EBA observes discrepancies in relation to the protection of client funds by deposit guarantee schemes and makes recommendations to the EU Commission

• The EBA analysed current approaches to the protection of client funds and observed different approaches across the EU, which are leading to an undesirable divergence in the way clients’ deposits are protected.
• The Opinion recommends to the European Commission to clarify the DGSD to ensure that client funds deposited with credit institutions are protected by the relevant deposit guarantee scheme.
• The proposed recommendation would bring clarity, harmonised treatment, and enhanced consumer protection across the EU.

The European Banking Authority (EBA) published today an Opinion on the treatment of client funds under DGSD, where it assessed the current approaches to the protection of funds deposited with credit institutions on behalf of clients by entities that are themselves excluded from DGS protection. Based on its assessment, the EBA included some recommendations to the EU Commission, which aim at informing its ongoing review of the DGDS.

More specifically, the EBA assessed the treatment of client funds placed with banks by payment institutions, e-money institutions, investment firms, other banks, and other types of financial institutions. The EBA observed that there are discrepancies in relation to the protection of client funds by DGSs across the EU, and also within Member States, depending on what sort of entity deposits them on behalf of its clients.

Thus, the Opinion recommends to the Commission to clarify the DGSD to ensure that funds deposited on behalf of clients are uniformly protected across the EU. Such a clarification will ensure clarity, harmonised treatment of client funds, and in instances when they are not covered, enhanced consumer protection.

The Opinion also recommends how to avoid a risk of contagion spreading from a failed bank to entities which placed client funds with that bank, and to ensure that credit institutions contribute to the DGS funds based on the amounts of protected client funds they hold. 

It should be noted that the Opinion does not concern the much more prevalent cases, when depositors place their funds directly with a bank, including instances when financial institutions place their own funds with a bank.

Legal basis and background

Article 19(6) DGSD requires the EBA to support the EU Commission in its development of a report on the progress towards the implementation of the DGSD. This Opinion builds on the EBA’s existing publications in fulfilment of the mandates above, which are the three EBA Opinions on the implementation of the DGSD, published between August 2019 and January 2020 (available here).

On 2 February 2021, the European Commission requested the EBA to provide technical advice on issues related to the treatment of client funds placed with credit institutions by other credit institutions, payments institutions, e-money institutions, investment firms, and other financial technology companies. The COM requested the EBA to provide the final report by 31 October 2021, to inform the COM’s proposals for a revised DGSD (available here).