UK BoE consults on FSCS depositor protection and new resolution tool

The UK Bank of England (BoE) has published its consultation paper CP4/25 which contains proposals for depositor protection and the new resolution tool proposed by the Bank Resolution (Recapitalisation) Bill. The consultation paper was published alongside relevant appendices and a press release.

The first part of the consultation proposes increasing the FSCS deposit protection limit from £85,000 to £110,000, and increasing the limit applicable to temporary high balance claims from GBP1 million to GBP1.4 million. The increases take into account the effect of consumer price inflation since the limit was last updated in 2017, with the UK Prudential Regulation Authority (PRA) revising the figure to a round number for memorability, with the aim of increasing depositor awareness and confidence in the deposit protection framework. The consultation also proposes changes to the PRA's supervisory expectation, reinstating that firms should ensure their systems are able to accommodate limit changes at short notice.

The proposals also include changes to disclosure obligations and deposit compensation information, to ensure firm disclosures remain clear and up to date. The consultation paper notes in particular that firms should prepare now, ahead of the potential change in limit on 1 December, and make any necessary updates to their single customer view systems. The deadline for comments on this part of the consultation is 30 June. The PRA expects to confirm final rules and implementation dates in November. If the proposals are taken forward as set out in the consultation paper, the new rules will apply to firm failures occurring on or after 1 December, with firms having until 31 May 2026 to implement changes to their disclosure materials.

The second part of the consultation relates to the new resolution tool as proposed by HM Treasury in January 2024 to enhance the UK's special resolution regime. The new mechanism, if introduced, would allow the BoE to use funds provided by the banking sector via the FSCS to cover costs associated with recapitalising a failing firm to support the sale of (all or part of) the firm to a private sector purchaser, or a transfer to a bridge bank. The Bank Resolution (Recapitalisation) Bill (currently at the report stage ahead of its third reading in the House of Commons) will introduce the necessary legislative changes to implement the new mechanism.

The PRA is consulting on the basis that the Bill is not changed substantively before receiving royal assent, with a view to ensuring that the PRA rule changes – which would allow the FSCS to make recapitalisation payments where required by the BoE (and make an ex-post levy on deposit takers excluding credit unions) – can be made as soon as possible. If the Bill does not pass into law, the PRA proposals will not be taken forward. The deadline for comments is 30 April.

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