Depositor Compensation Scheme - Ministerial Response - 8 December 2009

Findings

Comments

3.1.1

The  Jersey  authorities  and other key stakeholders believe that a depositor compensation scheme  is  not  necessary,  in the  sense  that  it  will  never need  to  be  used,  due  to  the rigour  of  the  bank  licensing policy in Jersey and the Jersey Bank Business Model.

There are 2 parts to this finding.

The first is that a depositor compensation scheme is not necessary and the second is that it is highly unlikely that it will be called upon. EDD agrees with the finding that it is extremely  unlikely  that  a  deposit compensation scheme will be used based on the current business model. In this regard EDD notes the evidence given to the Panel by  the  Jersey  Financial  Services Commission  ("JFSC"),  the  Viscount  and other  industry  experts  that  due  to  the rigorous licensing regime and the nature of the banking sector in Jersey, the risk of a bank failure is very small.

However,  with  regard  to  the  first  part, following  a  change  in  international standards,  and  in  the  expectations  of depositors,  EDD  considers  that  a  DCS  to protect depositors and to maintain the public finances is necessary.

3.1.2

The world has changed since the  onset  of  the  world financial  crisis  and  global recession.  The  political climate  has  changed markedly.  Different approaches to bank failure are now  under  consideration, leading  to  an  increased

EDD agrees with the finding that the nature of  the  banking  industry  has  undoubtedly changed  considerably  and  further  changes can be expected in the future.

However, EDD rejects the finding that there is  an  increased  likelihood  that  a  bank  or banks could fail in Jersey. The action taken over  the  past  year  demonstrates  that

likelihood  that  a  bank  or banks could fail.

jurisdictions with parents or head offices of Jersey subsidiaries or branches are not only supporting  but  also  have  the  capacity  to support  their  systemic  banks.  Measures currently  being  considered  in  other jurisdictions are yet to be finalised and it is not  at  all  clear  that  the  measures  once adopted will lead to an increased likelihood that  a  bank  or  banks  could  fail.  Oxera indicate  that  any  such  measures  will  be designed so as to make it even less likely that systemic retail banks are allowed to fail.

3.1.3

The Jersey Banking Business Model is not without risk, as has  been  identified  by  the International  Monetary  Fund. A  depositor  compensation scheme is required to protect retail depositors.

EDD  agrees  that  no  banking  model  is without  risk,  but  as  stated  above,  the evidence is that the risk of a Jersey bank failure is very low.

EDD  agrees  that  a  deposit  compensation scheme  is  now  necessary.  It  should  be remembered  that  the  world  has  seen  a financial crisis of enormous proportions and no Jersey Bank has failed in that time.

3.1.4

The  final  Oxera  Report appears to have been tailored to  bolster  the  preferred scheme  of  the  Economic Development Department.

EDD disagrees with this finding.

Oxera  are  independent  economic consultants with an international reputation for providing expert advice in the area of Depositor  Compensation  Schemes.  EDD notes in this regard that the Panel's Report does not criticise any of the actual findings of the Oxera Report.

3.1.5

The  development  of  the scheme has been carried out in a  less  than  transparent manner.

EDD disagrees with this finding.

Although the tight deadline set by the States Assembly for developing a proposed DCS meant that a full public consultation was not possible, EDD did consult key stakeholders and industry experts. It is also important to note  that  all  relevant  documentation  has been provided to the Panel.

3.1.6

There has been a lack of co- operation  with  the  Panel during its evidence gathering from  a  number  of  key stakeholders.

EDD  co-operated  fully  with  the  Panel's review and understands that no lack of co- operation  is  alleged  with  regard  to  EDD. EDD  is  not  able  to  comment  on  the  co- operation given to the Panel by third parties.

3.1.7

Although  consultation  took place  with  one  of  the  main stakeholders,  the  Jersey Bankers Association, and with amongst  others  the  Jersey Financial  Services Commission,  the  Law Officers  and  Viscount's Department  on  technical issues,  there  was  no consultation  with  the  small business  community,  who were left out of the scheme, or with the General Public.

EDD  agrees  that  in  the  limited  time available, a full public consultation was not possible.

EDD did consult the key stakeholders listed along  with  other  experts.  No  data  were available  to  allow  the  inclusion  of  small businesses  in  the  DCS  to  be  adequately costed, as confirmed subsequently by both the  Institute  of  Directors  and  the  Jersey Chamber  of  Commerce.  The Minister  has undertaken  to  carry  out  the  necessary research and to report his findings back to the States Assembly within 5 months of the legislation  being  agreed  by  the  States Assembly.

3.1.8

The  £50,000  payout  per eligible depositor per bank is consistent  with  comparable jurisdictions and is a credible level of compensation.

EDD agrees with this finding.

3.1.9

The  coverage  of  Jersey resident  and  international retail depositors is appropriate and  consistent  with international standards.

EDD agrees with this finding.

3.1.10

It is appropriate that charities and  children's  trusts  are covered by the scheme.

EDD agrees with this finding.

3.1.11

The  scheme  does  not  cover small  businesses  and insufficient consideration was given to establish if this would be achievable.

EDD  disagrees  that  insufficient consideration was given to the inclusion of small businesses in the proposed DCS.

No data could be given by the banks that would enable the analysis of the breakdown of deposits along with the differing factors that  normally  differentiate  the  size  of business.  Consequently  no  definition  of small business could be determined and the cost of including small businesses could not be  quantified  quickly  during  the development  of  the  scheme  with  the resources  available.  The  Minister  has undertaken  to  carry  out  the  necessary research which involves doing a full scale survey  and  to  report  back  to  the  States Assembly (see also point 3.1.7).

3.1.12

The  proposed  scheme  is  not world  class  and  does  not comply with all of the IADI core principles.

EDD disagrees with this finding.

The proposed DCS is tailored to the banking industry  in  Jersey  and  with  the  right implementation  is  capable  of  complying with  at  least  the  majority  of  IADI  Core Principles,  as  confirmed  by  the  Jersey Financial  Services  Commission.  In particular,  EDD  notes  that  a  post-funded DCS  is  not  incompatible with  IADI  Core Principles.

3.1.13

There is no evidence of a risk management  strategy  for  the States' liability in the scheme.

EDD disagrees with this finding.

A  risk  management  strategy  has  been central to the development of the scheme. Work was carried out by the Treasury and Resources Department in order to identify the  most  appropriate  source  of  States' shortfall and liquidity funding. Oxera have produced models showing the likely States contribution  in  a  variety  of  scenarios. Critically, the Scheme has been devised to minimise the costs to the States. Both the States and the DCS will receive independent legal advice with regard to the terms of any loan agreement for the provision of liquidity funding in order to ensure that the risks are appropriately managed.

3.1.14

The  drive  to  keep  down  the costs  for  the  commercial benefit  of  the  banks  has dominated the development of the scheme to the detriment of the  principles  of  protecting depositors  and  limiting  the exposure of taxpayers.

EDD  agrees  that  the  proposed  DCS  was designed  to  keep  unnecessary  costs  to  a minimum,  but  disagrees  that  this  has dominated the development of the DCS.

The main driver behind the development of the proposed DCS was the need to establish a  credible  DCS  in  accordance  with international  standards  as  quickly  as possible in order to protect depositors and maintain the public finances.

3.1.15

Depositor  Compensation schemes should not be used as competitive  tools.  Jersey should  have  consulted  with the Isle of Man and Guernsey with a view to co-operation on developing  standard approaches  to  the  protection afforded to depositors.

EDD disagrees with this finding.

EDD did consult with Guernsey concerning their  scheme  and  closely  followed  the developments in the Isle of Man. However, the different groupings of banks and size of deposits in each jurisdiction means that no one scheme would be properly suited to the specific circumstances of all 3 jurisdictions. Further,  EDD  does  not  see  why

competitiveness  should  not  be  a  relevant factor  in  the  development  of  finance industry legislation.

3.1.16

The 5 year cap is unique to the Guernsey scheme and to that proposed  in  Jersey.  It  is designed to minimise the costs to the banks but this is to the potential  detriment  of depositor protection.

EDD disagrees with this finding.

All  schemes  have  some  form  of  cap  in place. EDD considers that the 5 year cap is necessary in order for the proposed DCS to be competitive with schemes in comparable jurisdictions.  Further,  the  data  analysis demonstrates that the amount of the cap is consistent  with  international  standards relating to DCS.

3.1.17

An  ex-post  funded  scheme lacks credibility.

EDD disagrees with this finding.

The  Jersey  scheme  has  been  designed  in accordance  with  Principle 11  of  the  IADI Core  Principles  which  requires  that  a credible  source  of  liquidity  funding  is  in place.  In  the  proposed  DCS,  liquidity funding is provided to the DCS by a loan from  the  States  whose  ability  to  pay £100 million  gives  the  required  stamp  of credibility.

3.1.18

Hybrid  funded  schemes  are becoming  increasingly common.

EDD  agrees  that  there  are  many  hybrid schemes in existence however there are also many post funded schemes.

It  is  considered  that  hybrid  schemes (incorporating  a  pre-funded  element)  are appropriate for jurisdictions in which there are  regular  bank  failures.  EDD  does  not consider  that  hybrid  funding  would  be appropriate  for  Jersey  as  the  evidence suggests that the risk of a failure in Jersey is very small.

3.1.19

A permanent Board would be able to react more effectively to a bank failure than a Board established post failure.

The  Viscount,  who  is  the  expert  used  to dealing with insolvencies on a regular basis gave  evidence  that  the  EDD  proposals concerning  a  Board  were  credible  and practical.  However,  in  response  to Scrutiny's  concerns,  the  Minister  has undertaken  to  appoint  the  Board  to administer the DCS as soon as possible.

3.1.20

Public  awareness  of  the scheme will be an important element of its credibility. It is not  clear  who  will  be responsible  for  promoting Public  Awareness  of  the scheme.

EDD  agrees  that  public  awareness  of  the DCS should be promoted and has appointed a project officer to prepare papers on the appropriate manner to promote the DCS.

3.1.21

A permanent Board would be more  credible  to  depositors and would be well placed to undertake  roles  including promoting  Public  Awareness of the scheme.

EDD has undertaken to appoint the Board to administer the DCS as soon as possible.

EDD  does  not  consider  that  it  would necessarily be appropriate for the Board to be  responsible  for  promoting  public awareness  of  the  DCS,  when  other participants in the safety net are arguably better  equipped  to  address  this  issue.  A conclusion  will  be  reached  on  this  issue once the project officer has completed the necessary research.

3.1.22

The Board as proposed is not sufficiently independent.

EDD  disagrees  with  the  finding  partly because  the  Regulations  establishing  the DCS  state  clearly  that  the  Board  is  an independent  body,  and  partly  because  a memorandum of understanding can resolve any residual issues in this area.

3.1.23

The proposed aim for a seven day  payout  is  currently unrealistic and undermines the credibility of the scheme.

EDD disagrees with this finding.

EDD considers that the requirement for an interim compensation payment to be made to  depositors  within  7 working  days  of receipt of a valid claim is credible and notes the Viscount's evidence to the Panel in this regard.

3.1.24

There  are  significant  cross border  asset  recovery concerns.

EDD agrees that international bank failures can lead to complex cross-border insolvency issues, but considers that it is impossible for Jersey to address this unilaterally.

Considerable work is currently underway in order  to  address  this  issue  internationally and Jersey will join the appropriate forums in order to assist in this process.

3.1.25

There  is  no  separate insolvency  law  for  banks  in Jersey  despite  the  likely complexity of the liquidation of a failed bank.

EDD  agreed  that  there  is  no  separate insolvency law for banks.

This  issue  was  raised  in  the  recent  IMF report and is being considered separately.

3.1.26

Claims of high recovery levels from of a failed Jersey bank's parent  company  are  untested and not guaranteed.

EDD disagrees with this finding.

Whilst  there  have  been  no  Jersey  bank failures as a result of the recent international financial  crisis,  there  have  been  bank failures  in  both  the  Isle  of  Man  and Guernsey. In both of those cases recoveries are expected to exceed 70p in the pound.

Recommendations

Accepted/ Rejected

Comments

Target date of action

3.2.1

The Minister for Economic Development should make provision for coverage to be extended to small local businesses.

Further work is necessary in order for the Minister to form a view.

No data were available to allow the inclusion of small businesses to be adequately costed, as confirmed subsequently by both the Institute of Directors and the Jersey Chamber of Commerce. The Minister has undertaken that EDD will carry out the necessary research and will report back to the States Assembly.

The Minister will aim to report back to the States Assembly by the first sitting in April 2010.

3.2.2

A  hybrid  funding structure  should  be adopted.

Rejected.

EDD considers that hybrid schemes (incorporating a pre- funded element) are appropriate for jurisdictions in which there are regular bank failures. Jersey does not face regular bank failures and EDD does not consider that hybrid funding would be appropriate in Jersey.

n/a

3.2.3

In order to raise the credibility of the scheme for depositors a real, permanent Board should be established.

Accepted.

EDD has undertaken to appoint the Board to administer the DCS as soon as possible.

A timescale is being developed in consultation with the Jersey Appointments Commission.

3.2.4

A permanent Board should be funded in advance outside of failure periods by an administration fund collected from bank levies.

Rejected.

EDD considers that it would be unfair to levy banks without their prior consultation. EDD has undertaken to fund the first year's administrative costs of the Board and to undertake a consultation with regard to its long-term funding.

The results of the consultation will be fed into the annual review of the DCS.

3.2.5

There should be a permanent Board funded by the banks and more demonstrably independent of the States and industry practitioners. Its remit should include public awareness, monitoring of international standards in depositor protection and the administration of the scheme.

Rejected.

EDD has undertaken to appoint a permanent Board as soon as possible and has also agreed to the Scrutiny Panel's amendments that the States should make such appointments on the recommendation of the Minister. EDD will be considering the remit of the Board as part of the annual review process.

EDD will appoint a permanent Board and consider the remit of the Board as part of the annual review process.

3.2.6

A separate insolvency law for banks should be established.

Being considered separately.

The issue of a separate insolvency law for banks was raised in the recent IMF report and is being considered separately by the IMF strategy group chaired by the Chief Minister's Department.

n/a