Implementing risk-based levies for the Financial Services Compensation Scheme deposits class

Policy Statement 25/16 | Consultation Paper 7/16

Published on 27 September 2016

Implementing risk-based levies for the Financial Services Compensation Scheme deposits class – PS25/16

Update 31 May 2017: As set out in PS25/16, FSCS compensation costs levies will be adjusted for the degree of risk incurred by deposit takers for the first time this year. FSCS compensation costs levies are included in the Financial Conduct Authority (FCA) Regulatory Fees and Levies invoice that firms will receive in July 2017. For more information see the PRA’s FSCS updates page.

Overview

This Prudential Regulation Authority (PRA) policy statement (PS) provides feedback on responses to Consultation Paper (CP) 7/16 ‘Implementing risk-based levies for the Financial Services Compensation Scheme deposits class’. 

This PS is relevant to UK banks, building societies and credit unions as well as to overseas firms with PRA deposit-taking permission; and the Financial Services Compensation Scheme (FSCS), as the UK’s administrator of its Deposit Guarantee Scheme (DGS).

In response to consultation feedback, the PRA has removed the proposal that legacy cost levies are risk-based. The PRA has also made technical amendments to the calculation methodology for credit unions to align with the requirements in the Credit Union Part of the PRA Rulebook. 

Appendix 1 of this PS contains the amendments to the Depositor Protection Part of the PRA Rulebook. Appendix 2 contains the final statement of policy specifying the calculation methodology for risk-based levies.

PDFPolicy Statement 25/16

Appendices

PRA Rulebook: CRR Firms, Non CRR Firms, Non-Authorised Persons: Depositor Protection Instrument 2016

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Statement of Policy


Published on 4 March 2016

Implementing risk-based levies for the Financial Services Compensation Scheme deposits class – CP7/16

Background

This consultation paper (CP) sets out proposed changes to the Depositor Protection Part in the Prudential Regulation Authority (PRA) Rulebook, and a new statement of policy in relation to the calculation of firm contributions to the Financial Services Compensation Scheme (FSCS).  The proposed rules advance the PRA’s general objective by establishing a sound funding framework for the FSCS and thereby minimise the adverse effect that the failure of a PRA-regulated firm could be expected to have on the stability of the UK financial system. A sound funding framework for the FSCS also enhances depositor confidence in the compensation scheme and therefore; contributes to financial stability.

PRA rules in the Depositor Protection Part currently require the FSCS to calculate firm levies solely on the basis of covered deposits. Article 13 of the recast Deposit Guarantee Schemes Directive (DGSD) requires that contributions to Deposit Guarantee Schemes (DGSs) should additionally be adjusted for the degree of risk incurred by each DGS member. The European Banking Authority (EBA) has issued guidelines to specify methods for calculating such contributions, as required by Article 13(3) of the DGSD. The PRA is setting out its proposed methodology towards the calculation of such risk-based levies that would apply to the repayment of both future compensation costs and existing legacy costs incurred by the FSCS.

The consultation is relevant to:

  • UK banks, building societies and credit unions as well as to overseas firms with PRA deposit-taking permission; and
  • the Financial Services Compensation Scheme (FSCS), as the administrator of the UK’s Deposit Guarantee Scheme (DGS).

Summary of the proposals covered by the CP

This CP proposes:

  • amendments to the rules governing the funding of the FSCS in Chapters 34, 49 and 42 of the Depositor Protection Part that would require the FSCS to adjust compensation cost levies for the degree of risk incurred by a DGS member. These would take effect from the 2017 levy cycle;
  • amendments to rules in Chapter 36 of the Depositor Protection Part requiring the FSCS to similarly risk-adjust legacy costs levies; and
  • a new statement of policy, specifying how the PRA intends to calculate the degree of risk incurred by a DGS member. Levies for all deposit-takers would be risk-based, but the PRA proposes different calculation methodologies for Capital Requirements Regulation (CRR) firms, credit unions and non-EEA branches due to their different legal and supervisory regimes.

The appendices in the CP set out:

  • proposed amendments to the Depositor Protection rules found in the Depositor Protection Part of the PRA Rulebook, and
  • a proposed new statement of policy, specifying the methodology the PRA proposes to use to calculate risk-based levies.
    Responses

The consultation closed on Friday 3 June 2016.

This CP is part of a series of policy developments, details of which can be found in the ‘Depositor, dormant account and policyholder protection – summary’ available in the FSCS section of the website.

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