A Depository Institution is an institution that accepts deposits in the ordinary course of banking or similar business.
HMRC will regard a person carrying out an activity in the UK that is a regulated activity for the purposes of the Financial Services and Markets Act 2000 by virtue of Article 5 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (accepting deposits) as a Depository Institution.
Entities within this definition will include entities regulated in the UK as a savings or commercial bank, a credit union, industrial and provident societies and building societies. In considering Article 5, HMRC will apply the relevant exclusions contained therein – for example, insurance brokers and solicitors would not be expected to fall within this definition. However in considering whether an entity is conducting banking or similar business, it will be the actual activities that the entity carries out that will be determinative.
An entity is considered to engage in banking or similar business if, in the ordinary course of its business it accepts deposits or other similar investments of funds and regularly participates in one or more of the following activities:
a. Makes personal, mortgage, industrial or other loans or provides other extensions of credit;
b. Purchases, sells, discounts or negotiates accounts receivable, instalment obligations, notes, drafts, cheques, bills of exchange, acceptances or other evidence of indebtedness;
c. Issues letters of credit and negotiates drafts drawn thereunder;
d. Provides trust or fiduciary services;
e. Finances foreign exchange transactions; or
f. Enters into, purchases, or disposes of finance leases or leased assets.
Entities that issue payment cards that can be pre-loaded with funds to be spent at a later date, such as a pre-paid credit card or “e-money” may not be Depository Institutions provided certain conditions are met.
Pre-paid credit card issuers may meet the requirements to be a Qualified Credit Card Issuer that will make them a Non-reporting Financial Institution or the payment card account may fulfil the conditions to be an Excluded Account.
“E-money” providers that are governed by the provisions of the European Union Electronic Money Directive (2009/110/EC) (EMD) are not deposit takers for the purposes of the Banking Consolidation Directive (2006/48/EC). Recital 13 to the EMD explicitly states that “The issuance of electronic money does not constitute a deposit-taking activity under Directive 2006/48/EC”, consequently such providers will not fall within the definition of Depository Institution that requires deposits to be accepted in the ordinary course of a banking or similar business.
Entities that solely provide asset based finance services, such as a factoring or invoice discounting business, or that accept deposits from persons solely as collateral or security pursuant to a sale or lease of property, a loan secured by property or a similar financing arrangement, between such entity and the person making the deposit, will not be Depository Institutions.
Entities that facilitate money transfers by instructing agents to transmit funds (but do not finance the transactions) will not be considered to be engaged in banking or similar business as this is not seen as accepting deposits.