Changes to Deposit Guarantee Schemes

The recast Deposit Guarantee Schemes Directive requires EEA Member States to make important changes – in most cases by 3 July 2015 – to the savings protection schemes that they operate.

First implemented in 1995, the Deposit Guarantee Schemes Directive¹ requires each EU Member State (extended to the EEA Member States) to make available a deposit guarantee scheme (a “DGS”) in order to protect – to a prescribed extent – certain types of deposit within its jurisdiction. Published on 12 June 2014, the recast Deposit Guarantee Schemes Directive² (the “Recast Directive”) requires each EEA Member State to modify the savings protection schemes that it operates in important ways – the vast majority of the changes must be in place from 3 July 2015.

The Current Position

A DGS applies to certain deposits in banks and other credit institutions only; a separate compensation regime applies (under the Investor Compensation Schemes Directive³) to the activities of investment firms and to the investment business of credit  institutions.

If a credit institution in the EEA is unable to repay a qualifying deposit that is due and repayable, the relevant DGS must  pay the relevant depositor (typically a consumer) compensation up to a certain level (depending on the size and nature  of the relevant deposit): typically the financial ceiling is €100,000 in respect of the aggregate qualifying deposits held by a qualifying depositor with the relevant credit  institution.

The original Directive was amended substantially in 2009⁴, principally to increase the level of deposit that is protected and to reduce the period of time within which a payment under a DGS must be made.

Changes made by the Recast Directive

The principal changes that the Recast Directive will require to be made are:

• A more focussed definition of a qualifying “deposit”: Structured products and bonds of the types that would be financial instruments for the purposes of MiFID⁵ typically will be outside the definition of a “deposit”. Further, only credit balances where the principal is entirely repayable on its terms (and not, for example, solely pursuant to a guarantee) will qualify.

• Clarification of the scope of the obligation: Member States will no longer have any discretion to exclude, or limit, the protection afforded by a DGS to certain types of financial institution. Instead, the Recast Directive requires that deposits made by certain classes of depositor (such as an investment firm or a pension fund) are generally excluded from the ambit of those protections while affording a discretion to Member States to extend the protections of a DGS to a limited class thereof (being deposits of certain pension schemes and local authorities).

• A raising of the financial ceiling of a DGS  for certain purposes: Member States are required to ensure that certain deposits are protected in their entirety for a limited period from the time of deposit. Examples include deposits resulting from a real estate transaction relating to private residential property and deposits that are linked to a life event such as a marriage, divorce, redundancy or death. Member States have a discretion regarding the length of that limited period of enhanced protection, subject to it not being less than three or greater than 12 months.

• An acceleration of the timescale within  which a scheme must make a payment: The original Directive requires Member States to ensure that a qualifying claim is paid within 20 working days of the event that triggered the liability under the DGS.  This period of time will, in a stepped manner, be reduced to 7 working days from 1 January 2024.  The 20-working-day deadline will apply until 31 December  2018 following which the deadline will be 15 working days (until 31 December 2020) and 10 working days (until 31 December 2023), culminating in the previously mentioned 7-working-day period from 1 January 2024.  The Recast Directive sets out circumstances in which payment may be deferred, such as where the deposit is subject to legal dispute.

Improved identification and information requirements should facilitate this accelerated payment timetable. The Recast Directive requires Member States to ensure that (a) credit institutions’ records identify qualifying deposits clearly as such and (b) a DGS may require its members, at any time and on request, to provide to it all information necessary to prepare for a repayment of depositors.

• A tightening of the funding arrangements  for a scheme: The original Directive does not prescribe the means, or any required level, of funding a DGS. The Recast Directive will require that a DGS must be funded to at least 0.8%6 of the “covered deposits” of its members, ie 0.8% of that part of the aggregate qualifying deposits of each member that do not exceed the applicable financial ceiling. At least  70% of a DGS will have to be funded in cash although up to 30% may be funded by way of payment commitments.  The target date for a DGS to achieve this funding level is 3 July 2024, subject to certain limited exceptions.

• Transactions between DGSs: Subject to strict controls the Recast Directive will permit a DGS to lend money to another DGS.

• Permitted related activities of a DGS: The Recast Directive will permit a DGS to finance the resolution of a credit institution and, subject to strict controls and conditions, to prevent the failure of a credit institution.

• Changes to the set-off arrangements: A  DGS will no longer be entitled to set off against a qualifying deposit any liability that the relevant depositor may have to the particular institution.  Accordingly, if a credit institution fails, the DGS payment in respect of a qualifying deposit with that institution will have to be paid gross.

• Information to customers: A credit institution will be required to provide every qualifying depositor with a standardised information template regarding the applicable DGS and the protections that it provides.

• Supervisory arrangements: The Recast Directive will require the competent authority of each Member State to supervise the DGS(s) in its jurisdiction and will require a DGS to undertake regular stress tests of their systems.

The bulk of the Recast Directive must be reflected in national law by 3 July 2015. However, Member States will have until  31 May 2016 to make arrangements for the transitional period until 31 December 2023 so that a claimant under a DGS who is not to receive a full payout within 7 working days nonetheless must be provided at an early stage with a portion of his or her entitlement that is sufficient to enable the claimant to meet cost of living expenses, pending the full payout under the DGS.