Isle of Man Depositors’ Compensation Scheme (“DCS”) (1)
The Isle of Man Treasury and Isle of Man Financial Services Authority (“IOMFSA”) has published this joint guidance to assist persons who wish to gain an overview of how it is anticipated the 2010 DCS Regulations will operate if the DCS is activated.
The guidance does not constitute legal advice nor is it a ruling on the law. Reference to the precise wording of the DCS is always recommended and if you are in doubt as to the meaning or interpretation of the DCS then you should take legal advice.
A Guide for Consumers Questions...
The DCS is a fund of last resort for customers of Isle of Man offices of Class 1(1) licensed deposit takers (“covered banks”) in the Isle of Man, but it does NOT protect customers of Class 1(2) or Class 1(3) deposit takers. It recompenses some depositors if such a covered bank is unable, or likely to be unable, to pay claims against it, and as a result is declared by the Treasury to be in default. The DCS is not designed to act as an unlimited provider of funds in the event of a systemic crisis or to bail out global covered banks’ Isle of Man operations. It is limited in what it can and cannot do; the DCS fund is not a standing fund but is made up as required by levies from the participating covered banks and money provided by the Treasury.
When a covered bank is declared in default, it may be placed into liquidation and you (the depositor) will not be able to withdraw your funds in accordance with the contractual terms of your account. In general terms, the DCS provides protection for those individuals with lower value deposits / savings (up to £50,000 in total). It may also deliver a more timely pay out of up to the first £50,000 for depositors (who are individuals) with higher amounts held with the covered bank than would be available in the shorter term from the liquidation of the covered bank’s assets, depending on the size of the covered bank that failed.
A lower level of protection is provided (up to £20,000 in total) for many other types of depositor such as companies, trusts and charities; it should however be noted that monies held in client accounts are not entitled to protection.
The DCS is established under the Financial Services Act 2008, and the most current version of the DCS (the Depositors’ Compensation Scheme Regulations 2010, as amended) came into force on 23 October 2010. The Keeling version of the regulations is shown here.
The manager of the DCS is the Isle of Man Treasury, or a person who may be appointed by the Isle of Man Treasury. The manager may also appoint an agent to administer the DCS on its behalf when a fund is created to provide compensation to customers of a failed covered bank.
The DCS protects certain deposits (called eligible protected deposits with Isle of Man offices of covered banks licensed by the Isle of Man Financial Services Authority (“IOMFSA"). The section on eligibility provides more information on the types of depositor that receive protection. All covered banks that accept deposits from individuals and companies are members of the DCS and are called participants. A list of participants is available on the website of the IOMFSA. Where this guide refers to a covered bank in the context of the DCS you may assume that the covered bank is a participant.
As a fund of last resort there are limits to what the DCS can do and the amount of compensation it can pay out. The funding of the DCS is described in Funding of the DCS. This means that in the event of a very large covered bank failing, or in a systemic crisis, the DCS is unlikely to be in a position to provide the full amount of compensation due to you in a timely manner.
The actual level of compensation you receive will depend on the basis of the claim that you make, in the event you have an eligible protected deposit with a covered bank that has been declared in default. Compensation limits are per depositor per covered bank. The levels of compensation are described below.
The maximum cover is £50,000 per person per covered bank, for claims against covered banks declared in default from 23 October 2010. If you hold less than £50,000 on deposit you are protected to the amount you have on deposit. Explanations of how the limits and compensation work are shown below for different scenarios. Further information is also provided in the section on eligibility.
The DCS will provide up to a maximum of £50,000 in respect of the sum of all eligible protected deposits you hold with the covered bank that has defaulted. If you have less than £50,000 with the covered bank the DCS will provide compensation up to the amount you have with the covered bank.
The level of compensation may however be reduced by any amounts you owe the covered bank, for example through a personal loan or mortgage, subject to specific arrangements between you, the covered bank and the DCS. For example, if you have total deposits of £80,000, also a mortgage of £50,000, your mortgage could be netted off against your deposits, to leave a net total of £30,000. You would therefore be entitled to claim £30,000 from the DCS.
The DCS provides compensation of up to a maximum of £50,000 per person per covered bank. If you have more than one account with a covered bank then deposits in all of those accounts will be covered but only up to a total maximum of £50,000.
If two or more individuals share a joint account in a covered bank, they are each entitled to up to £50,000 in compensation. For example, if you have a joint account with one other individual containing £80,000, each of you can claim compensation of ½ of £80,000 i.e. £40,000.
If in the previous example you also had £25,000 in a sole account, the total balances apportioned to you under the DCS would be your share of the joint account (i.e. £40,000), plus the £25,000 of your own, giving a total claim on the covered bank of £65,000. As this exceeds the maximum covered by the DCS, you would be entitled to claim from the DCS the maximum level of compensation for an individual namely £50,000.
This is treated as if each child is regarded as the holder of a separate deposit, of an amount equal to the total deposit divided by the number of children for whom it is held. The limit of compensation for each of the children is up to £50,000 as they are themselves individuals.
For example, if you had £60,000 in an account titled “Mr A Smith & Mrs B Smith re Miss C Smith & Master D Smith” (C Smith and D Smith are your children) then each of your children would be entitled to claim £30,000 each. Any accounts you hold in your own name with the same covered bank would be treated separately for calculating your own compensation limits.
If you are an individual and have more than £50,000 on deposit with a covered bank, the DCS will still cover the first £50,000 of your claim. All depositors who claim on the DCS assign their rights to all of their deposits to the DCS and the DCS “stands in their shoes” as a creditor of the failed covered bank (see claims process below). This means that the DCS will receive back any future amounts that the liquidator of a failed covered bank distributes.
When the amount the liquidator has distributed to the DCS exceeds £50,000 in relation to your specific claim, the DCS passes on surplus amounts to you. In this situation you receive back from the failed covered bank the same amount you would have received in the liquidation, although the DCS will normally provide you with a quicker payment of the first £50,000 (albeit please note the section above dealing with “limits to compensation (protection) available”).
The table below gives examples of how it is anticipated the DCS would interact with the liquidation proceeds of a failed covered bank.
|With 40% final recovery rate (low / medium recovery)||With 80% final recovery (high recovery)|
|Amount of Claim / Net Deposit||Comp paid by DCS to you||Recovery from liquidator paid to DCS (40% of the deposit amount)||Amount retained by DCS||Surplus paid to you||Net Cost to DCS||Comp paid by DCS to you||Recovery from liquidator paid to DCS (80% of the deposit amount)||Amount retained by DCS||Surplus paid to you||Net Cost to DCS|
|Up to compensation limit held on deposit (individuals)|
|Above maximum compensation limit (individuals)|
The recovery rate specified (40% or 80%) means the amount of ‘cash’ the liquidator recovers for distribution to creditors of the bank compared to the total amount owed to creditors.
In this case, the deposits will not be in your name as an individual and are treated as being separate deposits from any you may hold in your own name. Such deposits will normally be protected to up to a global sum of £20,000.
If you have a deposit in your own name, and also, for example, you are the ultimate beneficiary of a SIPP deposit with the same covered bank, these are treated separately for deposit limit purposes, and therefore you would be entitled to up to £50,000 for deposits held in your own name in addition to a potential £20,000 maximum available to the trustees of the SIPP (subject to the trustees’ entitlement to claim).
In relation to this type of product you are not usually the legal owner of the bond product and therefore you would not be entitled to any direct compensation payment.
The maximum cover is £20,000 per entity per covered bank. Entities, for this purpose, include companies, trusts, nominees, charities and partnerships. Trusts include, for example, SIPPs. Deposits constituting client accounts, which are described as such, are however not entitled to compensation.
If the entity has less than £20,000 on deposit it is protected to 100% of the amount it has on deposit. Certain entities are excluded from entitlement to compensation. Explanations of how the limits and compensation work are shown below for different scenarios. Further information is also provided in the section on eligibility.
The DCS will provide up to a maximum of £20,000 in respect of the sum of all eligible protected deposits the entity holds directly with the covered bank that has defaulted. If the entity has less than £20,000 with the covered bank the DCS will provide compensation for up to the full deposit amount.
The level of compensation may however be reduced by any amounts the entity owes the bank, subject to specific arrangements between it, the covered bank and the DCS. For example, if the entity has total deposits of £50,000, also a loan from the same covered bank of £30,000, the loan could be netted off against the deposits, to leave a net total of £20,000. The entity would therefore be entitled to claim £20,000 from the DCS.
The DCS provides compensation of up to a maximum of £20,000 per entity per covered bank. If the entity has more than one account with a covered bank then deposits in all of those accounts will be covered but only up to a total maximum of £20,000.
There are a number of exceptions from entitlement to compensation, which means that certain depositors will not receive any compensation from the DCS if the covered bank with whom their monies are held is in default. These depositors may, however, still be eligible for distributions from the liquidator as creditors of the failed covered bank.
Depositors not entitled to compensation are:-
- Deposits constituting client accounts;
- A person (business) licensed by the IOMFSA;
- Other banks;
- Any person who in the opinion of the manager of the DCS has any responsibility for, or may have profited directly or indirectly from, the circumstances giving rise to the covered bank’s default;
- Any person who was (or was exercising the functions of) a director or controller (or a person connected to a director or controller) of the failed covered bank
- Companies who were in common ownership with the failed covered bank (for example, a parent company, subsidiary or fellow subsidiary)
Cash held with the covered bank that is used as security for a loan from the bank.
If the deposit (or portion thereof) you hold is used for the purpose of securing monies borrowed from (loaned by) the failed covered bank, that deposit is also not eligible for compensation. The manager of the DCS may also take into account other borrowings you have from the covered bank, and whether any rights of set off exist, in determining the amount of compensation that you may be eligible for.
No. The DCS does not differentiate according to the residency or nationality of an individual or an entity.
Yes. The DCS provides compensation for all eligible protected deposits irrespective of the currency in which they are held. For the purpose of calculation of the amount of compensation that may be payable the foreign currency deposit would be converted to sterling at the rate prevailing on the date of default of the covered bank.
Yes. The DCS covers current accounts, notice accounts and fixed term accounts irrespective of the final maturity, including actual accrued interest to the date of default. The DCS does not however cover any interest, bonus or similar payment due after the date of default.
When a covered bank has been declared in default the DCS is activated. In order to obtain compensation from the DCS a depositor has to make a claim to the DCS within 6 months. The manager of the DCS, in conjunction with a receiver / liquidator will determine whether the depositor has entitlement to compensation, checking the information provided by the depositor against the covered bank’s records. The claims process is free to the depositors.
In order to be able to accept a claim from you (the depositor) the DCS will require you to assign all your rights to it in respect of the money that the covered bank owes to you. This means that the DCS becomes the creditor of the failed covered bank (rather than you). This applies in respect of the whole of your deposit(s) even if the total of your deposits exceeds the limit of compensation.
The DCS will pay your claim from the funding it receives (see Funding of the DCS).
Over a period of time the liquidator of the covered bank will normally recover assets and pay the value received to creditors. In your case, the liquidator’s payment will be made to the DCS.
If you had less on deposit than the compensation limit, once you have received your compensation (i.e. your deposit amount in full), any money the DCS receives from the liquidator will be retained in the fund created. It can then use these monies to repay the other covered banks and Isle of Man Treasury that provided the funding for the DCS. As the liquidator of a covered bank will not normally recover 100% of assets, the result is a net cost to the DCS (and therefore the providers of funding).
If you had more on deposit than the compensation limit, and have received the full amount of compensation due to you (£50,000 or £20,000), you may receive further amounts via the DCS depending on the proportion of the failed covered bank’s assets that the liquidator recovers. This arises when the amount the liquidator has distributed to the DCS exceeds the compensation paid in relation to your specific claim; the DCS passes on surplus amounts to you. In this situation you receive back from (and via) the DCS the same amount as you would have as a direct creditor in the covered bank liquidation. The DCS may, however, provide you with a more immediate payment of the first £50,000 / £20,000. The table below demonstrates how this works in relation to an individual based on a 60% recovery rate.
|With 60% final recovery rate (medium recovery)|
|Amount of Claim / Net Deposit||Comp paid by DCS to youl||Recovery from liquidator paid to DCS (60% of the deposit amount)||Amount retained by DCS (note 1)||Surplus paid to you|
Note 1: the amounts retained by the DCS are ultimately repaid to the providers of funding of the DCS.
There is no time limit for the payment of compensation. The amount of compensation paid and the timing of compensation payments will depend upon the size of the covered bank which fails (and its asset quality and profile) and the amount of funding contributed. The payment period will also vary according to whether, and to what extent, the DCS borrows money, the timing of the contribution from the Isle of Man Treasury and the timing of levies from participants (see Funding of the DCS below).
The DCS does however aim to make at least an interim payment to eligible depositors after 28 days from the date of the default of a covered bank, subject to the depositor complying with the requirements for admission into the DCS. Such an interim payment may be less than the full compensation which would be due to the depositor.
The DCS is funded, if and when required, by contributions from covered banks in the Isle of Man that are participants in the DCS (to a net amount outstanding of £100 million in any consecutive 10 year period and £200m for all defaults) and money from the Isle of Man Treasury (to a net amount outstanding of £100 million in any consecutive 10 year period). Therefore the amount contributed by banks and the Isle of Man Treasury together is limited to £200 million outstanding at any one time, no matter how many covered bank failures (defaults) may take place. The Manager of the DCS may (but does not have to, or may not be able to) borrow money.
This means that in the event of a very large covered bank failing, or in a systemic crisis, the DCS is unlikely to be in a position to provide the full amount of compensation due to you in a timely manner.