Improving depositor outcomes in bank or building society insolvency

The Bank of England would like to hear ideas to support its work to improve depositor outcomes in the event of bank or building society insolvency.
Published on 03 December 2021

The Bank of England’s Policy Statement on its review of its approach to setting a minimum requirement for own funds and eligible liabilities (MREL), published in December 2021, stated that “the Bank considers that recent innovations in technology in the banking system may afford opportunities to mitigate disruptions that may occur in the insolvency of a failing mid-tier firm whose business model is dominated by transactional account banking. These developments include Open Banking and ‘linked accounts’ technology.

The Bank has initiated work to be carried out in consultation with the banking industry, Financial Services Compensation Scheme (FSCS), Financial Conduct Authority, Prudential Regulation Authority and other interested parties with a view to developing alternative processes which may reduce disruption to transactional accounts in the event of an insolvency procedure. Subject to the outcomes of this work, the Bank is considering whether it could significantly raise or remove the transactional accounts threshold”.

Currently, the FSCS aims to effect pay out of eligible deposits within seven days of a bank or building society failing. Payments to individuals in more complex cases will take longer. Even with compensation within FSCS coverage limits being paid within this time, customers may need to open another current account. This may not be straightforward, especially for more vulnerable members of society. Thus, while an FSCS pay-out is underway, depositors may temporarily lose access to their funds at the bank or building society in insolvency.

The impact of this would depend on the depositor profile of the bank or building society in question, in particular the proportion of depositors whose primary source of income is paid into the bank and/or who rely solely on their accounts with the failed provider for day to day banking services, for example standing orders and direct debits, or small businesses making payments to their employees and suppliers.

The Bank, working with other authorities and with the private sector, wants to explore opportunities to minimise the disruption caused by insolvency to those depositors who are protected by the FSCS but are reliant on their accounts with the failed firm for day to day banking and access to money.

As well as the benefits to depositors of these improved outcomes in insolvency, this work could have broader benefits for the UK banking sector. It would make it less likely that (despite having a large number of active current accounts) smaller banks with balance sheets of less than £15 billion to £25 billion would be required to maintain recapitalisation capacity, typically in the form of equity or subordinated debt in addition to minimum capital requirements, that is needed to support a bail-in or partial transfer resolution strategy in order to meet the MREL. This would reduce costs for smaller and growing banks, supporting innovation and competition in the UK banking sector, while reducing risks to UK financial stability should they fail. We note, however, that this work will take some time to complete and so the Bank does not envisage being able to make any consequential changes to resolution strategies and MRELs for individual firms before end-2022 at the very earliest.

We anticipate that industry innovation and support will be a key part of reducing disruption to transactional accounts and improving depositor outcomes in the event of an insolvency procedure. Therefore, at this initial stage, the Bank is interested in hearing from anyone, not limited to the financial sector, who may be able to suggest how best innovative, cost-effective and efficient solutions could be developed and implemented. If you would like to make a suggestion for consideration as part of this work, please contact resolution.enquiries@bankofengland.co.uk.  As this work develops it will be subject to formal procedures, such as public consultation, as appropriate. 

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