MINISTER FOR ECONOMIC DEVELOPMENT (the “Minister”)
Lodging of a package of draft legislation relating to the
Jersey Bank Depositors Compensation Scheme
1. ISSUE AND RECOMMENDATION
1.1. Various amendments and renewals are required with regard to the legislation relating to the Jersey Bank Depositors Compensation Scheme (“DCS”). A package of draft legislation has been drafted and is ready for lodging.
1.2. There are no financial or manpower considerations for the States of Jersey.
1.3. It is recommended that the Minister approves the package of draft legislation, signs the declarations as to human rights compatibility, and directs that the documents be lodged au Greffe for debate by the States at the earliest opportunity.
- BACKGROUND
2.1. The DCS was established by the Banking Business (Depositors Compensation) (Jersey) Regulations 2009 (the “DCS Regulations”) along with the Jersey Bank Depositors Compensation Board (the “Board”), which will administer the scheme.
2.2. In the unlikely event of a Jersey bank failure, the DCS would pay compensation to depositors to prevent hardship resulting from lack of access to funds. Compensation is limited to £50,000 per depositor per banking group and is subject to an overall cap of £100 million in any five year period.
2.3. The Banking (Depositors Compensation) (Jersey) Regulations 2009 (the “Triennial Regulations”) provide for offences in relation to the DCS.
2.4. The Triennial Regulations will expire in November 2012 and need to be replaced. The opportunity is being taken to make other amendments to the legislation relating to the DCS.
2.5. A package of draft legislation has been prepared, comprising:
(i) Banking Business (Depositors Compensation) (Amendment and Miscellaneous Provision) (Jersey) Regulations 201- (“Amendment 1”);
(ii) Banking (Depositors Compensation Supplementary Provisions) (Jersey) Regulations 201- (“Amendment 2”);
(iii) Banking Business (Amendment No. 8) (Jersey) Law 201- (“Amendment 3”); and
(iv) Bankruptcy (Désastre) (Amendment No.6) (Jersey) Law 201- (“Amendment 4”)
These are the first steps in a series of changes
3. Amendment 1
3.1. Amendment 1 will amend the DCS Regulations to introduce an annual administration levy on Jersey banks to fund the recurring administrative costs of the DCS.
3.2. The DCS Regulations did not envisage that a standing Board would be set up to administer the DCS, but during the States debate on the DCS Regulations, it was agreed that it would be appropriate to have a standing Board.
3.3. The Minister agreed that the Economic Development Department (“EDD”) would fund the set-up costs and would investigate the introduction of an annual administration levy on banks to fund the recurring administrative costs of the Board, in line with international standards.
3.4. Following an appointments process that was overseen by the Jersey Appointments Commission, Board members were nominated by the Minister and a standing Board was appointed by the States Assembly in February 2011.
3.5. Board members have indicated that they will assume their functions under the DCS Regulations once, inter alia, an appropriate funding mechanism to meet the Board’s administrative costs is in place. The Minister is therefore carrying out these functions in the meantime.
3.6. A proposal to introduce an annual administration levy on banks was consulted on in May-July 2010 (see Consultation Paper at:
http://www.gov.je/Government/Consultations/Pages/DepositorCompensationScheme.aspx).
3.7. No objections were received to the proposal and the Jersey Bankers Association indicated general acceptance of the principle that the banking industry should fund the costs of the Board in line with international standards.
3.8. A draft amendment was subsequently prepared in 2011 but lodging has been delayed by a number of issues, including:
(i) The need to ‘strip out’ the amendment introducing the administration levy from other (more complex) amendments, so that this could be progressed by the Law Draftsman’s Office as a priority;
(ii) A complex legal-drafting issue was subsequently raised by the Law Draftsman’s Office that had to be considered at some length by the Law Officers’ Department. This has now been resolved; and
(iii) Further consultation with industry over the proposals.
3.9. These issues have now been resolved and Amendment 1 is ready for lodging.
Annual administration levy
3.10. Amendment 1 will allow the Board to issue written notices to banks requiring them to pay an administration levy for that bank registration year, which runs from each 1 February to 31 January the next year.
3.11. Annual administration levies will be calculated by dividing the total estimated amount needed for the year equally between the banking groups that hold eligible deposits.
3.12. Annual administration levies will be paid into the Board’s administrative costs bank account, which is separate from the compensation fund into which compensation levies be paid in the event of a bank failure.
Safeguards
3.13. Appropriate financial safeguards and governance arrangements are in place in relation to the annual administration levy specifically, and the Board in general.
3.14. The Board will have to keep audited financial accounts and submit these to the Minister with a report on its activities on an annual basis. The Minister will then place the accounts and the report before the States.
3.15. The Board are required to ensure that ‘the Board and the scheme are administered in a prudent and economical manner’; and that ‘the resources of the Board are used efficiently and effectively’.
3.16. The Comptroller and Auditor General may also audit the Board in accordance with Public Finance legislation.
Sundry amendments
3.17. Amendment 1 will also make some sundry amendments (e.g. correcting cross-references) and clarificatory amendments, including to the Public Finances (Depositors Compensation) (Jersey) Regulations 2009.
4. Amendment 2
4.1. On the advice of the Law Officers’ Department, the DCS Regulations could not provide for offences because the enabling power under which they were made (i.e. Art. 37 of the Banking Business (Jersey) Law 1991) was not sufficiently wide.
4.2. Provision for offences relating to the DCS was therefore made separately in the Triennial Regulations, which were made at the same time as the DCS Regulations.
4.3. Such regulations only remain in force for 3 years and the Triennial Regulations therefore need to be replaced before they expire in November 2012.
4.4. Amendment 2 will replace the Triennial Regulations and will remain in place for a further 3 years. During this time the enabling power will be amended in Amendment 3 so that provision for offences can be imported into the DCS Regulations in due course, thus consolidating the two sets of DCS-related regulations.
5. Amendment 3
5.1. Amendment 3 will amend Article 37 of the Banking Business (Jersey) Law 1991 (“the BBL”), under which the DCS Regulations were made, to extend the scope of the enabling power so that the DCS Regulations can provide for offences and a greater range of other matters in the future.
5.2. Once Art. 37 BBL has been amended, the offences that are provided for in the renewed Triennial Regulations (i.e. Amendment 2) can be imported into the DCS Regulations.
5.3. This will consolidate the two sets of DCS-rated regulations and will avoid the need to keep renewing triennial regulations.
5.4. In keeping with the more recent preference of the Law Draftsman’s Office and the Law Officer’s Department with regard to regulation-making powers, once amended by Amendment 3, Article 37 will set out in much greater detail the scope of what Regulations made under it may provide for.
5.5. It is important to note that Amendment 3 is primarily to the regulation-making power in Article 37, and does not effect the changes directly – it mainly sets the scope of what Regulations may provide for in future.
5.6. Amendment 3 will also place a duty on the liquidator of a failed bank to cooperate with the DCS Board so as to ensure that all compensation under the DCS is paid out as soon as possible. This change will take effect when Amendment 3 comes into force and will not require Regulations.
5.7. The Law Officers’ Department has reviewed Amendment 3 and has confirmed that the provisions are compliant with the European Convention on Human Rights.
- Amendment 4
6.1. Amendment 4 will amend the Bankruptcy (Désastre) (Jersey) Law 1990 (the “Bankruptcy Law”) to change the order of priority for a bank insolvency, such that in the unlikely event of a Jersey bank failure, the DCS Board would be a priority creditor and would receive recoveries from the liquidator before any other unsecured creditor.
6.2. The DCS is designed to provide compensation to depositors as quickly as possible, so that they do not suffer hardship from being cut off from their funds.
6.3. Although a loan agreement is in place for the States of Jersey to provide up to £100 million liquidity funding to the DCS Board, it is considered desirable to increase the liquidity of the DCS further.
6.4. The policy behind the proposal to introduce priority was set out in the public consultation carried out by EDD in May-July 2010 - see Consultation Paper at:
http://www.gov.je/Government/Consultations/Pages/DepositorCompensationScheme.aspx. No objections were received to the proposal.
6.5. Rather than giving priority to all depositors, Amendment 4 will give priority to depositors’ rights that have been vested in the Board. At the moment, this happens when depositors submit a claim form to the DCS Board, but under the revisions which are currently being planned, there will be introduced faster payment to depositors without having to subject documentation in simple cases called Straight-Through Payout (“STP”).
6.6. The Board would ‘stand in the shoes’ of the depositors who have vested their rights in the Board and is entitled to receive recoveries from the liquidator as a creditor of the failed bank. It is anticipated that the Board will be the main creditor of the failed bank.
6.7. Giving priority to the depositors’ rights that are vested in the Board is more effective than giving it directly to depositors themselves because the liquidator will only have to pay one creditor (the Board) rather than, potentially, hundreds of thousands of individual creditors.
6.8. Other jurisdictions have depositor priority, including Hong Kong, Malaysia, Australia, Russia and Argentina.
6.9. In the UK, until 2001 the Deposit Protection Board (which was akin to the DCS) was automatically entered as a creditor of the failed bank and had preferential rights to recoveries due to depositors.
6.10. That changed when the Financial Services Compensation Scheme (“FSCS”) replaced the Deposit Protection Board, but the UK government is now proposing to re-introduce depositor priority from 1 January 2019 – see:
http://www.hm-treasury.gov.uk/d/whitepaper_banking_reform_140512.pdf
6.11. Amendment 4 will give the payment due to the DCS Board a higher level of priority than debts due to other preferred creditors, such as debts due:
(i) to the Health Insurance Fund;
(ii) to the Social Security Fund;
(iii) to the Income Tax Department;
(iv) in respect of rates to a Jersey Parish.
6.12. Consultation has taken place with the relevant States Departments. It is considered that the level of priority is justified for the following reasons.
6.13. The amount of priority will be limited to £50,000 of each depositor’s rights that are vested in the Board. The total amount that is entitled to priority will therefore be the same as the total amount of eligible deposits.
6.14. Because the amount of total eligible deposits in any one bank is relatively small compared to the total amount of deposits held by that bank, affording priority to the total amount of eligible deposits should not affect the amount of payment to other preferred creditors but simply the timing.
6.15. For example, the liquidators of Kaupthing Singer & Friedlander Limited currently estimate that total recoveries to non-preferential creditors will be 83-86% (see http://www.kaupthingsingers.co.uk). It is understood that all preferred creditors have been paid in full.
6.16. Other priorities may take the liquidator some time to identify and calculate. This could delay the payment of recoveries to the DCS Board.
6.17. The Treasury Department, the Heath and Social Services, and the Viscount’s Department support the proposed amendment.
6.18. The Law Officers’ Department has reviewed the Amendment and has confirmed that the provisions are compliant with the European Convention on Human Rights.
- RECOMMENDATION
7.1. It is recommended that the Minister approves the package of draft legislation, signs the declarations as to human rights compatibility, and directs that the documents be lodged au Greffe for debate by the States at the earliest opportunity.
Director, Finance Industry Development
Economic Development Department
gov.je