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Financial services
Guarantee Schemes
In Europe, considerable work is underway to determine the shape of various guarantee schemes. These help ensure that customers of financial services are adequately protected. The UK enjoys one of the most robust schemes in Europe – the Financial Services Compensation Scheme (FSCS).
The FSCS is the UK's compensation fund “of last resort”, available to consumers who have bought financial services from firms regulated in the UK. The FSCS offers protection to consumers across the spectrum of financial services – bank account deposits, insurance, investments, and mortgages.
The European Commission is currently focused on several guarantee schemes in Europe, all of which are covered by the Financial Services Compensation Scheme (FSCS) in the UK. These correspond with the following Directives:
- Deposit Guarantee Schemes Directive
- Investor Compensation Schemes Directive
- Insurance Guarantee Schemes Directive
Financial stability & the role of guarantee schemes
Schemes to safeguard the financial protection of customers play an important role in supporting consumer confidence. For example, they protect customers who have been wrongly sold an inappropriate investment, and help protect deposit holders in the event of financial instability. By shoring up consumer confidence, the existence of guarantee schemes can help reduce the likelihood of financial crises.
However, the design of a scheme is also important to promote market efficiency and competitiveness. It is essential to avoid encouraging ‘moral hazard’ – in which a financial institution would believe itself to be protected from the consequences of taking risk because of the very existence of the scheme.
The European Commission is undertaking essential work in this area, which has been sharpened by the experiences of the financial crisis. The crisis exposed the limits of some of the various guarantee schemes in place across Member States, and the inconsistency in their existence or scope.
In addition, the Commission is looking closely at whether guarantee schemes have a role to play in tackling ‘procyclicality’. This is when the natural economic cycle becomes exaggerated, meaning that periods of economic downturn are much more sharply felt. Policymakers across the globe are determined to tackle procyclicality, so that financial institutions are made to use benign economic periods to prepare for the bad. This is reflected in the liquidity and solvency requirements of major pieces of financial legislation such as the Capital Requirements Directive and Solvency II (PDF). Guarantee schemes may also have a role to play in tackling procyclicality.
Further reading
In July 2008, HM Treasury, the Bank of England and FSA, produced a joint paper looking across the various guarantee schemes. Please see:
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