Review of Directive 94/19/EC on Deposit-Guarantee Schemes (DGS)

Transcription

1 Berlin, Review of Directive 94/19/EC on Deposit-Guarantee Schemes (DGS) Response by Verbraucherzentrale Bundesverband Federation of German Consumer Organisations Reg-ID: Verbraucherzentrale Bundesverband e.v. vzbv Fachbereich Finanzdienstleistungen Markgrafenstr Berlin

2 Review of Directive 94/19/EC on Deposit-Guarantee Schemes Response to the Commission s Communication of Summary of top aspects 1. Schemes need to be actually fit to operate cross-border and to withhold economic turbulences. (Different to what consumers had to face with the Icelandic situation in several Members States.) 2. Especially for the sake of a growing common market we must not allow Institutes not to take their share in DGS systems where they yet actually do major business. Using a common market derives common duties! 3. Proceedings to repay consumers in cases of default need to be reconsidered to operate smoothly. And should involve host DGS schemes in those Members States where consumers are affected. 4. The guaranteed amount is not the top most important of all aspects, although it needs to cover in general the interest. The most important aspect is that the coverage will not fail to be in place at the time needed. 5. Minimum harmonisation is needed to provide for options to achieve both: sound and secure basic coverage and options to guarantee far more. The latter will be important on single case defaults of an institute, the first will need to well withstand severe turbulences like in Iceland. 6. It is as well crucial to reconsider operability of Directive 97/9/EC on investor-compensation schemes. The Phoenix case in Germany showed how fragile its construction is. A single case overextended its funding and thus we need due scrutiny and stress tests for all these schemes. 7. We need short and reliable payout periods without options to extend them and are looking forward on the concepts to ensure this to operate under the current alterations off the Directive. 1. Question and General Remarks vzbv welcomes the opportunity to comment on the initiative shown by the Commission to restructure Deposit-Guarantee schemes and likes to specifically point out the shared interest of not only consumers but institutes as well to be able to operate with trustworthy schemes on this behalf. Actually DGS is not only a type of insurance on the important issue to keep consumers monies safe, but as well a necessary protection to limit the risk of bad news to cause 2

3 bank run and further escalating effects that might irrevocably lead to a preventable default and loss of money. Yet to achieve this protection more than a theoretic or legal guarantee is needed, but a scheme that actually does not disappoint consumers at any stage nor leave them without their money for a substantial period of time. Omitting bank runs and similar effects is psychological and does not allow for any disappointments anywhere. With Iceland s Kaupthing German consumers were yet faced with a practical default that was not immediately covered for by a working DGS scheme in Iceland and though money has been returned by now, taking more than half a year of time, it is still a danger to future defaults as we can hardly assess the psychological impact to German consumers on this. This is especially true for the trust into a financial market within the EU. German government was at the peak of the beginning crisis urged to declare coverage for all German institutes (as a political action) yet this left distrust in any European operations. German government could not cover for other nations banks and though Iceland is not an EU-member people still trusted on a law that was derived from the Directive 94/19/EC and applied within the EEC. Trust was lost and it should be considered a main task to restore this trust by giving practical reason to consumers to feel well protected and at home within the EU. Raising the levels of protection as well as shortening the period of repayment is important but yet only part of it. Guaranteeing and protecting schemes from potential defaults themselves as well as enabling easy and swift access to those schemes by any EU citizen that needs to claim coverage is of importance as well. With that we have by far not yet fulfilled all duties deriving from the recent defaults. Among those topics undealt by so far are a. Ensuring that these schemes will actually not fail to serve again or render a country into a similar situation as it happened in Iceland - which created a law in full accordance to Directive 94/18/EC (and from its theoretical content even better) actually. So what shall we expect for smaller Member States which may face a similar situation if 3 out of 4 participating banks e.g. fail at the same time? (Not that bigger Members States would not completely fail when suffering this quota.) b. Secondly Kaupthing and Icesave created a significant amount of obligations in other countries, while not or only partly participating in those schemes. In Germany the solution by law secured only the minimum amount by the Directive as higher protected amounts were guaranteed by private funds and exchange schemes among banks. Thus the law not even allowed Kaupthing e.g. to take part in the German legal system. The private systems were open for foreign banks yet only covering those amounts extending the already legally protected account limits. A failure of that legal system would not be covered. Is it with remark a) clever to keep schemes separated this way or do we need to consider those schemes to work were business is actually done? 3

4 c. Practical experiences with Kaupthing showed a mere series of headaches for German consumers on how to act, apply and inform themselves. Thousands of desperate inquiries were started to a facility which, as far as we understood, was kept alive in Iceland by a single person in the beginning. Lack of knowledge of language and the legal background and the practical difficulties of contacting could e.g. be avoided if the national schemes of the consumers were to take care of contacting their colleagues of the scheme abroad and manage their domestic claimants. Thus a scheme might only be asked by 26 other schemes on procedures and practical aspects instead of thousands of individual consumer waiting for help. There would be no language problems and other hindrances for consumers to contact their home scheme then. And the national schemes will need to be prepared in any case for a certain amount of claimants according to the population of that Member State. It does not make much sense to have everyone to be prepared for a potential 400 Mio. consumers, does it? Even if claims are to be served by another member states scheme, at least handling those claims could be made much more practical. 2. Question on coverage Though as indicated most cases will be covered by the new coverage levels some cases might need higher coverage, like cases were consumers need to keep money safe while selling a home and buying a new one. Most important is yet, that these systems are sound and safe and actually can provide for shorttermed coverage in cases of default and keep cost-effective. In Germany we actually had so far a low legal coverage and an almost unrestricted private coverage. All mayor institutes thus could guarantee substantial coverage to all consumers. In Iceland we learned about an interesting approach to guarantee full coverage by DGS yet make that dependant on the funds. The legal minimum was to be guaranteed in any case but any higher accounts would be dealt by the remaining funds that were considered prior claims to other debtors. This scheme actually was favourable as it would save account holders from extra application to insolvency cases. With respect to further questions currently (b) Coverage of Euro would be our first choice, yet coverage height might need constant review to really cover the majority on account holders well. Solution (d) would be rather impractical for consumers who want to abroad and are not well informed about the protection level. If DGS is extended to the application of specific products that are prepared for special reasons like pension funds we might need to cover higher levels though, see below. 4

5 3. Question on minimum or fixed level We would rather prefer a minimum level leaving options for further development, as long as they do not interfere with an option of a netted backup coverage for those schemes. Actually in Germany we know already a top-up system. The only danger with that arises with cross-border accounts, when other national legal systems are to cover the first amount and the German top-up will guarantee for the rest. In case of a failure of the legal system these schemes consumers with lesser money on their accounts would be by far less protected than those with substantially high amounts. 4. Question on splitted accounts Though we do not hold detailed evidence on this we know that consumers do split accounts and in general keep an eye on coverage. Most of German Kaupthing consumers e.g. kept the margins of DGS Iceland. Coverage in detail was also among the top inquiries of consumers following the crisis. Furthermore it might be advisable to split because so far we see no chance to develop a DGS that would ensure almost immediate coverage leaving no time span open, where an affected consumer cannot access at least some of their monies for whatever urgent reasons it might be needed. 5. Question on aggregation and brands We need at least information on this, if it might slip the awareness of the consumer, that he or she might hold two differently branded products with actually one bank. It should be made compulsory to actively inform on this. Abilities of banks to actually get extra coverage for any of their brands sound favourable and should not be made impossible. 6. and 7. Questions on fixed levels and special exemptions Deposits on pensions and similar important deposits should be further secured to meet their purpose. If a ruling would lead to reduction of their protection or if products arise that are actually covered by DGS in this respect we might need unlimited coverage according to those schemes. It might therefore be more advisable NOT to fix coverage. Typical reasons why consumers deposit a significant higher amount of money on a bank deposit is e.g. heritage and buying and selling a new home. As in the case of Kaupthing we have learned about examples of this. It would be very advisable to allow for short-termed extra guarantees as it is not practical to split these monies up. They yet cover mayor shares of the total financial capacities of those consumers and should not be unprotected. Again this is a good reason not to fix coverage. 5

6 8. Question on Mutual Guarantee Schemes So far we did not make any negative experiences with these schemes. If systems are big and members themselves are independent enough to ensure, that a failure would be covered by the others, we see no reason not to allow these schemes. Securing the money by alternative schemes must not necessarily be seen as a market distortion it might well be a market factor. As long as the minimum is ensured and information on these schemes is accurate, we see no reason to restrict this Questions on products to cover The scope of eligible deposits should not be diminished to the current situation. Investor protection regulations should be minded. Structured deposits and debt certificates (see Lehman) have proven to be quite dangerous to consumers, they should be covered. There is furthermore no reason to leave leaks with non- EU currencies if they are offered by EU credit institutions. And there are missing sectors: How do we guarantee cross-border insurance? Questions on eligible depositors We restrict ourselves to comment on consumer issues. We should yet keep very small business uses of accounts that are as well of consumer use not unprotected Questions on a pan-european DGS As indicated in our general remarks we see a necessity for an approach that excludes an economic failure of a Members States DGS scheme. We have not made up our opinion in detail on how this may be done; the approach of a single DGS would yet destruct some of the existing schemes covering for more than the legal minimum, which is important if failures are restricted to a single or very few institutes. What we will need is a netted approach, how a single DGS is automatically supported if situations like in Iceland occur, with as far as we have learned 3 out of 4 institutes failing at the same time. A scheme to cover this might be a guarantee to cover each other, yet this may be a potential problem to the stability of national DGS as well. It might be advisable to consider, that some sort of failure occurred, as some institutes generated a high level of activities abroad that simply could not be backed by the home system and its economy. It might be better to pursue an approach that involves institutes across Europe to participate where they are doing business, this would reduce the dangers of small economies to be overloaded by successful yet risky activities in other Member States. This might be done by setting limits to a certain amount of activity when to join another Member States system. Keeping systems split may be advisable to exclude a mayor failure throughout Europe, although systems are thinkable, that cover economies of more than one Member State, especially if they are small. Financial Authorities need to 6

7 have yet a cross- border eye on the stability of those schemes and provide regular stress tests. 21. Question on mandate of DGS Though DGS s should have means to act, if banks face instability, the protection of the depositors monies should not be reduced by activities to stabilize banks with those monies. DGS is not and must not be a bailout scheme, nor should it prevent - on the costs of depositors institutes deserved failures. Its reason is to save depositors of the results of those failures and keep up to that point consumers confident on the protection of their money in order to save them and prevent pre-early failures Questions on information duties We favour information duties on the participation of schemes. With regard to informational overload we need to consider this information to be very comprehensive and to include whether a deposit is covered by the legal system and of which country as well as the necessary information on extra (mutual) or different DGS-protection and how this affects the legal claim. A short but readable if possible standardized description with the contract should do. From court decisions right now with e.g. Lehman certificates we can learn that the most dangerous aspect to consumers is not the now quite well known presence of standard DGS schemes but their absence or difference if they are abroad (including non-eu). Courts in Germany have ruled that the absence of expressive hints on the missing protection or reduced protection of a deposit or investment product is significant failure to counselling the consumer. It might be an option to reduce overload of information if warnings on missing or altered protection become compulsory and information on the general protection is kept short. 25. Question on information duties upon failure With DGS schemes informing on bank failures we out of our current experiences would strongly advice to involve the host DGS schemes with handling information and procedures for those host country consumers. The DGS that suffers the failure should focus on preparing the payments. But for the sake of language accessibility and capacity each host country DGS can be by far better prepared to their home market consumers. Information exchange can then be reduced to those 27 schemes. Hundred thousands of urgent consumer requests around Europe to a single-handed DGS office in Iceland ridiculed any other approach! 26. Question on set-off arrangements As indicated by the communication itself a simple set-off arrangement may indeed force those consumers to pull out their money at once and thus break part of the concept of DGS. 7

8 Furthermore as indicated a bank in peril may actually need to sell off claims to refinance. A missing protection by DGS would yet then or later deprive consumers of those guaranteed monies they need and calculate with to repay that claim then hold by someone else. We must not forget that in these situations claims and securities are NOT restricted to bank and consumer. It is of no use to set off a deposit and a credit if the money is substantially lost with the creditor yet its creditor is still holding a security against the consumer and may cash in without any options for the consumer to get essential monies from the deposit. Finally credit obligations though they may be claims of banks against the consumer cannot simply be set off to deposits at the point of failure as it is part of the contract to repay them later and to still have capacities with further monies. We must not mix these contracts up but consider we do not need to argue on this, it has yet to be well taken into account Questions on payout, delay and procedure With payout periods we need to balance the interest of access to the money as quick as possible yet as well as reliable as possible. A mere promise that cannot be kept is more dangerous than a short period of time. Especially with general bank accounts it is though important to have at least a limited quick access to some of the money. For application reasons it might make sense to keep the affected accounts of the defaulted bank operable in a limited mode for this reason. We should yet omit necessities of explicit applications for reimbursement by consumers despite giving the information where the protected money is to be sent to. DGS schemes need to know accounts and claims by the time of a failure and address those claimants themselves. They should publicly inform when they are doing this, so consumers might have a chance to inquire if they do not get information. We do not know whether tagging accounts is a good idea considering the different situations that might occur; clarifications should not block other consumers claims. 34. Question on proven capabilities of DGS Stress tests are advisable yet as indicated above it is not efficient to have a bulk of personnel at hand with every single DGS to cover for claims of all over Europe but to include host DGS schemes with that, which may prepare better for national capacities of claimants as well as specific questions they may have. Host DGS may filter these questions to get comprehensive answers by the affected home DGS that is to prepare payments. 35. Question on topping-up arrangements The answer can already be derived from the above answers. 8

9 36. Question on cross-border access point by host DGS Definitely yes, see above question 34 and Questions on financing We are not in a position to go into details, yet financing has to be sound and still cost effective. We have seen the investor s protection funds in Germany to be already overextended by a single failure. The schemes and way to fund should not slow down the legal promise of quick coverage. This is for the sake of institutes and general market stability as well and institutes should see the necessity of this protection for themselves, as well. The balance on funding and risk may be found by enforcing participation with schemes where institutes do business. This may be more facilitating to a common market reality than a home country approach. 40. Further questions/aspects See Question 1. 9