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Banking basics
A recap of a few things you’d think financial professionals ought to know

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Your nest egg, sitting quietly and out of harm’s way yesterday
Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 Article 5
Actual Text of the RAO (as of 7/23) JC’s Nutshell version
Accepting deposits

5.— (1) Accepting deposits is a specified kind of activity if—

(a) money received by way of deposit is lent to others; or
(b) any other activity of the person accepting the deposit is financed wholly, or to a material extent, out of the capital of or interest on money received by way of deposit.

(2) In paragraph (1), “deposit" means a sum of money, other than one excluded by any of articles 6 to 9A,[1] paid on terms—

(a) under which it will be repaid, with or without interest or premium, and either on demand or at a time or in circumstances agreed by or on behalf of the person making the payment and the person receiving it; and
(b) which are not referable to the provision of property (other than currency) or services or the giving of security.

(3) For the purposes of paragraph (2), money is paid on terms which are referable to the provision of property or services or the giving of security if, and only if—

(a) it is paid by way of advance or part payment under a contract for the sale, hire or other provision of property or services, and is repayable only in the event that the property or services is or are not in fact sold, hired or otherwise provided;
(b) it is paid by way of security for the performance of a contract or by way of security in respect of loss which may result from the non-performance of a contract; or
(c) without prejudice to sub-paragraph (b), it is paid by way of security for the delivery up or return of any property, whether in a particular state of repair or otherwise.
Accepting deposits

5(1) Regulated Activity: Accepting deposits is a regulated if—

(a) Onlending: The acceptor on-lends the deposit; or
(b) Financing: The deposit materially finances the acceptor’s business.

5(2) Meaning of “deposit”: A “deposit” is a payment, not excluded by any of articles 6 to 9A[2] which:

(a) Must be repaid: Must be repaid on demand or at an agreed time or in agreed circumstances; and
(b) Payment is not in return for goods and services or as security: Is not for goods or services or as security for any obligation of the acceptor.

5(3) Meaning of “in return for goods and services or as security”: a payment in return for goods and services or as security means one made:

(a) Sale rental or supply contract: Under a contract for the sale, hire or supply of goods or services, where it would only be repayable if the goods or services were not provided; or
(b) Performance security: As security for the performance of or loss under a contract; or
(c) Property security: As security for the delivery or return of any property.

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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.[3] 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.

To recap: a bank deposit is basically a loan to the bank, repayable on demand (if an ordinary deposit account) or at the end of the agreed term (if a term deposit).

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 institutionsbanks, in the vernacular — are allowed to accept deposits.


Limitation Act 1980

This gives a (demand) bank deposit special status under the Limitation Act 1980, since it is not payable at any time, unless it is asked for, so the limitation period never begins to run.

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.

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  • 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.

See also


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  1. Exclusions for supranational banks, solicitors, debt securities, and electronic funds
  2. Note, importantly, Article 9 of the RAO, whcih excludes debt securities with a term of longer than 12 monts.
  3. This startles people. It has even been known to startle senior credit officers. For a patient explanation see our article on cash.