The Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) in their joint ‘Dear CEO letter’ on 14 April 2021, highlight the risks associated with deposits that are placed with banks and building societies via deposit aggregators. Charlotte Gregory and Sallyanne Caswell discuss.
Deposit aggregators, also known as savings platforms, are businesses that allow consumers to spread their money across multiple accounts with different banks. This enables customers to move money according to changing saving rates, thus ensuring maximised savings. Deposit aggregators are regulated in accordance with the Payment Services Regulations 2017, which provides limited permissions for certain activities (such as payment services and account information provision). Whilst some regulatory rules will apply to those businesses, the scope is narrower than that of fully authorised banks and building societies (“firms”).
Given the convenience and increased choice offered by deposit aggregators, it is no surprise that their use has gained significant traction in recent years. However, as not all activities carried out by deposit aggregators are regulated, they can pose risks to banks, building societies, and consumers who could struggle to understand the consequences, as well as the benefits of utilising these platforms.
The key issues outlined by the FCA and PRA are summarised below:
Customer awareness of how deposit aggregators work was a key concern. Customers may be unaware of the two models being used by deposit aggregators – and the implications for each. The ‘direct model’ operates where aggregators introduce customers to a bank or building society and customers become direct customers of the firm. The ‘trust model’ involves the deposit aggregator holding the accounts on trust for their customers. Depending on the model, customers may be ineligible for payments under the Financial Services Compensation Scheme (FSCS) or may unknowingly breach the £85,000 deposit threshold for protection. How products are promoted by deposit aggregated therefore needs to be carefully considered by firms, who will be ultimately responsible for the financial promotion of its products.
Other risks highlighted by the letter related to liquidity and resolution. For example, deposits from a deposit aggregator may represent a significant portion of a firm’s balance sheet and therefore present a concentrated liquidity risk.
In addition, firms should be aware of their obligations in terms of resolution. Given that deposit aggregation is a relatively new concept, firms should plan ahead to ensure eligible claimant criteria are met and client-specific information is available to ensure a swift pay-out
A key take-home is the need for heightened due diligence when forming relationships with deposit aggregators. In particular, a firm’s senior management should ensure appropriate oversight with deposit aggregators and consider whether any further steps need to be taken by the firm to mitigate the risks outlined above.
Please click here for a review of the FCA’s latest Dear CEO letter to e-money institutions.
If you are an authorised firm and would like more information on how to ensure the issues in the ‘Dear CEO letter’ are embedded within your business, please contact us.