Currently, certain key commitments owed to business customers by banks are set out in the voluntary Business Banking Code (the ‘Code’). Compliance with the Code is monitored and enforced by the Banking Code Standards Board (BCSB).
Certain deficiencies in this voluntary regime have been identified by the UK’s Financial Services Authority (FSA), most notably that the BCSB has limited powers of enforcement and no power to impose fines. Additionally, the Code is based on prescribed rules rather than general principles favoured by the FSA and does not focus on desirable consumer outcomes.
Such deficiencies coupled with the FSA’s new role as the UK’s regulator of payment services pursuant to the Payment Services Directive (PSD), which will see the FSA regulating payment transactions by banks and building societies from November 2009, adds weight to the FSA’s argument that it is time to extend its remit to most aspects of retail banking.
The FSA’s New Regime
The new framework for regulating the way banks, building societies and credit unions treat their banking customers will be based on the FSA’s Principles for Business, the Banking Conduct of Business Sourcebook (BCOBS) and the Payment Services Regulations 2009 (the ‘PSRs’). This article focuses on the BCOBS.
The new regime will affect UK-authorised banks and building societies, UK-authorised e-money issuers (but not small e-money issuers), credit unions and incoming European Economic Area (EEA) branches of credit institutions and e-money issuers.
Who Does the BCOBS Seek to Protect and Which Firms Will the Rules Apply to?
The FSA has introduced a new defined term of ‘banking customer’ to identify the businesses to be protected by the BCOBS. ‘Banking customer’ is defined as including the following:
- A micro-enterprise.
- A charity with an annual income of less than £1m.
- A natural person acting in a capacity as a trustee if he is acting for purposes outside his trade, business or profession.
In this respect, the BCOBS mirrors the definitions included in the PSRs, creating consistency across the board.
What is a micro-enterprise? The FSA has indicated that a micro-enterprise will be defined in the following terms: “an enterprise which employs fewer than 10 persons and has a turnover or annual balance sheet that does not exceed €2m, including self-employed persons, family businesses, partnerships and associations with regular economic activity.”
You will note that the definition uses the denomination of euros for its turnover criteria. The FSA states that the European Commission’s monthly accounting rate of the euro can be used to determine if an enterprise falls within the criteria. Determination of fulfilment of the criteria should be completed at the time of conclusion of the contract, therefore when the account is opened.
The FSA has also made it clear that the term also covers all those properly acting on behalf of the customer.
A Summary of the New Regime
The new BCOBS will apply to ‘retail banking services’ (a new definition covering accepting deposits and providing services in relation to deposits). This sourcebook will contain those parts of the existing COBS rules and guidance that apply to deposit-taking and new high level, outcome-focussed rules primarily relating to the provision of information to retail banking consumers and small businesses outside the scope of the PSD.
In essence, the BCOBS will provide rules and guidance on communications with banking customers, post-sale service requirements and cancellation rights.
The PSRs will now cover some of the products currently under the remit of the Business Banking Code. In essence, the new regime will involve the full application of the Principles and BCOBS to the regulated activities of accepting deposits and issuing electronic-money to the extent that these do not conflict with the PSRs. This does not mean that there is no interaction between the two sets of ‘regulations’. Where a retail banking service is a payment service under the PSRs then BCOBS 4 (information requirements) will not apply. However, to the extent that other provisions are compatible with the PSD, other provisions (including BCOBS 5 (rules on post-sale)) will apply in respect of matters that the PSRs do not cover.
The New Regime – Creating Certainty or Confusion?
The new regime may, initially, lead to some confusion for both consumers and firms alike as much of the regime is still to be clearly defined.
First, credit products are not covered by the FSA’s proposals. This has attracted a certain amount of industry criticism given that there is uncertainty about how the provisions of the Banking Codes relating to overdrafts, unsecured credit and credit cards will continue to apply.
Although the FSA has stated that it intends to work with the Office of Fair Trading (OFT) and the Code Sponsors to retain the consumer credit commitments in the Banking Codes, the BCSB believes that the FSA’s proposals risk leaving these valuable commitments “in a hiatus,” and that the FSA and the OFT will need to strengthen their co-operation and co-ordination to ensure consistency in their approach to regulation. It is, however, expected that industry guidance on the BCOBS will contain a chapter on consumer credit.
Furthermore, at the time of writing, the exact fate of the Business Banking Code has not been finally determined. Respondents to the FSA consultation Paper 08/19 confirmed that most elements of the Code were regarded as being useful. Consequently, the FSA expects that the only element of the Code that will not be taken forward or expanded on in industry guidance will be that conflicting with the new BPS regime. The FSA quarterly consultation paper 09/20 envisages amendments to the draft BCOBS by suggesting additional provisions relating to:
- Advance notification to a banking customer of material changes to interest rates that are to the customer’s disadvantage and of bonus or introductory rates coming to an end.
- Liability for losses in respect of unauthorised transactions on accounts outside the scope of the PSRs.
- Exclusion of liability to mirror the Conduct of Business Sourcebook.
- Value dating of non-payment account funds.
- The action a firm must take where it has failed to execute a transaction or has executed it incorrectly.
Importantly, the FSA has introduced six-month transitional provisions to allow firms time to change references to the Business Banking Code in documentation and literature and to allow firms time to implement our proposals on interest rates.
Some confusion will arise as the exact fate of the Code and the future role of the BCSB have not yet been determined. This is further compounded by a lack of essential industry guidance that would provide much needed clarity on the workings of the new regime.
Where Do We Go From Here?
The BCOBS will come into force on 1 November 2009. Internal compliance and other processes, systems and customer-facing documents will need to be reviewed by firms subject to the BCOBS. In addition, as the new regime includes the application of the FSA’s Principles for Businesses to deposit-taking, firms will need to be mindful of the overarching obligation to treat customers fairly when reviewing their processes and documentation. Given that the FSA has made it clear it is not minded to grant firms anything other than very limited transitional provisions beyond 1 November, any such review will need to be co-ordinated and processes decided quickly.
While in the long run the BCOBS will no doubt generally be viewed as a good development for consumers, at this stage some of the nuts and bolts holding the retail banking relationship together still appear decidedly loose. Between now and November the regulators and industry players have to work together closely to agree and communicate the settled roles each of them will play in the new regime together with new guidance to keep consumers clear as to their rights under retail banking and consumer credit legislation. The landscape could change further still when the European Commission publishes its report on the retail financial services market, expected in the summer.
At a time when the industry is in the middle of crisis management, with further “challenging and audacious” regulation expected from Europe, the jury is still out as to whether the new regime is timely intervention or premature meddling.