PRA CP 15/15 Depositor Protection
Response to the consultation
While we appreciate that this consultation is not directly relevant to the proposals in CP 20/14 which were confirmed with some amendments in PS 6/15, we would like to use the opportunity to reiterate our concerns at the original proposals which the PS confirms are not to be taken up.
We have a number of key concerns arising from the proposals:
- Loss of credit unions’ FSCS protection – we remain concerned that there is potential for the removal of credit unions’ own protection under FSCS for deposits made on credit unions’ own account could exacerbate financial instability and fails to recognise the particular challenges facing credit unions as small, deposit-takers.
- Firstly, there is a certain section of the credit union sector for which the failure of their counterparty bank has the potential to wipe out their entire capital reserves and lead to the credit union’s insolvency in turn. Any credit union of assets of roughly £3 million or below, with a 3% capital-assets ratio capitalisation requirement under the CREDS sourcebook, could potentially have their entire reserve wiped-out due to the loss of the £85,000 protection afforded by FSCS.
- Secondly, while credit unions are financial institutions with a greater market awareness than individual persons, they do not have the level of resource and market-monitoring capability which would be apparent for a large corporate depositor. Therefore, it cannot be fair that a large non-financial depositor with much greater resources available to manage counterparty exposure is afforded protection while a small credit union is not.
- Thirdly, a number of factors including the prudential and financial crime regulations applying to banks, monetary policy and banks’ commercial considerations have combined in recent months to create difficulties for credit unions in opening bank accounts. This, combined with the restrictions on credit union investments set out in CREDS, can act to constrain the ability of credit unions to move funds around at will in times of financial stress. The assumption underpinning the PRA proposals that this is possible, therefore, is flawed.
- Fourthly, in certain circumstances where a deposit-taker has a particularly concentrated exposure to the credit union sector and it faces problems of liquidity, credit union depositors removing their funds could exacerbate run conditions and further undermine the deposit-taker’s stability. The effect of this may be to exacerbate problems of credit unions securing counterparties since their deposits will become more volatile.
While the PRA maintains that to continue to protect credit union funds would be inconsistent with the terms of the Directive, we believe there may be scope to use the provisions contained in Article 11 in relation to resolution procedures to provide some protection by FSCS in the event of a bank failure threatening the viability of a small credit union.
We understand that a debate is currently taking place, in light of the Sterling-Euro exchange rate, as to whether the £85,000 limit may be maintained post 3 July 2015, in contravention of the €100,000 harmonised protection limit which would today represent a significantly lower sum. This suggests to us that in certain circumstances infringement or re-interpretation of the Directive text will be considered and it is disappointing that this is being refused in relation to protecting credit union deposits.
If the PRA is not minded to accept these arguments, we would appreciate a fuller explanation of the policy drivers behind the PRA’s position in order to assist the credit union sector understand the PRA’s rationale in adopting the stance it has.
- Disclosure requirements – we are concerned that the policy statement does not provide the requested clarity as to whether the PRA will provide flexibility in updating FSCS coverage disclosure statements in branch and online. Especially in light of concerns relating to the potential for the current Sterling-Euro exchange rate, it may be that these disclosure statements are required to change substantially and to have an overnight implementation requirement between 2 and 3 July 2015 does not recognise the cost that this implies for small providers such as credit unions. We are reassured by informal suggestions that supervisors will provide flexibility as far as is reasonable but a more-formal assurance would also be appreciated.
- Removal of the electronic reporting opt-out for Single Customer View – a small number of small credit unions continue to operate manually in paper-based format. Given the obvious challenge that electronic reporting presents for these credit unions, we are disappointed that the PRA has decided not to take up our proposal that credit unions who can demonstrate that they are in this position, be allowed to remain outside of the electronic reporting framework.
- 24 hour submission deadline – we are concerned that if the 24 hour deadline is applied rigidly in relation to the verification of the Single Customer View, credit unions may not be in a position to comply with the requirement if the request for verification arrives at a date and time at which they are not operational or staffed. A number of credit unions remain open on only a part time basis and therefore may not be physically in a position to comply with a verification request in circumstances where it is received when the credit union is closed for business. Any guidance or reassurance that can be provided as to how this will be applied in practice would be appreciated.
In relation to the proposals in CP 15/15 themselves, we have no major concerns which arise directly from them beyond the fact that they omit to offer proposals in relation to the concerns which we reiterate above. In respect of notifying depositors who are no longer eligible, this may present some limited costs but we do not anticipate that this will be a significant due to the typical profile of credit union members.
We appreciate the slight extension of the transitional period for changes to the Single Customer View. This should assist credit unions in updating their systems in order to comply with the new requirements.
We would be very happy to provide any further information or to answer any questions which the PRA may have in relation to our response. We are very keen to explore how reassurances and guidance might be provided to our members.
The full document is available to download on the right hand side.