This Is Guernsey

By Tom Edwards

CONSULTATION with the finance industry is due to start in the summer about a compensation scheme for islanders if their bank went bust.

At present there are no deposit-protection arrangements in Guernsey, meaning that savers would lose all their money in such an event. Guernsey Financial Services Commission director-general Peter Neville (pictured) said that in the past, local bankers had not been keen on the idea.

‘We are considering what recommendations we should make on the setting up of a deposit protection scheme in Guernsey.  In the past local bankers have been unenthusiastic, mainly because they did not want to bear the funding costs of a scheme which would inevitably fall on them.’

Compensation schemes have been thrust into the limelight recently because of the credit crunch.

In the UK, the Financial Services Compensation Scheme is underwritten by the industry and pays up to £35,000 per person.

The FSCS is an independent fund, set up under The Financial Services & Markets Act 2000 as the UK’s compensation fund of last resort for customers of financial services firms.

The limit for stockmarket investments is £48,000 per person, which also covers losses resulting from mis-selling or theft by employees.

Mr Neville said it was too early to say what kind of protection any future compensation scheme might offer Guernsey savers.

‘The establishment of a deposit-protection scheme is one of a number of matters that we are considering as a result of the Northern Rock affair and the wider market turmoil.

‘Our view is that we should address at least the majority of these as part of one exercise, which is what we are doing.

‘Work on drawing up proposals has begun and we expect to be ready to consult the banking sector in the summer.

‘It would therefore be premature to comment on how a deposit protection scheme might work.’

The current law governing the regulation and supervision of local banks is The Banking Supervision (Bailiwick of Guernsey) Law, 1994.

It gives the GFSC the power to set out the technical criteria for banks that provides a framework for them to be run prudently.

The regulation is designed to ensure that banks are operated with adequate capital and liquidity, together with the appropriate systems and controls in place to manage the risks in the particular business lines in which they are engaged.

Mr Neville said the law could not stop banks going bust.

‘In the event of a failure, the company-administration law would be helpful in protecting the bank from its creditors so that it could have a breathing space to sort matters out.

‘Among the alternatives might be the sale of all or part of the bank and that might avoid the need for compensation because depositors would not have lost any money.’

In the light of the political and legislative considerations, it would also be wrong to speculate when there might be a scheme in Guernsey, said Mr Neville.

‘The current banking supervision law gives the States of Guernsey the power to establish compensation schemes but it would require an ordinance to be introduced to prescribe the details of any scheme and to bring it into force.’