A recap of a few things you’d think financial professionals ought to know
The Jolly Contrarian holds forth™
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Not a little pot of cash with your name on it sitting in a vault in a wood-paneled office in Pall Mall, however much this figment of the popular imagination rides on, even in the minds of those — certain credit officers at investment banks, for example — who really should know better.
A deposit in a bank account is a form of on-call indebtedness where a customer lends its money to a bank. Yes: that’s right: you lend money to the bank. Once you do this, it isn’t your money anymore. The bank pays you interest in return. This is, in large part, how banks fund their lending activity. You know how, in Hamlet, Polonius says to Laertes “neither a borrower or a lender be”? Well, banks are both.
All this is neatly explained in the explanatory notes to the Dormant Bank and Building Society Accounts Act 2008:
- A deposit in a bank or building society account constitutes a debt owed by the bank or building society to its customer. Although banks and building societies are free to make use of money received from customers (subject to prudential rules which aim to ensure the institution always retains an adequate capital base) the institution remains liable to repay the debt to its customer indefinitely.
Who can take deposits?
This is laid down by Article 5 of the Financial Services and Markets Act 2000 Regulated Activities Order 2001, which describes the regulated activity of accepting deposits. Only regulated credit institutions — banks, in the vernacular — are allowed to accept deposits.
Limitation Act 1980
Is this the same as client money?
Yes - and no. With client money, the person to whom you pay the money doesn’t ever hold it, but merely looks after it for you by depositing it in their name but on your behalf in a bank somewhere else. That bank is therefore the borrower. You are still the lender. More particularly, CASS 7 client money applies only where you hold a money for or on behalf of a client in connection with MiFID business or designated investment business. So it is a limited case.
Retail deposits and cross default
Just note that the thought of retail deposits being gummed up due to operational snafus and local insurrections in far flung places can give certain banks a nosebleed when it comes to contemplating their liabilities under a cross default clause. You should expect that they will be carved out. More at Cross Default.
- Could short term debt securities be considered as deposits for the purposes of FSMA’s Regulated Activities Order? Answer — in limited cases yes. Explanation, and suggestions about how to deal with it, in the premium section.
- Client money
- Cash — a much misunderstood thing
- Limitation Act 1980
- Credit institution
- Dormant Bank and Building Society Accounts Act 2008
- Exclusions for supranational banks, solicitors, debt securities, and electronic funds
- Note, importantly, Article 9 of the RAO, whcih excludes debt securities with a term of longer than 12 monts.
- This startles people. It has even been known to startle senior credit officers. For a patient explanation see our article on cash.