On 31st March 2023, the Prudential Regulation Authority (PRA) published policy statement PS2/23. The statement, in conjunction with the amendments made in PRA23/1, finalised the rules in the PRA Rulebook that relate to depositor protection, bringing electronic money institutions, authorised payment institutions, small payment institutions, credit unions (in respect of e-money) and PRA-authorised credit institutions within scope of the Financial Services Compensation Scheme (FSCS) depositor protection regime.
How compensation will work
The scheme will now apply to FSCS‑eligible customers of the above listed types of firm (meaning that the customer must meet the FSCS’s eligibility conditions, with the usual maximum compensation set at £85,000 per customer).
If an EMI or PI safeguards funds with a PRA-authorised credit institution, and that institution fails, the FSCS will compensate eligible end-customers as if they held those funds (that are attributable to the customer) directly with the bank itself.
Consumer protection
The intent of both the PRA and FCA in recent times is clear – with a wave of regulations targeting the improvement of consumer outcomes on the back of increasing public scrutiny. The collapse of Silicon Valley Bank and Credit Suisse brought the question of depositor protection into sharp focus.
Before the depositor protection scheme was expanded, if an EMI or PI’s safeguarding bank failed, the EMI or PI, while it began the arduous process of recovering funds from an insolvent bank, would likely need to cover their transactional burden from their own funds. This threatened the sustainability of the EMI/PI itself and heightened the risk that the end-customer may need to wait through two insolvency processes before funds were recovered, if ever.
With the FSCS compensation funds, the end-customer will likely find it easier to recover their money, and the EMI/PI itself will have better chances of survival. Additionally, the PRA Rulebook has been amended to allow compensation to be paid to the end-customer if the EMI/PI also enters insolvency.
Points to note
- These amendments do not apply when an EMI/PI fails independently of a safeguarding bank failing. The changes do change to the FSCS protection afforded to end-customers that hold money or open accounts with PRA-authorised credit institutions via EMIs or PIs.
- If an EMI/PI safeguards with an overseas bank there will be no FSCS protection.
- Where an EMI/PI holds safeguarded funds with more than one bank, if one of the safeguarding banks fails, it is not clear how that will be compensated.
To understand what deposit protection could mean for your EMI or PI, call +44 2890 650 481 or book a free 30-minute video consultation by clicking on the link below.
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