Deposit Aggregators: Implications for Prudential Risk

Over the last few years, deposit aggregators (DAs) have grown in both number and scale to become a significant part of the UK’s savings market infrastructure. As their reach has grown, the implications for prudential risk have attracted attention from regulators.

The opinions expressed here are those of the authors. They do not necessarily reflect the views or positions of UK Finance or its members.

DAs are savings market intermediaries whose business models are designed to bring benefits both to savers and firms: savers by offering streamlined access to an extensive range of banks and savings products, and potentially enhanced returns, all via simple-to-use and innovative platforms; and, firms by revolutionising traditional routes to market, simplifying on-boarding, operational, and marketing processes, and delivering technological advancements that can also contribute to better asset and liability management.

DAs have each developed their own specific arrangements or models to provide services to firms, which can cause complexity in the ways in which the implications for prudential risk are managed. Some firms have partnered with multiple DAs, each with a unique operating model, which adds further intricacies and challenge.

In April 2021 and November 2023, DAs were the subject of Dear CEO and Dear CFO letters respectively, and regulators have elaborated upon and expanded their expectations of firms in this regard. As DAs become increasingly embedded in UK savings market infrastructure, and innovation in this space continues, the prudential risk implications for firms may evolve yet further.

What are the implications for prudential risk of raising deposits via DAs?

The primary risk areas associated with raising deposits via DAs include:

  • Depositor protection due to the risk to delays in payouts from the Financial Services Compensation Scheme (FSCS) in the event of a failure, as well as the handling of financial promotions and risk of consumer harm. This is an area of keen interest for UK regulators and failure by firms to ensure they adhere to regulatory expectations could result in investigations, and potentially lead to fines.
  • Liquidity risk and reporting from the perspective of key risk drivers such as funding concentration and correlation of behaviour, to the risk of increased outflows due to technological advancements and digitalisation, as well as classification and treatment for regulatory reporting such as the Liquidity Coverage Ratio.
  • Third-party or outsourcing risk arising from DAs’ role as critical service providers, necessitating a high level of due diligence, governance, and oversight.

We explore these risks and potential mitigating actions in our article here

For the many firms that already raise deposits via DAs, these developments should trigger immediate action to ensure they are appropriately and proportionally mitigating the prudential risks arising from those deposits. For other firms who may be considering or who are yet to partner with a DA, the clarification of regulatory expectations serves as a high but well-defined benchmark against which to evaluate any future decision-making and existing risk management frameworks.

Register for our webinar Deposit Aggregators – Prudential Risk Management Implications for Banks on 21 March to learn more about these aspects of prudential risk and mitigating actions.