MINISTER FOR ECONOMIC DEVELOPMENT
Consultation on the Depositor Compensation Scheme
1. Issue and Recommendation
1.1. The Economic Development Department wishes to seek the views of the public on various issues relating to the recently introduced Jersey Bank Depositor Compensation Scheme.
1.2. It is recommended that the Minister approves the consultation paper and that the paper should be issued.
1.3. There are no financial or manpower implications for the States.
2. Background
2.1. The Banking Business (Depositors Compensation) (Jersey) Regulations 2009 (“DCS Regulations”) were adopted by the States on 6 November 2009 and immediately introduced a Depositor Compensation Scheme (“DCS”) in Jersey.
2.2. The key features of the DCS are that:
• Subject to certain conditions, it provides protection of up to £50,000 per person, per Jersey banking group, for local and international depositors in line with international standards;
• Retail deposits (i.e. those held by private individuals) are protected but protection does not extend to deposits held by companies, small and medium enterprises (“SMEs”), partnerships or trusts;
• In the event of a bank failure, the States would lend liquidity to the DCS to enable it to pay up to £5,000 compensation within 7 working days and the balance of compensation within 3 months of receiving a valid claim;
• The £50,000 limit will apply per person, so a £100,000 deposit held in a joint account by two people would be completely covered;
• The maximum liability of the DCS will be capped at £100 million in any 5 year period, in line with the Guernsey scheme;
• The majority of the cost of the compensation will be borne by the banking industry, but levies will be capped with the States making up any shortfall;
• Claimants would assign their rights to recoveries in the failed bank’s liquidation to the DCS;
• In most cases, the DCS would be funded solely by levies on the banking industry with any States shortfall funding being fully repaid from the liquidation proceeds.
Funding the administration costs of the DCS
2.3. The DCS will be administered by an independent Board, which will be an independently audited States body. In order to expedite the implementation of the DCS, during the course of the States debate on the DCS in November 2009, the Economic Development Department agreed to fund the initial set-up of the DCS Board and the first year’s administration costs.
2.4. The purpose this pledge was to allow the Department to consult properly on the issue of who should pay for the recurring administration costs of the DCS Board after the first year.
2.5. A comparative analysis of DCS schemes in other jurisdictions shows that the administration costs of such schemes are typically met by an annual levy on the banks that are covered by the scheme. The rationale for this is essentially the same as that for making the banks primarily responsible for funding DCS compensation in the event of a bank failure, namely, that banks benefit from the existence of the DCS through the added reassurance it provides to banks’ customers and the stability of the banking system.
2.6. The Consultation Paper therefore proposes that the Economic Development Department funding of administration costs should cease after December 2010 and that an amendment should be made to the DCS Regulations to provide the Board with an additional power to levy Jersey banks for its recurring administration costs.
Depositor priority
2.7. In order to offer greater protection to depositors, some countries have introduced legislation that effectively elevates the claims of depositors over those of other unsecured creditors for bank insolvencies. This is referred to as either depositor priority or, less commonly, depositor preference.
2.8. Currently, in the unlikely event of a Jersey bank failing, the claims of depositors in the bank insolvency would not benefit from priority status. Depositors would therefore be paid on an equal footing with all the other unsecured creditors of the failed bank.
2.9. It is considered that the introduction of depositor priority in Jersey would provide additional protection to many depositors beyond that currently offered by the DCS. The Consultation Paper therefore proposes that legislation should be introduced that ranks the claims of depositors in Jersey banks over the claims of other unsecured creditors
2.10. The effect of depositor priority on costs and the behaviour of stakeholders depends on a wide variety of country-specific legal and economic factors. The Economic Development Department is therefore seeking feedback from both the banking community in Jersey and creditors of Jersey banks in order that a fully considered approach can be taken.
3. Recommendation
3.1. It is recommended that the Minister approves the consultation paper and that the paper should be issued.
DIRECTOR, FINANCE INDUSTRY DEVELOPMENT
gov.je