On 28 October 2021, the European Banking Authority (EBA) published an opinion on the treatment of client funds under the deposit guarantee schemes directive (DGSD), where it assessed the current approaches to the protection of funds deposited with credit institutions on behalf of clients by entities that are themselves excluded from deposit guarantee schemes (DGSs) protection.

Based on its assessment, the EBA observed that there are discrepancies in relation to the protection of client funds by DGSs across the EU, and also within Member States, depending on what type of entity deposits them on behalf of its clients, and included some recommendations to the EU Commission, which aim at informing its ongoing review of the DGDS.

In particular, EBA evaluated the treatment of client funds placed with banks by payment institutions, e-money institutions, investment firms, other banks, and other types of financial institutions, which are excluded from DGSs under Article 5(1) of the DGSD. Whereas in respect of deposits placed in credit institutions by other credit institutions, the DGSD explicitly states that the exclusion from DGS coverage only applies to deposits that credit institutions “make on their own behalf and for their own account”, no similar wording is currently in place in respect of deposits placed in credit institutions by other entities.

The EBA further observed that Article 5(1) may potentially create legal uncertainty in terms of its interaction with Article 7(3) of the DGSD. Article 7(3), which is not limited to deposits placed in credit institutions by a specific type of entity, provides ‘Where the depositor is not absolutely entitled to the sums held in an account, the person who is absolutely entitled shall be covered by the guarantee, provided that that person has been identified or is identifiable […]”.

The opinion recommends to the Commission to clarify the DGSD to ensure that funds deposited by other entities on behalf of clients are uniformly protected across the EU (irrespective of whether these entities are credit institutions, payment institutions, electronic money institutions or investment firms), in the spirit of avoiding a risk of contagion spreading from a failed bank to entities which placed client funds with that bank and ensuring that credit institutions contribute to the DGS funds based on the amounts of protected client funds they hold.

The opinion can be located here.

EBA’s press release can be found here.