UK: Key Changes For Deposit Takers In The Single Customer View Journey

Last Updated: 15 October 2014
Article by Andy Whitton and Doug Stewart

Most Read Contributor in UK, August 2017

The PRA's recent release of Depositor Protection Consultation Paper CP20/14 (CP) sets out proposed changes to the PRA's rules and is designed to promote consumer confidence and financial stability by improving the speed of compensation payouts in the event of a failure. In this article we provide banks and building societies, regardless of size, with a summary of the key changes being proposed in relation to the next stage of the Single Customer View (SCV) journey.

Specifically, the CP implements the revised European Union Deposit Guarantee Schemes Directive (DGSD) and proposes new rules to further enhance protection offered to consumers in payout and transfer scenarios. As the PRA's proposals will now require small deposit takers with less than 5,000 accounts to submit electronic SCV files, it is applicable to all deposit takers regardless of size.

'2. Implementing the recast Deposit Guarantee Scheme Directive': Impact Assessment

Eligibility

PRA proposals: The DGSD broadens the eligibility criteria that now makes large companies eligible for compensation (assuming they hold protected deposits).

Implications: All deposit takers will need to include large companies in their SCV files, as well as incorporating deposits from previously out of scope systems that only support large companies. It will also mean 'wholesale only' deposit takers (i.e. firms accepting deposits only from previously ineligible large companies) will need to develop a SCV capability. These deposit takers would be required to adhere to the disclosure rules and also Financial Services Compensation Scheme (FSCS) levy obligations. All deposit takers would now be required to provide the Company Registration Number in the SCV file.

Proposed implementation date for new eligibility rule: 3 July 2015

For 'wholesale only' deposit takers, the new rules on SCV systems and continuity of access will not come into force until 18 months following the publication of the Depositor Protection Policy Statement. However, they are still required to 'mark' eligible in the meantime.

Temporary High Balances (THBs)

PRA proposals: THBs are designed to protect customers who have unusually high balances as a result of 'significant life events' (such as inheritance or an insurance payment). Importantly, the PRA proposes that deposit takers are not required to identify THBs. Instead, FSCS would use the SCV file to pay the initial £85,000, and then contact customers with unprotected balances to explain what constitutes a THB and what evidence is required to support an additional payment from FSCS. The PRA is proposing to introduce a THB compensation limit of £1M that would be in place for 6 months (for each 'life event'), no matter what 'in' and 'out' transactions have taken place, and regardless of whether customers switch banks/building societies.

Implications: Whilst existing SCV capabilities will support the FSCS execution of THB payments, under the PRA proposals, deposit takers will be required to amend the prescribed wording used on FSCS promotional materials used in branches/online as follows '[....] Any deposits you hold above the £85,000 limit are not unlikely to be covered.' (Further disclosure requirements are covered below under 'Customer Communications'.)

Proposed implementation date for THB disclosures: 3 July 2015

Customer communications

PRA proposals: The DGSD requires deposit takers to take steps to promote awareness of FSCS. This includes the use of a prescribed 'information sheet' that must be provided to all new customers at account opening (with receipt being acknowledged), and at least annually thereafter. The PRA is proposing to adopt the proposals as per the DGSD, with deposit takers providing their own contact details. Additional disclosure requirements are also proposed relating to mergers or conversions where customers must be given three months to withdraw funds exceeding the limit without incurring penalties/fees that might apply.

Implications: In addition to changing FSCS promotional materials (e.g. branch stickers etc.), deposit takers will need to consider the training implications for front line staff/procedures to effectively communicate FSCS coverage. The PRA are proposing that the 'information sheet' would replace the existing requirement to disclose FSCS protection on statements. (Also see 'Temporary High Balances' for additional disclosure requirements.)

Proposed implementation date for customer disclosures: 3 July 2015

Payout periods

PRA Proposals: The DGSD requires all Member States to move towards the existing UK target (of delivering payout within 7 days) by 1 January 2024. However, the DGSD now requires that deposits held in beneficiary, trust or client accounts ('exclusions') be paid within three months.

Implications: These 'excluded' accounts now need to be delivered to FSCS alongside the SCV file for Verification and Payout purposes within 72 hours (see 'In flight transactions (IFTs) and speed of SCV file production' below for details of the proposed reduction of this time limit to 24 hours)

Proposed implementation date for exclusions file: 18 months after Depositor Protection Policy Statement

'3. Single Customer View Changes': Impact Assessment

SCV Reporting

PRA proposals: Deposit takes will be required to submit a SCV Report (annually and three months after a material change) which includes new information relating to: dependencies (i.e. reliance on other deposit takers or suppliers to produce files), controls, reconciliations (back to source systems), the process for creating the exclusions file, and how firms treat dormant accounts.

Implications: Deposit takers are still required to obtain Board level approval of their SCV compliance status prior to submission of SCV Reports to the PRA. Reconciliations between source systems, SCV and exclusions files, inactive files and any relevant IFTs will require careful planning. Implementation reports will be removed from the SCV reporting requirements.

Proposed implementation date for SCV reporting: 18 months after Depositor Protection Policy Statement

In flight transactions (IFT) and speed of SCV file production

PRA proposals: The existing 72 hours deadline for SCV file production was intended to allow sufficient time for IFTs to settle. The PRA's IFT proposals require deposit takers to identify the balance of an account at a fixed point in time (i.e. on the date of default) and do not expect IFT adjustments to be made. Consequently, the PRA's proposed rules reduce the SCV (and now exclusions) file production window to 24 hours.

Implications: The challenge of dealing with IFTs is removed and existing system based approaches (beyond normal end of day processing) can be decommissioned. Deposit takers currently taking more than 24 hours to produce an SCV file will need to re-engineer their processes. The PRA also expect deposit takers to further reduce (to an unspecified time) the file production time scale as IT systems are updated.

Proposed implementation date for IFT: 18 months after Depositor Protection Policy Statement
Proposed implementation date for 24 hour file production: 18 months after Depositor Protection Policy Statement

Standardised (SCV and exclusions) file formats

PRA proposals:

The PRA's COMP rules already require deposit takers to submit SCV files in a format that is 'compatible with FSCS systems'. The proposals seek to increase clarity around what compatibility with FSCS systems means, specifically citing three examples of acceptable file formats, all of which require more data fields.

Implications: SCV fields will need to be updated to supply additional data fields in (one of) the required formats. All systems will need to be updated to ensure that exclusions files are provided alongside SCV files for Verification and Payout purposes. Previously deposit takers only had to be able to identify exclusions.

Implementation date for file formats: 18 months after Depositor Protection Policy Statement.

EU Banking Recovery and Resolution Directive (BRRD)

PRA proposals: The BRRD requires insolvency law to give higher priority to certain types of deposits (preferred creditors). The PRA is proposing a new SCV rule that will help deliver this BRRD requirement, and specifically that will ensure that 'natural persons' and 'micro, small and medium sized enterprises' are marked on SCV files.

Implications: Deposit takers will need to develop the capability to identify and flag natural persons, micro, small and medium enterprises (criteria: fewer than 250 employees, an annual turnover not exceeding 50M euro AND/OR an annual balance sheet total not exceeding 43 million euro) in their SCV files.

Implementation date for BRRD flagging: DGSD requires deposit takers to mark customer records by 3 July 2015.

Keys, codes and flags

PRA proposals: The PRA proposals require deposit takers to introduce the following new flags to SCV files

  • Inactivity flag – Deposit takers will be required to use a new field to flag accounts that have had no customer initiated activity from 2 -15 years. This will enable FSCS to defer payments on these accounts.
  • Natural persons and micro, small and medium sized enterprises field – This will enable the PRA to assess super preferred and preferred customers for BRRD purposes.
  • Product Codes– A new hierarchy of product types is now being prescribed for the Product Code field to support a complete or partial transfer of deposits in a resolution scenario. The rule is designed to allow the prioritisation of protected, instant access accounts where a customer has multiple accounts with a balance over £85,000.

Implications: Deposit takers will need to apply new criteria to identify micro, small and medium sized enterprises (to be checked annually). Additionally, deposit takers will need to be able to process the last 15 years of transaction files to identify/flag accounts with no 'customer initiated' activity for between 2 and 15 years.

Proposed implementation date for new flagging: 18 months after Depositor Protection Policy Statement.

New SCV fields

PRA proposals: The PRA is proposing the following new fields to be included in the SCV file:

  • Type of national identifier (passport/National ID)
  • National identifier number (where held by the firm)
  • Company registration number (or other business registration number)
  • 'Business Identifier Code', 'International Bank Account Number' and 'Sort Code' 
  • For exclusions file only - New codes required to identify type of exclusions file 
  • Transaction within the last 24 months 
  • Branch jurisdiction (for countries outside UK) 
  • Preferred creditor field 
  • Structured deposit accounts 
  • 'Currency of account', 'account balance in original currency' and 'exchange rate used' 
  • Account balance in original currency before interest accrued applied 
  • Amount of transferable eligible deposit in each account

Implications: Deposit takers will need to identify what data is held across different databases and ensure that a capability is developed to identify, extract and support this new information within the updated SCV files.

Proposed implementation date for new SCV fields: 18 months after Depositor Protection Policy Statement.

'4. Continuity of Access': Impact Assessment

Context: The PRA rules are designed to support 7 day payout by FSCS. However, it may be preferable for customers to have continuity of access to their deposit accounts following a failure. (The Banking Act 2009 allows eligible deposits to be transferred to a private sector purchaser/or bridge bank). The PRA's proposals set out the systems changes that will be required to transfer accounts from a failed bank to another financial institution, whilst maintaining continuity of access – including payments – of deposit accounts.

The PRA's objective is to ensure continuity of access (including payments) to FSCS covered deposits in the event of a failure. All eligible accounts transferred are likely to continue to operate on the failed bank's systems for a period of time through a transitional arrangement. Following transfer, the acquiring institution would assume regulatory responsibility for transferred accounts as the legal owner and liability holder.

PRA Proposal – To comply with the DGSD requirements, deposit takers need to be able to 'mark' and identify FSCS eligible deposits. The PRA is proposing that 'unmarked' (i.e. uncovered/ineligible) accounts are frozen at resolution and that marked accounts remain accessible. Excluded accounts would also be frozen.

In a resolution scenario, the PRA is proposing that deposit takers have the capability to identify protected and uncovered deposits, transferring covered deposits to a new institution, and moving any uncovered balance to a separate (individual or large suspense) account. The new Product Code hierarchy (See 'Keys, Codes and Flags' section above) will be used to prioritise accounts which are needed for day to day living (for customers that have covered and uncovered balances). Payment instructions for transferred accounts should be continued to enable payments to continue to be made.

Implications: These are significant proposals that fundamentally require the feedback of SCV outcomes into institutions core banking systems. (E.g. Building BAU payment and deposit systems to be able to selectively operate for all customers or just eligible and not excluded accounts).

Continuity of Access Implementation date: 18 months following Depositor Protection Policy Statement.

Coming up:

Board level approval for SCV Report – Deadline 31 December 2014

Existing PRA rules require deposit takers to submit a SCV Report – approved on behalf of a Board member, no later than 31 December 2014.

Funding

The DGSD requires contributions to be made by deposit takers based on the degree of risk incurred by the firm. The European Banking Authority is developing guidelines to help calculate risk based levies and these will be published in due course, thereafter the PRA expects to formally consult. The DGSD also requires FSCS to be ex-ante funded, although HMT and PRA intend to make use of a DGS provision that allows Member States to establish an ex-ante fund through existing contributions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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