Appendix 5 Certificate of Experience 2016 Deposit Guarantee Scheme Annual Report 2016
Contents Overview... iii DGS Eligibility... iv Key Features of the Deposit Guarantee Scheme...v Key Activities in 2016... viii Appendix 1 - European Union (Deposit Guarantee Schemes) Regulations 2015 (S.I. No. 516 of 2015)... xii ii
Overview The Deposit Guarantee Scheme (DGS) is the State s statutory deposit protection scheme established under Irish and European Law. The DGS protects depositors of banks, credit unions and building societies authorised by the Central Bank of Ireland (the Bank). In the event of a credit institution being unable to repay its deposits, the DGS is required to repay eligible deposits up to 100,000 per depositor within the statutory repayment deadline of 20 working days. The Bank is the designated authority in the State tasked with administering the scheme. The DGS is funded by the credit institutions covered by the scheme and protects deposits held at authorised Irish institutions including their EU branches. Deposits held with credit institutions that are authorised in another European Economic Area Member State are covered by that country s deposit guarantee scheme. As part of the Bank s financial safety net, the DGS plays a key role in maintaining consumer confidence and financial stability in the State. The DGS contributes to the stabilisation of the financial system, aims to prevent the potential for contagion within the system and ensures that depositors are provided with swift access to their funds in the event of the failure of a credit institution. In 2014, the European Union enhanced the protection afforded by European DGSs through the introduction of EU Directive 2014/49/EU on deposit guarantee schemes (the Directive). The Directive harmonised the scope of coverage for depositors, introduced robust funding requirements for DGSs and mandated a reduction in the deadline for the payment of compensation from 20 working days to 7 working days over a phased basis. In addition, new depositor information requirements were introduced in order to ensure that depositors are aware of the key aspects of protection of their deposits by the DGS. The Directive was transposed into Irish legislation in 2015 as European Union (Deposit Guarantee Schemes) Regulations 2015 (S.I. No. 516 of 2015) 1. Since its establishment, the DGS has compensated depositors in respect of three liquidated credit institutions. In November 2016, the High Court appointed provisional liquidators to Rush Credit Union Ltd resulting in the invocation of the DGS. As at end 2016, the scheme had issued compensation payments covering three invocations of approximately 71m to nearly 15,000 depositors. In accordance with the Bank s statutory obligations, this annual report highlights the key features of the DGS and its activities in 2016. 1 See Appendix 1 iii
DGS Eligibility Protected Deposits Current accounts Saving accounts Demand deposit accounts Notice deposit accounts Fixed-term deposit accounts Share accounts in a building society or credit union Deposit element of structured deposits/tracker bonds may also be eligible if the deposit element is repayable at par Protected Depositors Individuals Sole Traders Partnerships Clubs, associations, schools and charities Companies Funds held in trust or in client accounts by solicitors and other professionals may be eligible if the underlying beneficiaries are eligible in their own right Small self-administered pensions Not Protected deposits by: Banks, credit unions and building societies Persons charged (pending a court decision) or convicted of money laundering offences Financial Institutions Investment Firms Depositors who have never been identified in accordance with money laundering legislation Insurance and Reinsurance undertakings Collective Investment undertakings Public Authorities A pension scheme or retirement fund (other than a small self-administered pension scheme) The website of the DGS at www.depositguarantee.ie provides further information on the operation of the scheme. iv
Key Features of the Deposit Guarantee Scheme The European Union (Deposit Guarantee Schemes) Regulations 2015 (S.I. No. 516 of 2015) (the Regulations) provide the primary legislative basis for the DGS. The Regulations are supplemented by the Financial Services (Deposit Guarantee Schemes) Act 2009 (as amended), which provides additional provisions relating to the funding of the scheme. The Regulations transposed the Directive into Irish Law and came into effect in November 2015. The new legislation has enhanced the coverage and design of deposit protection in Ireland. Scope of Coverage The scheme s scope of coverage has broadened in line with the principle of harmonisation under the Directive. In general, all retail depositors and businesses are now eligible for coverage under the scheme. Previous exclusions, such as those of large companies are no longer in place, which has simplified the coverage for businesses. Overall, there are only a small number of exclusions remaining, relating predominately to financial institutions such as banks, insurers and investment firms. Deposits by small selfadministered pension schemes continue to retain coverage under the new regulations. However, similar to the previous legislation, deposits by all other pension schemes and retirement funds remain excluded. Coverage Level The overall coverage level of 100,000 applies to a depositor s aggregate eligible deposits with a credit institution. However, in addition to the statutory coverage level, the regulations now provide additional coverage to certain types of deposits above the 100,000 level. These deposits, known as temporary high balances, relate to life events such as the sale of a house or an inheritance from an estate. The additional coverage, which is up to 1 million per eligible life event (although deposits related to personal injuries receive unlimited coverage), lasts for a period of six months following receipt of a qualifying deposit or from the moment the deposits become legally transferable. v
Operational Capability Single Customer View (SCV) The Directive retained the principle of a harmonised limit per depositor rather than per deposit. Therefore, in order to calculate a depositor s coverage under the DGS, credit institutions must identify and aggregate the eligible deposits for each depositor. This approach establishes a Single Customer View (SCV) for each depositor and, thus, ensures that depositors receive compensation for all of their eligible deposits within the coverage limit of 100,000. Accordingly, in order to ensure the operational capability of credit institutions to produce a SCV for each eligible depositor, the DGS has engaged extensively with credit institutions to implement detailed technical standards and requirements. For its own part, the DGS has put in place technical operational systems to accept SCV files and process compensation payments in a timely manner. The DGS makes compensation payments by way of crossed cheques, which ensures that it is in a position to issue compensation quickly. The method of payment also ensures that depositors who do not maintain other accounts may receive their compensation without having to provide alternative bank accounts to the DGS. Funding of the Deposit Guarantee Scheme Following the introduction of the European Union (Deposit Guarantee Schemes) Regulations 2015 (S.I. No. 516 of 2015), new funding arrangements were introduced requiring the DGS to reach a target fund level of 0.8% of covered deposits by 2024, resulting in the establishment of the DGS Contributory Fund in 2016. This replaced the previous funding mechanism whereby credit institutions maintained deposits with the Central Bank for use in DGS invocations. A risk-based methodology, in line with European Banking Authority guidelines, was employed to calculate contributions for each institution based on their degree of risk and level of covered deposits. The first annual contributions to the new fund were collected at end 2016. The Central Bank has published Risk-Based Contributions to the Irish Deposit Guarantee Scheme which is available at https://www.centralbank.ie/consumerhub/deposit-guarantee-scheme. vi
Repayment Deadline Currently, the DGS has a repayment deadline of 20 working days. However, the Directive highlighted the need to reduce this deadline in order to improve depositor confidence and meet depositors needs. As such, in accordance with the Directive, the DGS will be implementing a phased reduction of the repayment period to 7 days by 2024. vii
Key Activities in 2016 Over the course of 2016, notable activities included the compensation of depositors following the liquidation of Rush Credit Union and the establishment of the DGS Contributory Fund. Rush Credit Union In November 2016, the High Court appointed Jim Luby and Tom Rogers of McStay Luby as joint provisional liquidators to Rush Credit Union Ltd. The Central Bank applied for the winding up having regard to the concerns it had relating to certain governance and financial issues faced by Rush Credit Union. The decision to apply to the High Court to wind up Rush Credit Union was made by the Governor of the Central Bank. Upon the appointment of the provisional liquidators, the DGS was invoked and preparations were made to repay members within the statutory deadlines. Following the invocation, the DGS issued compensation payments of 22.3m to approximately 9,700 members of Rush Credit Union, representing a payout to over 98% of depositors within seven working days. viii
DGS Contributory Fund Prior to the Directive, Member States were not legislatively required to maintain prefinanced deposit insurance schemes. In Ireland, under the previous legal framework, credit institutions were required to maintain 0.2% of their total deposits in an account known as the Deposit Protection Account (DPA). The DPA funded any invocations of the DGS through the maintenance of deposits by credit institutions with the Bank. However, the funds in the DPA remained the property of the credit institutions. The Directive addressed the divergent nature of funding across the EU with the introduction of pre-funded schemes and risk based contributions. Over the course of 2016, the Bank implemented a significant reorganisation of the scheme s funding mechanism with the design of a risk-based methodology to calculate contributions and the creation of the DGS Contributory Fund. Credit institutions now contribute to the DGS based on the amount of their covered deposits and risk profile. The Bank developed its calculation methodology in accordance with the EBA s guidelines on methods for calculating contributions to deposit guarantee schemes. The guidelines set out the methods for calculating risk indicators for members of DGSs, for aggregating risk scores and determining their risk-based contributions. The Bank calculated and collected the first annual risk based contributions at the end of 2016, totalling 93m, fulfilling the mandate of the DGS to take annual contributions to reach 0.8% of covered deposits by 2024. Stress Testing and Cross-Border Cooperation In 2016, the EBA addressed two new sets of regulatory guidelines (EBA/GL/2016/04 and EBA/GL/2016/02) to European DGSs regarding the areas of stress testing and cross-border cooperation. The Directive requires DGSs to perform stress tests on their systems every three years, with the first test due by July 2017. In order to ensure that DGSs effectively test their systems and a broad range of relevant scenarios, the EBA drafted guidelines detailing procedures for stress tests. Broadly, the guidelines set out a systematic and comprehensive approach to planning, running and concluding stress test exercises. The testing addresses a range of scenarios including the ability of DGSs to compensate depositors, to finance the resolution of credit institutions and to use their available financial means to finance measures to preserve the access of depositors to covered deposits. In line with the guidelines, the DGS has initially engaged with the EBA on its test schedule and plans for future stress testing. ix
When conducting the tests, the DGS assesses a wide range of elements including access to data, funding, staff and operational resources. In addition, under the guidelines, the EBA will conduct peer reviews of DGSs every five years which should assist in ensuring general best practice is applied by the DGS. The objective of the cooperation guidelines is to facilitate an effective cooperation between cross-border DGSs where a failure of a cross-border credit institution occurs. Under the Directive, in case of failure of a branch of an EU bank established in a different Member State, depositors will now benefit from the assistance of their local DGS, which will provide them with the payout on behalf of the DGS in the Member State where the bank is established. In order to promote a consistent approach and to facilitate entry into cooperation agreements between DGSs across the EU, the guidelines specify the objectives and minimum content of such cooperation agreements. The Bank confirmed to the European Banking Authority that it would comply with both sets of guidelines in 2016. For 2017, the DGS will liaise with its European counterparts on their practical implementation. Depositor Information The Directive reiterated the importance of depositor information and included a number of provisions aimed at enhancing public awareness of deposit guarantees. These provisions resulted in direct obligations for both the DGS and credit institutions in the national regulations. As such, credit institutions began providing depositors with information on the DGS throughout 2016. For its own part, the DGS itself launched a new website (www.depositguarantee.ie) providing general depositor information and a facility for public queries. Credit Institutions Depositor Data quality assessment Over the course of 2016, the DGS continued to assess the depositor data of banks and credit unions to ensure that, in the event of an invocation, data was of sufficient quality to ensure a successful payout. Credit institutions are provided with formal feedback following each assessment and, where necessary, requested to resubmit data for further assessment. This ongoing process carried out by the DGS ensures that if a credit institution failure occurs, a successful compensation process can be initiated to ensure that depositors are reimbursed with their savings. x
Guidelines of the European Banking Authority (EBA) The European Banking Authority (EBA) has issued guidelines that the DGS adopts when carrying out certain functions. o Methods for Calculating Contributions to DGS. The Bank has applied a system of differential contributions depending on the risk posed by each deposit-taking institution in accordance with EBA guidelines. o Guidelines on cooperation agreements between deposit guarantee schemes. These guidelines cover the definition of the co-operation agreements, which must be signed by EU Deposit Guarantee Schemes. They allow for the process of crossborder compensation between Member States. The Irish DGS has worked closely with the European Forum of Deposit Insurers in this regard and has signed up to a multilateral agreement between EU DGSs to ensure that the compensation process can take place in line with requirements outlined in the Irish Regulations. o Guidelines on stress tests of deposit guarantee schemes. These guidelines impose mandated stress testing by the DGS to ensure that our systems are sufficient for a payout process. The Irish DGS has an extensive testing system and ensures that stress tests are carried out on an annual basis. xi
Appendix 1 - European Union (Deposit Guarantee Schemes) Regulations 2015 (S.I. No. 516 of 2015). EU Directive 2014/49/EU on deposit guarantee schemes was transposed into Irish legislation in November 2015 as European Union (Deposit Guarantee Schemes) Regulations 2015 (S.I. No. 516 of 2015). The Regulations designate the Bank as the authority in the State that carries out the functions and duties of a designated authority for the purposes of the Directive. The Directive harmonised eligibility rules across the EU, maintained depositor coverage at 100,000 per person per credit institution, and introduced the concept of Temporary High Balances whereby coverage is extended to up to 1m in certain cases for a period of 6 months after funds have been credited to an account. Funding requirements were introduced that mandated the DGS to reach an available financial means of 0.8% of covered deposits by 2024 and payout deadlines are being phased down to 7 working days by 2024. The DGS, acting as designated authority, can require, at any time and on its request, from credit institutions all the information necessary to prepare for a repayment of depositors. The DGS must ensure the confidentiality and protection of data pertaining to depositors accounts. Key aspects of the 2015 DGS Regulations Requirements for Membership of the deposit guarantee scheme. Membership of the DGS is mandatory and an authorised credit institution shall not take deposits unless it is a member of the scheme. Eligibility of Deposits. In general, the Deposit Guarantee Scheme protects deposits belonging to individuals, companies, partnerships, clubs and associations. It excludes public authorities, insurers, pension funds, collective investment schemes, banks and certain other financial institutions. xii
Coverage level of deposits. The coverage level for the aggregate deposits of each depositor is 100,000 per credit institution. In addition, the directive provides for coverage of temporary high balances. This feature allows for the payment of compensation in excess of 100,000 in the case of qualifying deposits. Qualifying deposits may include deposits resulting from real estate transactions relating to private residential properties, deposits related to particular life events of a depositor such as marriage, civil partnership, divorce, retirement, dismissal, redundancy, invalidity or death and deposits based on the payment of insurance benefits or compensation for criminal injuries or wrongful conviction. Qualifying deposits are protected for up to 6 months after the deposit has been credited to an account. Repayment of deposits and determination of the repayable amount. The compensation limit of 100,000 applies to the aggregate deposits placed with the same credit institution irrespective of the number of deposits, the currency of the deposits, and the location of the deposits within the EU. The DGS is currently mandated to ensure that a duly verified repayable amount is available within 20 working days. This repayment period must reduce to 7 working days by January 2024. Powers of the designated authority. The deposit guarantee scheme can take actions, or direct other persons as necessary to take such actions, as it considers necessary to ensure compliance with the Regulations. Financing of the DGS through the DGS Contributory Fund. The Regulations mandate the DGS to achieve an available financial means of 0.8% of covered deposits of all credit institutions authorised in the State by 2024. The calculation of contributions is based on the covered deposit level of the credit institutions and the risk assessment of each institution carried out in accordance with guidelines issued by the EBA. The DGS must ensure that it has adequate systems in place to determine the potential liabilities of the Fund. The Central Bank determines the rate of interest payable on any such funds held on deposit with it. Reporting to the European Banking Authority. The DGS informs the EBA of the amount of covered deposits in the State, and the amount of the available financial means in the Fund each year. xiii
Co-operation with other deposit insurance schemes within the EU. The DGS covers depositors at branches set up by its member credit institutions in other Member States. However, depositors at branches of such credit institutions are repaid by the deposit guarantee scheme of the host Member State on behalf of the Irish DGS. Equally, the Irish DGS will make payments to those depositors at branches in Ireland of member credit institutions authorised in other Member States. In order to facilitate effective cooperation with the deposit guarantee schemes in other Member States, written cooperation agreements are put in place to ensure that such requirements are operationally feasible. The Irish DGS, as with other DGSs, works in close co-operation with the European Forum of Deposit Insurers (EFDI) and has signed up to a multilateral agreement covering such processes. Depositor Information. Credit institutions established in the State are obliged to provide to actual and intending depositors information on the DGS as well as informing them of any exclusions from protection. In addition, confirmation that deposits are eligible must be provided to depositors on their account statements and a depositor information sheet must be provided to all depositors annually. The website of the DGS outlines relevant information for depositors concerning the provisions regarding the process for compensation by the DGS. xiv
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