Non-EEA national depositor preference regimes



Do you accept deposits via a UK branch of a bank or other company incorporated outside the EEA?

If so, you will need to consider carefully the proposal published in FSA’s consultation paper 12/23 (“12/23”). These will apply to all companies, other than insurers, incorporated outside the EEA that have a UK branch with a Part IV permission to accept deposits (“impacted branches”).

You will need to establish whether or not your home country operates a national depositor preference regime (“national preference”). If so, you will need to:

  • Inform the FSA
  • Plan to meet FSA’s new requirements for enhanced national preference disclosure (which will replace those currently in SYSC 22) and for incorporation of national preference in depositor contract terms
  • Consider your options in the light of FSA’s proposed anti-national preference rules. The options may include:

CP 12/23 - background

In September, FSA published a consultation paper looking at the implications of non-EEA national preference. 12/23 proposes new rules that would prohibit UK branches of firms from non-EEA countries with national preference from accepting UK deposits unless the firm has implemented satisfactory measures that eliminate the disadvantage that UK branch depositors face on insolvency.

Many countries operate a deposit insurance scheme that protects bank depositors, in full or in part, when banks collapse. Some countries operate national preference, which prioritise the claims of home-country depositors over those of depositors outside the home country if a firm becomes insolvent. Countries known to operate national preference include the United States, Australia, Singapore and Turkey. FSA is concerned that depositors at UK branches of companies incorporated in these countries face greater losses than home country depositors.

The Financial Stability Board (“FSB”) highlighted the issue of depositor preference in its October 2011 publication, and claimed that ‘national laws and regulations should not discriminate against creditors on the basis of their nationality’. FSA, however, says that it sees little action by national preference countries to remedy the problem and it also sees the international move to adopt ‘bail-in’ powers as potentially exacerbating the national preference problem.

The UK does not currently have any depositor preference but the Independent Commission on Banking (“ICB”), chaired by Sir John Vickers, recommended that one be introduced for FSCS-insured deposits. This recommendation was accepted by the government in its June 2012 White Paper but the precise scope of any such preference is still to be considered.

Measures to address national depositor preference

Under the proposed new requirements, impacted branches would be required to:

  • establish a UK-incorporated subsidiary to carry out their UK-based deposit-taking business; or
  • set up an equally effective alternative arrangement that ensures UK depositors are no worse off than the depositors in the home country if the firm fails. The alternative measures available to firms include:

FSA will allow other measures which eliminate the subordination of the UK branch depositors compared to home country depositors. However firms will have to set out how they intend to meet this requirement and how the chosen measure would operate under the national depositor preference legislation.

Firms would also have to provide legal opinion on how any measure they are proposing as alternative arrangements would eliminate the subordination of UK branch depositors.

When will this take place?

The FSA has extended the deadline for responses to its consultation from 11 December 2012 to 31 January 2013. The FSA intends the new rules to be in place by January 2013 but the extension of the consultation is likely to delay this. Once the rules are in force, there will be a two-year transition period to enable firms to make preparations for the new requirements. Firms will be expected to meet the new rules two years from when the new rules enter into force (originally intended to be January 2015).

Who will this affect?

FSA has identified 23 impacted branches, which collectively hold approximately £800bn in deposits and 80% of which are UK branches of US firms at the time of reporting. This number does not include all firms that are potentially affected but represent those with the most significant levels of deposits.

FSA also considered whether to restrict the new requirements to retail deposits but the proposed amendments to SYSC 22 do not make a distinction between retail, corporate and other classes of deposits. FSA noted that legislation in countries that operate national preference do not make the distinction either. The proposed disclosure requirement would apply to all firms who accept UK deposits, irrespective of the type of deposit.

Disclosure requirement

FSA is also proposing a rule requiring, during the two-year transition period, impacted branches to disclose information about national preference and highlight the fact that the claims of depositors in the home country will be preferred to the claims of depositors outside the home country. The information provided will need to be clear, and succinct, without technical or legal jargon, making clear what will happen to deposits placed in the UK branch if the firm fails. All firms (including those that have already disclosed such information e.g. under SYSC 22) will be required to include information on national preference in contracts with their new and existing deposit customers.

Costs of compliance

FSA estimates the total incremental costs for US banks adopting the dual payability measure to be in the region of £550 to £1120 million annually and a one-off cost of £10 to £15 million to implement. The annual cost would be largely down to the cost of deposit insurance provided by the Federal Deposit Insurance Corporation (“FDIC”) and increased opportunity costs from deposit reserve requirements.

How CMS can help

There are three issues for your bank:

1. Are we caught?

2. What, in real terms, are the options?

3. Which is the best (or least worst) choice?

We have extensive experience in dealing with all forms of banking operations from start-ups through restructuring to transfers of business. We are alert to the impacts that business change can have on capital, systems and management responsibility. We can, taking all of this into account, help you to assess the options and make the right choice.

We would be happy to discuss the position of your firm under the new regime and to take time ‘brain-storming’ the options free of charge. If this would be of interest or you would like to discuss any of the issues for your firm, please contact us by email or telephone.

CMS is a leading legal services provider, with the most extensive footprint across Europe. It has more than 5,000 people and 2,800 lawyers working across 54 cities in 29 countries. We have a specialist regulatory practice with broad experience in FSA authorisations and international/cross border assignments including advising major financial groups on structures to meet FSA and EU requirements and to achieve optimum efficiency in terms of regulation, tax and capital. We have established over 50 FSA regulated firms over the last five years.