Financial Services Authority - FSCS Funding Model Review
In general terms we do not have any significant concerns arising from these proposals. We anticipate that the changes – where changes are proposed at all – should broadly reduce the burden upon our membership which is welcome given their profile and the very difficult trading conditions that they face.
We agree that the funding classes of firms should remain as they are in the short-run. We are keen, however, that in light of the Deposit Guarantee Scheme Directive (DGSD) currently under consideration at EU-level, that the class structures are re-considered at a future date. As we address below, we have considerable concerns regarding the potential impact of the ex-ante funding regime proposed by the Directive.
We are content for cross subsidy to be excluded for the deposit-taking class under the new PRA structure. We agree that the dynamics of the deposit-taking class are such that small failures, such as those within the credit union sector, can be resolved straightforwardly and without recourse to other classes, while major failures such as those seen in 2008/9 are of such systemic importance that special arrangements are required to resolve them.
Firstly, we are broadly supportive of the reduction in the class threshold for annual levies from the deposit taking class. We appreciate that a balance must be struck between the Scheme’s capacity to fund itself and the burden upon firms and think that the relatively slight reduction to £1.5bn from £1.8bn is appropriate. Of course, in the case of major failures, too low a threshold could well result in a larger overall cost to the sector where this necessitates loan financing and, therefore, interest payments are brought into the equation. The costs of interest accrued under such arrangements made in 2008 has been significant and so we agree that this should be a consideration in respect of not setting too low a threshold. The £1.5bn threshold would seem to strike a reasonable balance between short and long-term needs.
Of particular concern for the credit union sector, however, are the implications of the Deloitte modelling in light of the DGSD proposals. Deloitte find that in circumstances where the full £1.5bn threshold is levied in a single year, 9 firms in the deposit-taking class would be unprofitable as a result. Given the DGSD proposal to introduce – in addition to the current ex-post levies – a new ex-ante levy to build a pre-funded compensation ‘pot’ it seems likely that a still greater number of firms may struggle to meet their obligations in future.
Those firms that would struggle to meet a greatly increased burden from FSCS levies are likely to be credit unions given their small scale. Accounting for credit unions’ limited ability to pass-through the costs of increased regulatory burdens due to the statutory interest rate cap, there emerges a worrying scenario whereby a pre-fund levy in addition to a full FSCS levy in a single year could significantly undermine the financial position of a number of credit unions.
We feel strongly that it would not be proportionate to impose this level of burden upon the credit union sector and hope that a solution can be found when FSCS funding is re-visited once the DGSD has been finalised. It cannot be right that contributions to the FSCS should be allowed to undermine a firm’s financial viability.
Extending the horizon
We have no comment to make here since levies relating to deposit-taking are excluded.
We are happy for the tariff measure for the credit union sector – and deposit-takers more generally – to remain as it is in the short-term. However, it may be one element that could be used to mitigate against the concerns we have arising from the DGSD at some later stage. We await further clarity from Brussels before returning to this.
We would, however, like to highlight one related minor concern at a discrepancy we have identified in the relation between the reporting system for credit unions and the levies they pay to FSCS. The tariff measure for FSCS levies is “protected deposits” that being the amount of funds held on deposit by the credit union which the Scheme protects. Credit union returns, however, do not distinguish between deposits in general and protected deposits and, therefore, it appears that there is no way of making this distinction available to the FSCS. Likewise, credit unions’ new power to accept bodies corporate into membership introduces a new complication as some small firms are covered and others are not and this information does not seem to be available to the FSCS at present.
We fully accept that there are very few – if any – sums held in credit unions in excess of the £85,000 per-customer threshold but there is an increasing possibility that such accounts will exist as the sector grows and we feel, therefore, that in the interests of fairness, returns should be rectified over the medium-term to account for this potential.
We do not have any major concerns from these proposals.
We would urge that the FSA keep under regular review the split of MELL costs between PRA and FCA. While in recent years the costs may have been split roughly 50/50 we feel that there is potential for this to move and the split should reflect the true cost of each group of firms to the Scheme.
Attributing interest costs from compensation and specific costs arising from projects affecting only certain classes of firms to those classes from which the costs arise seems entirely fair.
In conclusion, we are broadly unconcerned with the proposals put forward here. Our key concern is the longer-term future of the FSCS and its funding arrangements in light of the DGSD. Given that the Deloitte modelling conducted in respect of the proposals here already highlights potential pressures upon some firms in the deposit-taking class before the introduction of ex-ante, pre-funding, the potential for severe strain upon some of our membership should the DGSD apply in the same proportions is strong. Since our members our restricted in their ability to pass through costs because of the interest rate cap, this potential is very concerning.
We look forward to returning to this issue once European developments are clearer and hope that we will be able to reach a position where the burden of FSCS levies does not inadvertently undermine the viability of some credit unions.
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