Regulating Retail Banking Conduct of Business
Posted: Friday 23 January 2009
The Financial Services Authority published a consultation paper, on 4th November 2008, “Regulating retail banking conduct of business” (CP08/19) which proposes a new framework for regulating retail banking conduct of business within the FSA’s remit. The CP is open for responses until 16th February 2009:
http://www.fsa.gov.uk/pubs/cp/cp08_19.pdf.
Present regulation
The current method of regulation is a self-regulatory approach contained in the voluntary Banking Codes for personal and business customers (the Codes) with compliance with the Codes overseen by the Banking Code Standards Board. For further information please see http://www.bankingcode.org.uk/home.htm
The need for change
The main factors identified by the FSA for the proposed changes are:
- the FSA needs to consider the risks affecting the whole of a firm’s retail market activities;
- the Payment Services Directive (PSD) which comes into force in November 2009 will introduce conduct of business rules which will apply to the majority of retail bank accounts, replacing much of the current Codes (estimated at up to 40%);
- the FSA has identified certain anomalies in not regulating retail consumers’ core financial services relationship, particularly given that it will regulate payment services from November 2009; and
- the FSA consider that there is scope for consumer detriment caused by the current regulatory approach being less “principles based” and transparent than the FSA’s approach, there being no credible deterrence powers as the BSCB has no power to fine, and there are some gaps in the Codes content - for example there is no overarching principle contained within the Codes similar to FSA Principle 6 (the obligation to treat customers fairly).
Scope
The consultation will affect all retail banking and firms which carry on the regulated activities of accepting deposits and issuing e-money. These include:
- UK authorised banks and building societies;
- UK authorised e-money issuers;
- Credit unions (but note that credit unions will be exempt from the PSD regulations); and
- Incoming EEA branches of credit institutions and e-money issuers.
- Credit cards and consumer credit
The new proposals will not apply to all retail banking products. The Office of Fair Trading will continue to be responsible for the regulation of consumer credit and will work with the FSA and other industry and trade associations to ensure that the current standards for regulation are maintained and also that there are no gaps in the regulation. The FSA intend to agree a concordat with the OFT to set out their respective responsibilities for the regulation of retail banking and how the two bodies will co-operate with each other.
The new proposals
The FSA are proposing to replace the existing Codes, rather than update parts of the Codes, and they are proposing the following new framework for the regulation of Retail Banking conduct of business:
- full application of all of the FSA’s Principles of Business to the regulated activities of accepting deposits and issuing electronic money;
- new high-level rules which will apply to retail banking services outside PSD scope in a new Banking Conduct of Business sourcebook (BCOBS);
- transfer of existing Conduct of Business rules and guidance applying to deposit-taking to BCOBS; and
- monitoring and enforcement by the FSA, integrated into the wider risk-based approach to the supervision of relevant firms and groups.
Under the new proposals, the most relevant Principles being applied would be:
Principle 6: “a firm must pay due regard to the interests of its customers and treat them fairly”.
Principle 7: “a firm must pay due regard to the information needs of its clients, and communicate information to them in a way that is clear, fair and not misleading”.
The new high level rules will not provide the same level of detail as currently contained within the Codes. The FSA have indicated that the industry may therefore wish to develop voluntary industry guidance which would preserve elements of the Codes, which could be all or part FSA-confirmed. This might cover, for example clearing information, online banking, basic bank accounts, cash machines, ISA transfer guidelines. This could however lead to complications, particularly for compliance, as firms will then require to ensure that they follow both the FSA Handbook as well as any industry guidance.
BCOBS
The Banking Conduct of Business will be structured in a separate sourcebook, organised to reflect the way firms carry out their business, moving from financial promotion and information disclosure to post-sale services. The draft on which the FSA are consulting is set out in Appendix 1 of the Consultation Paper and has the following structure:
- BCOBS1: application – BCOBS will apply to “retail banking services” (which will cover most transactions such as placing, transferring or withdrawing funds where the payer and the payee are located in the EEA and where the transaction is in Euro or Sterling but will not cover cheques) although it will not apply when the service is within the scope of the PSD;
- BCOBS2: communications with banking customers and financial promotions;
- BCOBS3: distance marketing and e-commerce, including an Annex with further detail on distance marketing disclosure requirements);
- BCOBS4: pre and post sale information to be provided to banking customers;
- BCOBS5: post-sale service requirements; and
- BCOBS6: cancellation.
This will comprise a mix of new and existing requirements, based on high level rules and guidance on those rules.
Sitting beside the BCOBS rules and guidance will be the PSD regulations, setting out detailed requirements on the information to be provided to customers on payment services, and on the rights and obligations of the payer and Payment Services Provider. In addition we are likely to have some sort of industry guidance on certain specific retail banking services.
“Banking Customer”
The FSA have indicated that they intend to broadly replicate the coverage of the Codes and the PSD, but are proposing that the definition of “banking customer” for the purposes of BCOBS is:
- a consumer (currently defined as a natural person acting for purposes which are outside his trade, business or profession);
- a micro enterprise (which would cover an enterprise which employs fewer than 10 persons and has a turnover or balance sheet which does not exceed €2 million including self-employed persons, family businesses and partnerships and trade associations regularly engaged in an economic activity);
- a charity with an annual income of less than £1 million; and
- a trustee of a trust which has a net asset value of less than £1 million.
The proposed definition of a micro enterprise is wider in some respects than the range of business customers currently covered by the Business Banking Code (which has a turnover limit of £1 million) and thus brings more customers within the scope of BCOB. Some specific omissions from the scope of the definition as currently drafted appear to be LLPs and limited companies.
Impact
The proposals will require:
- changes to marketing and financial promotion arrangements;
- changes to customer terms and conditions;
- revisions to systems and operations;
- management of different regulatory requirements for different products (as mentioned credit cards and consumer credit will not be covered by BCOBS); and
- changes to internal compliance processes.
Implementation
The FSA’s intention is to implement BCOBs at the same time as the implementation of PSD, November 2009, with any transitional provisions as necessary. This is an extremely ambitious timescale particularly as the PSD regulations have still to be approved and in view of the challenges currently facing the industry, its customers and its regulators. There will no doubt be significant developments and amendments to the current proposed wording as discussions between the regulators and the industry bodies continue, and in light of responses to the CP.
The FSA have indicated that they intend to publish further information on the PSD implementation in an Approach Document which will be found on their website at www.fsa.gov.uk/paymentservices. It is hoped that this will be available by February 2009.
Concerns
The general perception of the current Codes is that they are worded in such a way as to be readily understandable, and therefore accessible, by those consumers whom they directly affect, each of the Codes bearing the Plain English Campaign’s Crystal Mark. In contrast, the BCOBS rules and guidance are more heavily reliant on the glossary of definitions within the FSA’s handbook. These definitions are cross referenced throughout BCOBS, making them much harder to pick through. One would hope that the FSA will be able to produce a user friendly guide to BCOBS which firms can hand out to their customers along the same lines at the Code leaflets.
Another area for concern is the identification of any gaps or overlaps that might exist if the Codes are to be abandoned in favour of BCOBS. The FSA are working closely with trade groups and the OFT to identify these, and work is ongoing as to transitional arrangements for areas within the Codes which will fall out with BCOBS, for example those relating to credit cards. Time will tell whether this is all achievable by November 2009.
We shall update this briefing note as matters develop.
Contact Details:
Name: John Lunn
DDI: 0131 247 1066
Email: john.lunn@morton-fraser.com
The contents of this article are for information only and are not intended to be construed as legal advice and should not be treated as a substitute for specific advice. Morton Fraser accepts no responsibility for the content of any third party website to which this article refers.
Morton Fraser LLP is authorised and regulated by the Financial Services Authority.
