UK regulators highlight deposit aggregator risks for regulated firms

The ‘Dear CEO’ letter (3 page / 121KB PDF) was prompted by risks in relation to the increasing volumes of deposits placed with banks and building societies through deposit aggregators, which may not be regulated businesses. Deposit aggregators are intermediaries who may provide various services to retail customers, including updating them on available savings rates enabling them to move deposits around banks and building societies to take advantage of changing saving rates and maximising Financial Services Compensation Scheme (FSCS) protection for high balances by splitting deposits across a number of firms.

Financial services regulation expert Andrew Barber of Pinsent Masons, the law firm behind Out-Law, said where a deposit aggregator had structured its activities so it did not carry on regulated activities or payment services it was only by recourse to the regulated entities accepting the deposits that the regulators can seek to ensure customers using these services understand their regulatory protection and receive clear and fair materials on the deposits they are making.

“Firms must ensure they mitigate relevant risks and take the specific ‘next steps’ the regulators’ letter sets out,” Barber said.

The regulators acknowledged the upside and convenience deposit aggregators offer to consumers by unlocking preferential deposit rates and the potential benefit of FSCS protection where a consumer splits their deposits across a number of firms. However, they said regulated firms using aggregator services should consider and mitigate potential consumer harms from a range of resulting risks.

“The risks identified stem from misleading promotions, resolution and liquidity. Liquidity risks arise notably where deposits made using aggregators at small and medium sized banks and building societies comprise a significant proportion of such firms’ balance sheets and so, despite the diversified client base of the underlying depositors, constitute a concentration risk,” Barber said.

“In relation to the underlying customers the letter also tells firms as one of the expected steps to take, to consider the degree of transparency they have about the beneficial ownership of deposits made via deposit aggregators. So firms should consider how their know-your-client and anti-money laundering checks apply to these monies,” Barber said.

The letter emphasised the regulators’ expectations about proper senior management oversight of deposit aggregator relationships generally. Regulated firms using deposit aggregator services must be sure they have proper oversight of such aggregators’ activities on their behalf to identify and address the areas of regulatory risk that result from their business.

Firms should also conduct an “appropriate degree” of due diligence on the deposit aggregator firms they have relationships with, and must remember both regulators’ expectations about disclosure obligations more generally.

The regulators also identified a key risk relating to compliance with the rules on financial promotion, due to the marketing activity undertaken by deposit aggregators.

“The main concern is that consumers may not always understand properly from customer communications how FSCS protection works. Here the risks centre on the £85,000 protected balance threshold and how it applies, particularly where a customer has a number of deposits at a firm that in aggregate breach that threshold, and how different deposit aggregator models impact the timing of FSCS pay-outs if a bank or building society fails,” Barber said.

“Banks and building societies must keep in mind that where marketing communications of unregulated deposit aggregators acting as their agents are promotional in nature, as they are the regulated principal the onus remains with them to ensure such communications comply with the FCA’s financial promotion rules. Here the regulators’ expectation that regulated firms do proper due diligence will be relevant. Firms should also be aware of the FCA’s particular focus currently on promotions, not least as it has recently begun publishing its quarterly data on withdrawn and amended promotions it has reviewed,” Barber said.

The regulators said firms should discuss the issues in the letter internally and address any aspects directly relevant to the firm or its business model, as well as considering the extent to which its deposit book is reliant on business sourced through deposit aggregators.

Banks and building societies should also consider widening information provided to regulators and the FSCS to include information about the deposit aggregators used by their firm, the level of deposits from them, and the model the aggregators use.