Jersey Depositors Compensation Scheme - improved protection for depositors

The draft Bank Depositors Compensation Law 2016- (the Law) was lodged au Greffe on 20 December 2016. At the time of writing, there is no indication as to when it will come into force.

The Law, once it comes into force, will replace in full the existing Banking Business (Depositors Compensation) (Jersey) Regulations 2009 (the Regulations), which established the Jersey depositors compensation scheme (the Scheme).

The Scheme was introduced as a result of the financial crisis to ensure that, notwithstanding that no Jersey banks failed, Jersey had put in place measures akin to those in other jurisdictions with significant banking operations to protect individual deposits and main depositor confidence in the Jersey banking system.

Jersey's government has looked to international best practice and consequently, it has sought to improve the Scheme and further strengthen the existing protections for individual depositors, reflecting such best practice and to put Jersey firmly in line with other leading financial centres.

The Scheme will complement the proposed bank resolution regime to be implemented pursuant to the Bank Recovery and Resolution (Jersey) Law 2017 (the BRR Law).

Ogier's briefing on the proposed BRR Law can be found here

Both briefings will be updated when the Law and the BRR Law come into force.

What is the current Scheme?

The key features of the current Scheme are, broadly:

  • it applies to an "eligible depositor" (broadly, a natural person or administrator/executor of a deceased natural person's estate, irrespective of where resident or a Jersey charity) with a bank account in Jersey (being an account held with a person registered under the Banking Business (Jersey) Law 1991 (the BBL) to carry on deposit taking business (a Bank));
     
  • compensation to every eligible depositor upon bankruptcy of a Bank up to a maximum amount of £50,000 (note that this limit applies per Jersey banking group rather than individual Bank);
     
  • in addition to an annual administration levy (the Administration Levy) payable by all Banks, once a Bank has become bankrupt, the Jersey Bank Depositors Compensation Board (the Board), which administers the Scheme, will raise a levy on each other Bank based on the percentage of eligible deposits (i.e. deposits covered by the Scheme) of all eligible deposits held by the Banks as a whole;
     
  • the maximum compensation payable by the Board in total is £100,000,000 over a 5 year period (funded by a liquidity loan from the States of Jersey), which is similar to that applicable in the equivalent scheme available in Guernsey.   

What are the key changes for depositors under the new Scheme proposed by the Law?

While the Scheme itself is unchanged in many respects, the Law brings some key changes designed to further protect the rights and interests of depositors in the event of a Bank insolvency.

Trigger for activation

Under the Regulations, the protections available under the Scheme would only become available once the Bank has become "bankrupt" as set out in the Interpretation (Jersey) Law 1954 (as amended), i.e. the Bank must actually be bankrupt, for example, being declared en désastre.

Under the Law, far greater flexibility is given to the Board to declare when the provisions of the Scheme are activated. It enables the Board to activate the Scheme in circumstances where formal bankruptcy proceedings have not yet commenced but where the Board consider the Bank to be insolvent, i.e. unable or likely to be unable to satisfy claims in respect of any civil liability incurred by the Bank. Equally, even where formal bankruptcy has commenced, the Board has discretion not to activate the Scheme where a resolution procedure (such as that set out in the BRR Law) has started but not yet finished, or is likely to start within a reasonable time. 

£50,000 per Bank, not per banking group

The £50,000 compensation limit no longer applies on a banking group basis but on an individual bank basis, i.e. if a depositor held £100,000 with 2 Banks within the same banking group, under the Regulations, the depositor would only be entitled to £50,000 cumulatively across the 2 Banks in that banking group but under the Law, that depositor would now be entitled to £100,000 (i.e. £50,000 per Bank).

Under the Law, banks may now only be grouped for the purposes of calculating the Administration Levy only.

"Straight-Through Payouts"

Under the Scheme currently, eligible depositors must submit claim forms which set out the details of their deposits held with the failed Bank, in order to claim compensation.

Under the Law, this is amended so that, where data regarding deposits held by the Bank is accurate enough that additional information would not be required to make a payment (see below), then no claim form or otherwise would need to be submitted by a depositor. Equally, upon activation of the Scheme, the depositors' rights to their eligible deposits (i.e. up to the maximum £50,000) vests in the Board.  This should make payments quicker and more automatic, as it requires no positive action to be taken on the part of the individual depositor.

Importantly, while the current time period for compensation in full under the Scheme stands at 3 months, where bank data is determined to be of sufficient quality, payment is intended to be made within 7 working days, as opposed to £5,000 which was the amount to be paid within 7 working days under the current Scheme.

It should be noted that Banks, in conjunction with the Board, have developed an agreed form of deposit data, compatible with the Board's IT systems which should, in theory, make it less likely that data is held to be insufficient, requiring application forms to be filed by depositors as under the current Scheme.    

Ability to include additional recoveries above the £100 million threshold

Under the current Scheme, if the amount due to eligible depositors were greater than the amount allowed to be used as compensation by the Board (i.e. £100 million), the £50,000 maximum would be decreased per depositor in proportion to the amount owing to depositors above the £100 million limit. So, for example, if the failed Bank's eligible deposits equalled £200 million, each depositor would only be entitled to a maximum of £25,000 under the Scheme.

Under the new Scheme, the Board can use additional amounts recoverable from the failed Bank's liquidation, to satisfy any outstanding depositor obligations under the Scheme, up to the maximum £50,000. Consequently, the total fund available under the Scheme increases from £100 million to the £100 million plus those additional recoverable amounts, thereby increasing the chances of recovery for depositors.     

How do the changes affect Banks?

The Law introduces a new annual reporting requirement on Banks to submit to the Board, among other things, the amount of eligible deposits which they hold. This formalises the current informal agreement which Banks have with the JFSC whereby such information is shared with the JFSC on an annual basis.

The Law also extends the application of Article 26 of the BBL (i.e. the general power available to request certain information and documents), so that the powers granted to the JFSC to require information pursuant to that Article will also be extended to the Board. It should also be noted that, in conjunction with the extension of this power, the disclosure restrictions contained in Article 42 of the BBL extend to the Law, save that Articles 43 to 45 (which permits, among other things disclosure to the JFSC in order to carry out its duties) shall also apply to the Board in carrying out its duties.  

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Disclaimer

This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.

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