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Barclays/ING Direct banking business transfer

10 March 2013

The transfer of the UK banking business from ING Direct to Barclays, announced last year, was approved on 20 February by the High Court under Part VII Financial Services and Markets Act 2000 and was completed on 6 March. So, if you had an ING Direct deposit, you now have no claim on them, and no cover under the Dutch deposit guarantee scheme. Your risk is Barclays, and your recourse only to the UK’s Financial Services Compensation Scheme with its single limit covering all your exposure to Barclays.

When the scheme documents were originally circulated last year, I was interested to see the arrangements proposed for “overlapping” depositors, i.e. those with deposits in both banks in excess of the deposit guarantee limits. The Scheme allowed a “free walk” so that fixed term deposits could (apparently) be broken without penalty to allow customers to avoid increasing their exposure on Barclays and to move the money to another FSCS guaranteed bank. This is the fair and reasonable approach developed for previous transfers.

Unfortunately one detail was absent. Whether because of interest rate reductions, or simply because we have a positive yield curve, withdrawal at principal plus accrued interest is unfair. To take a simple illustrative example, where a depositor already has more than the FSCS limit with Barclays and has an ING deposit of £200,000 at 5% with one year left to run, he is allowed to move all £200,000 to a third bank; but if he reinvests with a third bank at the best market rate of say 1% for one year he will lose £8000. Of course Barclays makes an equal and opposite profit (it is able to take replacement deposits for 1 year at 1% rather than paying out the old interest), so the equitable arrangement is to add to the scheme provisions for compensating breakage costs. This after all was precisely what was done in the last reported case, Re Alliance & Leicester in 2010. I lodged my objection in December suggesting that this amendment be made.

An amendment was put before the Court during the hearing, the principles of which had been agreed with the FSA. Indeed the FSA chose not to appear, from which the court inferred that they were entirely happy with the scheme, and the judge sanctioned it, attaching considerable weight to the FSA’s supervision and disregarding my objection to the amendment.

The detailed compensation arrangements sanctioned by the court are as follows: breakage compensation will apply only to the first £85,000, so that if, in our example, the depositor withdrew the remaining £115,000 he would not be compensated. In other words under the very circumstances envisaged by the original scheme, the right to withdraw all £200,000 would remain, but if exercised in full the depositor would lose £4600. And Barclays would be enriched by that amount.

The logic of this £85,000 limit was apparently that Barclays only felt it necessary to offer full compensation in respect of amounts for which depositors had had the benefit of the Dutch deposit guarantee scheme. As a minor detail, the DDG limit of €100,000, which was just below £85,000 at the time of the hearing, now equates to just over £86,000. Two days after the court hearing, Moody’s downgraded the UK sovereign rating while maintaining The Netherlands’s AAA rating. Some people felt that ING Direct enjoyed the implicit support of the Dutch government, but the court felt that it was fair compulsorily to novate uninsured claims on ING Direct to Barclays irrespective of the level of existing exposure.

Details of the compensation scheme may be quite hard to follow (its application to multiple deposits, joint accounts, etc. multiply the complexities). Nevertheless the detail is not to be put in writing but is to be communicated to customers who enquire by telephone.

The FSA have confirmed to me that they have approved these arrangements.

The Treasury believe that “those who place deposits above [£85,000] must be responsible for monitoring and managing the risk associated with their investments.” But it seems harsh that those who try do so, and who are already exposed to Barclays to the maximum amount we consider prudent, are now forced either to incur a possibly substantial penalty (that unjustly enriches Barclays) or to see a potential doubling of our one-obligor exposure.

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