EBA: authorities need to take steps to protect deposits in EU branches of UK banks

In an opinion (7 page / 158KB PDF) directed at the regulators who are the designated authorities for the EU’s deposit guarantee schemes (DGS), the EBA said EU branches of UK banks should become members of local EU DGSs "if no equivalent protection is provided by the UK at the point of withdrawal from the EU".

The EBA said Brexit was “not likely to have an impact” on the protection of deposits in “the vast majority” of banks operating in the EU. However EU branches of UK credit institutions could be affected if these were excluded from the UK depositor protection scheme, the Financial Services Compensation Scheme (FSCS) on the UK's withdrawal from the EU.

The Bank of England and the Prudential Regulation Authority (PRA) have published a statement setting out their ‘near-final’ policy for financial services regulation after Brexit. This confirmed that after Brexit, deposits held by UK firms’ branches in the European Economic Area (EEA) would be treated as being in a third country and would not be protected by the FSCS.

The EBA said authorities should engage actively and promptly with local branches of UK banks to make sure their applications to become members of local DGSs were received ahead of Brexit.

It added that if UK policy changed and FSCS protection was extended to European branches of UK banks on Brexit, EU member states would need to check that depositors would still get the same level of protection as they do under the EU’s DSG directive.

Andrew Barber, financial regulation expert at Pinsent Masons, the law firm behind Out-Law.com, said: "It is good to see the EBA considering the lack of protection that depositors in EU branches of UK banks may have should a no-deal Brexit eventuate. These proposals seem like a pragmatic solution to ensure depositors remain protected no matter the outcome of negotiations."

The opinion notes the Bank of England's and PRA's and 'near-final' policy for branches of EEA credit institutions operating in the UK on Brexit to join the UK's DGS. If an EU DGS does cover third countries, depositors in the UK branch of a member of that DGS would potentially then be covered by the FSCS and an EU scheme.

“Although this issue might not have a material impact in the short run, nevertheless it poses a number of potential challenges, such as lack of clarity in relation to each DGS’s liabilities and obligations in the event of a payout, confusion on the part of depositors, an impact on that institution’s DGS contributions, or potentially costly IT adjustments to comply with any UK requirements, which ought to be addressed in the future,” the EBA said.

The opinion recommended that competent authorities should engage as soon as possible with DGS member institutions and encourage them to tell their customerswhich DGS they will be joining and the steps they will take to prevent detriment to depositors. If their deposits will no longer be protected by a DGS, customers need to be able to withdraw or transfer their funds without incurring any penalty, the EBA said.

The Bank of England’s and PRA's 'near-final' policy also explains the position on Brexit for depositor protection for passporting Gibraltar-based banks and the Gibraltarian establishments of UK firms. 

In 2014 the EU adopted a directive which requires all member states to set up at least one DGS that all banks must join. An EU DGS has to cover deposits at branches in other member states.