Financial Services Compensation Scheme Claims Management: Reimbursement for Insured Depositors

1. Financial Services Compensation SchemeClaims Management: Reimbursement for Insured Depositors Kate Bartlett Director of Operations

2. Content of the Presentation • About the FSCS • Faster Payout reforms • The Single Customer View • The Change Process • FSCS experience of Faster Payout using SCV • Questions

3. About the FSCS

4. About the FSCS • Who we are: The FSCS is the UK's compensation fund of last resort for customers of authorised financial services firms. We may pay compensation if a firm is unable, or likely to be unable, to pay claims against it. This is usually because it has stopped trading or has been declared in default. • How we operate: We are independent of the government and the financial industry, and were set up under the Financial Services and Markets Act 2000, becoming operational on 1 December 2001 (although we still cover claims from before this date). We do not charge individual consumers for using our service. We have come to the aid of more than 4.5 million people since 2001 while paying out over £26bn in compensation. • What we protect: • Deposits • Insurance policies • Insurance broking • Investment business • Home Finance • How we’re funded: The FSCS is funded by the financial services industry. Every firm authorised by the UK regulators is obliged to pay an annual levy, which goes towards our running costs and the compensation payments we make.

5. Faster Payout reforms

6. September 2007 • The ‘Run on the Rock’ – Northern Rock • The Tripartite (HM Treasury, Bank of England and the FSA) published: • October 2007 • ‘Banking reform – protecting depositors: a discussion paper’ • January 2008 • ‘Financial stability and depositor protection: strengthening the framework’ • July 2008 • ‘Financial stability and depositor protection: further consultation’ • Autumn 2008 - Spring 2009 • Banking failures in the UK - autumn 2008 and spring 2009 • February2009 • Banking Act 2009 set up the Special Resolution Regime Background to Deposit Protection Reform - Key Events

7. September 2008 • Bradford and Bingley – FSCS funded transfer of 3.6m deposits to Abbey at a cost of £15.65billion. • October 2008 • Heritable – FSCS funded transfer of 22,344 deposits to ING at a cost of £457million and 340 accounts paid manually at a cost of £8.1million. • Kaupthing Singer and Friedlander (KS&F) – FSCS funded transfer of 157,000 accounts at a cost of £2.5billion and 6,822 accounts paid manually at a cost of £342million. • Icesave – 292,579 accounts paid directly at a cost of £4.41 billion (£1.4billion covered by FSCS). • November 2008 • London Scottish Bank – 8,291 accounts paid at a cost of £191 million. March 2009 • Dunfermline Building Society – approx 260,000 accounts transferred to Nationwide Building Society. The FSCS contribution will be net i.e. the costs of resolution are to be calculated only after the level of recoveries is known. FSCS Banking Default Experience

8. Reform: changes to make Faster Payout possible • All deposit firms must have a “Single Customer View” for eligible depositors holding protected deposits: • FSCS is entitled to rely on the data provided by deposit takers • Information required for SCV file is detailed in the regulator’s handbook – COMP 17 • Firms with more than 5,000 accounts must hold the SCV in an electronic format • SCV must be capable of being produced within 72 hours of a request • Responsibility for determining eligibility of each product and account held lies with the deposit taker. Eligibility of accounts should be checked on a routine (annually) basis. • Eligibility of depositors criteria is simplified – but there are still some exclusions. • Depositors to be reimbursed within 20 days in line with DGSD requirement but additional UK aspiration to pay within 7 days. • Payout is gross – no off-setting against credit balances, no negative balances are included. • Balances of all types of account are calculated at date of default. • Customers do not need to submit an application for compensation. • Assignment of customers’ rights to FSCS is automatic after payment. • Insolvency Practitioners must assist FSCS in the execution of its duty • Raise awareness of FSCS – reinforce consumer protection.

9. Single Customer View

10. Single Customer View (SCV) Definition • The SCV provides a single, consistent, view of an eligible claimant’s aggregate protected deposits with a deposit taker: • Eligible depositors are entitled to compensation up to the FSCS limit across all their accounts in the same authorised Deposit Taker. The FSCS therefore need to have access to information that gives them a single view of each customer. • The requirements for the data provided are set out in the regulator’s COMP handbook as follows: • 17.2.3.1: A firm must be able to provide to the FSCS a single customer view for each eligible member, except to the extent that the eligible person is the beneficiary of an account held on his behalf by another person or if the account is not active, within 72 hours of a request by the FSCS. • 17.2.4: A firm must ensure that each single customer view contains all the information set out in COMP 17.2.8 R. SCV requirements went live at midnight 31 December 2010

11. Verifying the SCV • All firms subject to SCV requirements were required to submit reports to the regulator (then FSA), by 31 January 2011. • All firms with an electronic SCV were required to submit a sample SCV file - 10,000 records or 10% of their total records, whichever is less - to the FSCS by 31 January 2011. • FSCS ran a verification exercise for the sample SCV files between January 2011 and 31 July 2011, working with the deposit takers to resolve any issues. • FSCS have since repeated the verification exercise, for Northern Ireland credit unions who gained protection from April 2012. • An SCV verification process for “Business as Usual” is ongoing. Cost to UK deposit takers of implementing the SCV is around £1billion

12. The Change Process

13. Stakeholder Engagement • We worked closely with our key stakeholders through the change process and responded to their concerns. Formal consultation was combined with workshops and pilot programmes. This helped us develop an effective working model and gained buy-in to the Faster Payout process.

14. Deposits – Faster Payout • Our Process Review identified some key requirements: • Flexibility to deal with defaults of any size, and to scale up and down quickly. • Significant investment in IT needed: • System designed and built to handle large amounts of data - up to 10 million customers • Facility for secure transfers of data • Ability to process large amounts of data within a 24 hour period • Capacity to mobilise variable levels of resource at short notice, so an external outsourcer model was adopted for: • claim processing • call handling • payment provision • data processing • A range of payment options needed to be available to suit different types of customer. • Sufficient liquid funds needed to be in place to allow a large payout in days. 14

15. Technology Used To provide FSCS with the Faster Payout capability a new bespoke solution was developed in 2010 through a combination of contractor & FSCS resources.

16. Key Components • Working with Experian, our Strategic Partner for Verification to ensure that SCV files are fit for purpose. This includes the generation of a Verified SCV File and Payout Files • Once the SCV File has been received by FSCS all customers are subject to Sanctions Screening • A reconciliation process between SSCV, VSCV & Payment Files to ensure that payment volumes and values, and customer details are consistent across all files • Payout volumes/values are approved, Potentially Sanctioned Individuals are removed and files are sent to Payment Providers • Customer, Address, Claim & Payment information is loaded into Siebel to provide a master view of all claims and payments made

17. Payout Mechanisms • There are currently two payment methods available for the payout of claims – Cheque and Cash Over The Counter Cheque Cash Over the Counter Internal Printing External Cheques External Cheques Post Office • Payments are automatically assigned a particular payment channel, depending upon factors such as value of the claim. The assignment of payments to a particular channel is undertaken by Experian, in the form of payout files, at the same time as the Verified SCV file is produced • The Cash Over the Counter option has been used on most defaults since it was introduced in January 2011. The cash limit has been set at £1,000 per payment and is the quickest way of reimbursing customers with low value claims • Work continues on possible alternative payout options

18. Our experience of Faster Payout

19. Progress to Date • We have introduced speed and accuracy to payouts and increased customer confidence. • Although there is an increased element of risk inherent in the new faster process, so far there has been no evidence of inaccuracy by deposit takers. • Faster Payout process has now been used successfully for the 23 failed deposit firms in the UK since 1 January 2011. • For each default most of the customers have been paid within 7 days of the failure and all within 20 days. • Over 80% of those customers have been paid by the “straight-through” route. • Only 4 of those failed firms had opted-in to the electronic SCV process, so: • - additional work was needed on the data of most firms before payout • - most firms were not familiar with the secure data transmission process. • We are continuously improving the process by: • - Reviewing our results and identifying potential opportunities • - Ongoing projects in combination with the Regulator • - Working with the Tripartite to plan for major and combined failure scenarios • Each default payout has used a combination of cheque and cash over the counter letter payments.

20. Our SCV Pay-out experience so far

21. Key Success Factors • Engage with regulators, industry trade bodies and solution providers early on through workshops and seminars to clarify requirements and technical implementation • Be as prescriptive as you can in your SCV requirements of deposit takers – and avoid allowing opt-outs • Offer opportunities for early SCV submissions and testing • FSCS ran a Pilot programme with deposit takers • Establish capacity and scalability requirements at the start of the project, before solution design and build commences • Specify and mandate all technical requirements, such as file type & format • Think about the ongoing application and hardware support model • Ensure sufficient technical expertise – new systems are not just about policy • Don’t under-estimate testing – it needs to be integrated across solutions • Be prepared for deposit takers’ transmission and security concerns • Beware of local legislative restrictions • Ensure primary ownership of Intellectual Property (IP), even if the solution is outsourced • The need for continued oversight and testing

22. Questions

23. Appendices • Single Customer View definition • Faster Payout Process overview

24. Faster Payout Rules and Single Customer View Tables • Single Customer View • A firm must be able to provide a SCV to the FSCS for each eligible claimant within 72 hours of a request.A firm must ensure that each SCV contains all information included in the SCV data tables set out below, and that the additonal Faster Payout rules have been applied. If a claimant holds more than one account the ‘Details of account(s)’ table must be replicated for each acount held. Each table must be linked by a unique customer identifier. • Compensation amount • The SCV file must contain aggregrated balances for eligible customers, up to the limit of £85,000 (equivalent to €100,000). • Eligibility flags • A firm must be able to identify which accounts are held by eligible claimants and which accounts are held on behalf of beneficiaries who are, or who may be, eligible claimants. Firms must check if customers are still eligible for compensation at least annually. • Calculating aggregrate balance, including term accounts at default • If a protected deposit is not due and payable on or before the default date, the compensation amount must include the principle sum on the basis that it is due and payable on that date; interest accrued to that date; and unaccrued interest in respect of the period to that date. • Unique customer identifier (UCI) • Every customer must be allocated a UCI number. 24

25. Deposits Process - Overview Day Three Day Four Day zero SFTP Verification 2. DT sends SSCV file to Experian 24 hours VSCV file Experian Bank 5. Pull files from Experian SFTP to DataFlux Secured File System PF1 RFFI 3. Pull file from Experian SFTP to DataFlux Secured File System (i14) PF2 1. Deposit Taker defaults SSCV file 8a. Load the VSCV file into Siebel (i1) Siebel VSCV PF1 PF2 EIM SA (VSCV) SSCV DB • 6. Perform the control checks • - SSCV to VSCV • - SSCV to PFs • - VSCV to SSCV 4. Run Sanctions Screening. (i15) SFTP Payout Day Four Payment Providers SSCV Payout File FSCS Sanctions Engine 8. Remove PSIs / Exceptions from Payout Files 8b. Drop Payment Files into the DataFlux SFTP location for payment providers to pull the files from this secured location (Manual) - PSI 7. Controls Email sent and Approval Document dropped (Secure Folder) • DataFlux Secured File System • - Very restrictive access to assigned team only controlled by windows security • Sized for 200GB of space for file storage . • Experian SFTP • Transfer of data occurs over encrypted traffic by 1024 bit encryption • All files are encrypted by PGP 2048 encryption. The decryption key is held at FSCS SFTP server. • - The decrypted file is only stored on the data flux secured file system