Written by Harrison Folland and Chris Walker
On 14 April, the FCA and PRA published a joint letter highlighting the risks associated with the increasing volume of deposits being accepted by banks and building societies ("firms") through deposit aggregators.
As set out in the letter, deposit aggregators are "providers of intermediary services who sit between savings account providers and retail customers".
Depending on the business model used by the intermediary, this may include keeping customers informed of available savings rates within the market and offering a service which enables customers to spread deposits around different firms in order to take advantage of these rates and utilise "maximum FSCS protection for high balances"; some deposit aggregators may enable access to "preferential interest rates" or a "platform to view and manage all their accounts in one place".
Deposit aggregator business models can include:
- where deposit aggregator customers also become direct customers of the relevant firm ("direct models"); or
- where the deposit aggregator holds the deposit accounts on trust for their customers who therefore do not become the relevant firm’s direct customers ("trust models").
Deposit aggregators may or may not be FCA authorised depending on the business model used by the relevant entity.
Relevant risks and recommendations
The letter notes the following (non-exhaustive) key considerations:
1. Financial promotions and communicating with customers: It is the responsibility of firms to ensure compliance with the relevant rules on financial promotions, particularly BCOBS 2. Firms are expected by the regulators to be comfortable that any customer-facing messages are fair, clear and not misleading.
The letter highlights the importance of potential customer unfamiliarity with deposit aggregator services (such as the difference between direct and trust models) - as such, this includes any claims made regarding FSCS protections, including the length of time that a pay-out may take.
The letter also recommends that where information is provided on FSCS protection on a firm's website, it "may be preferable for messages to directly link to the FSCS website, rather than attempting to summarise or explain the FSCS process. [The regulators] also suggest that any references to timelines should mirror FSCS’ communications on pay-out timelines (that is within 7 days or within 3 months)."
2. Data management to "permit orderly failure": The letter also reminds firms that they should be prepared for the swift implementation of recovery and resolution measures in the event of financial stress. The letter notes that firms should have contingency plans in place and must plan ahead with deposit aggregators to ensure swift payouts for customers.
3. Liquidity risk management: The letter highlights the risk of potential concentrated liquidity risk, particularly for small and medium-sized firms; deposits from aggregators could represent a significant portion of these firms’ balance sheets, given the single commercial relationship between the deposit aggregator and the deposit taker. The letter states that firms should factor this consideration into their liquidity risk management practices and funding needs.
4. Senior management oversight: Firms are reminded of the need for their senior management to have oversight over the firm's relationships with deposit aggregators. The letter encourages the discussion of the letter with the appropriate governing body within the firm to determine whether any further action is necessary to ensure that the firm has "adequate arrangements" in place.
In the future, the regulators may wish to discuss these matters with the firm and would like firms to be prepared to explain "any actions taken in response to [the letter]".
The letter also reminds firms that they are required to disclose to the regulators "any material issues or concerns it identifies with its Deposit Aggregator arrangements which are notifiable under Principle 11 or SUP 15.3.1R for the FCA, or PRA Fundamental Rule 7 and the Notifications Part of PRA Rulebook for the PRA".
The letter concludes with the regulators' expectation that firms should:
- hold discussions at the appropriate level within the firm and considering addressing any of these aspects which are directly relevant to the firm and its business model;
- consider whether their deposit book is reliant on business sourced via deposit aggregators and whether any action is required as a result;
- consider any measures to ensure faster repayment by the FSCS in the event that this is required - the letter also welcomes views on this matter from firms and/or relevant trade bodies;
- look at widening the information provided to the FSCS, PRA, and FCA to include information about the deposit aggregators used by the firm in question and the level of deposits coming via them, as well as whether the firm uses a "direct’" or "trust" model which will support swift pay-out; and
- consider the level of transparency regulated firms have in respect of the beneficial owners of deposits sourced via Deposit Aggregators.
Deposit Aggregation is a relatively new and growing part of the industry and we recognise the benefits the services bring to consumers. We do not want to stifle competition or innovation, but we do want regulated firms to be aware of any potential risks as the industry develops. We are keen to work with firms to ensure that regulatory objectives are not compromised by the adoption of new business models.