides for preferred creditors in the event of a firm’s insolvency. However, these creditors include claims for ‘workmen’s dues’ and from ‘secured creditors’ and do not include claims from depositors. Once these creditors have been satisfied, separate legislation provides that, within three months of the winding-up, depositors with a savings account of the bank are first paid 250 rupees or the balance in the account, whichever is less, followed by regular depositors of the firm on the same terms. It is only once claims of depositors have been satisfied that claims of regular creditors are considered.
Indian insolvency law is silent on the jurisdiction of a depositor claimant against an insolvent firm. However, Indian case law makes it very clear that foreign creditors are to be treated equally with creditors in the home country and, as a result, will have their claim satisfied in parallel with depositors in the home country. India, therefore, does not operate an NDPR.
What is the effect of CP12/23 on Indian banks with UK-depositor branches?
According to CP12/23, the new rules will affect 23 deposit-taking banks. For those firms wishing to operate a dual payability system, there will be an estimated collective cost of between £550 million to £1.12 billion per annum. For those firms wishing to set up a new UK-subsidiary, there will be an estimated collective cost of between £100 million and £230 million per annum.
As has been demonstrated, India does not operate an NDPR and, therefore, any new regulations brought in as a result of CP12/23 will have a negligible effect on Indian banks with UK-depositor branches. Due to the substantial amounts of money involved in safeguarding UK-depositors on an annual basis, this will come as a great relief to Indian banks.