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The November 2009 Banking and Payment Services regime
The rules relating to the conduct of business by banks and similar institutions are set to change from 1 November 2009. From that date:
- The Payment Services Regulations 2009, covering the conduct of business of electronic transfers, will come into force and will be supervised by the Financial Services Authority (FSA).
- Banks will also become subject to regulation by the FSA of the conduct of business other than electronic transfers. The FSA’s general principles of business will be applied for the first time and there will be a new section of the FSA Handbook, the Banking Conduct of Business Sourcebook (BCOBS), covering the conduct of business by banks and near-banks.
- The Banking Code will be no more, at least in its current comprehensive guise, although some form of industry guidance will continue to exist.
In one sense the conduct of business by banks has been the centre of attention since the beginning of the credit crisis in the autumn of 2008. Some of the primary factors in the creation of the global credit crisis included: the growth of huge imbalances in the current accounts of various countries, leading to enormous investment in western countries and a ferocious search for yield by investors; the wave of financial innovation that met that demand, including an explosion in securitised instruments from the mid-1990s; the failure of banks and financial institutions to originate and distribute securities so as to divest themselves of risk, and in some cases their appetite for acquiring and arbitraging securities without regard to the risk; and over-reliance, in some cases, on short-term market funding instead of long-term deposits (see, for example, the chair of the FSA, Lord Turner’s review of March 2009, ‘A Regulatory Response to The Global Banking Crisis’ (the Turner Review), which was commissioned by the government).
Such conduct of business is now the focus of intense scrutiny; the question is what, if anything, should be done to prevent any such crisis recurring.
The UK government considers that the current tripartite system for bank regulation in the UK (shared between the Treasury, the Bank of England, which is responsible for the stability of the economy as a whole, and the FSA, which is responsible for the regulation of individual firms) should be maintained but reformed to some extent. This could be achieved by the creation of the new Financial Stability Council (comprising the Treasury, the Bank of England and the FSA), that would be charged with overseeing the stability of the financial system as a whole.
On the other hand, the opposition has indicated that it would abolish the FSA, hand all banking supervision to the Bank of England (with insurance to boot) and create a new Consumer Protection Agency to take over the rest of the functions of the FSA.
This article is not directly concerned with the causes of the credit crisis or what should be done to banking regulation as a result. Instead its focus is on changes to the regulation of the day-to-day conduct of business by banks and other institutions in making payments for customers and in lending. However, it may be that the credit crisis encouraged the FSA to take over the provision of the day-to-day conduct of business outside the scope of the payment services regulation, and may yet lead to specific regulation of loan-to-value for mortgages, and the sale of securitised products on the wholesale market (raised in the Turner Review, chapter 3).
Significance of the new rules
Until now, the banking industry in the UK has largely been self-regulated. The conduct of business of banks was governed by the Banking Code for personal customers and for businesses. First introduced in 1992, the Banking Code applied to current and deposit accounts, payment services, plastic money, loans and overdrafts. Subscription to the Codes was voluntary, but in practice universal. The Banking Codes covered the provision of information relating to interest rates, charges, other terms and conditions, making changes to an account, advertising, statements of account, the terms on which payment would be cleared, the use of plastic cards, confidentiality, unauthorised transactions and liability for them, lending, and complaints. The creators of the Banking Codes had become progressively more independent from the banking industry after the creation of the Banking Code Standards Board (BCSB), on which industry participants were eventually in the minority.
The roles of outside regulators were limited. The Office of Fair Trading (OFT) continued to deal with the regulation of credit. The Financial Ombudsman Service dealt with certain complaints in relation to banking business. For its part, the FSA dealt with the authorisation of banks (prudential regulation) but otherwise left regulation to the BCSB and the OFT.
In deciding, in April 2009, to do away with self-regulation from November 2009, the FSA was quite frank in conceding that self-regulation had not, largely, failed (despite problems with the quality of information given to customers, and regulation of, for instance, credit card and bank default charges). It preferred, however, to bring the conduct of banking within the scope of its general principles of business, to implement an overarching obligation to treat customers fairly, and to bring under one roof both the supervision of the stability of individual banks and the day-to-day conduct of business of those banks. The FSA therefore took the opportunity, when the regulation of conduct of business of electronic payments was handed to it from November 2009, to take over supervision of all other conduct of business in relation to banking (although not in relation to the provision of credit, which continues to be regulated by the OFT) (FSA Consultation Paper, ‘Regulating Retail Banking Conduct Of Business’, November 2008).
Challenges and dangers of the new regime for banks
The new area of regulation has been called the Banking and Payment Services Regime by the FSA, but it is undeniably a patchwork of different rules, which will to some extent be more complex than before.
First there is the Payment Services Regulation (the Regulation) 2008 SI 2009/209, bringing into effect the EU Payment Services Directive (the Directive), which, broadly, implements rules relating to electronic methods of payment such as funds transfers. This Regulation applies to banks and other institutions that provide electronic payment services. It does not apply to other methods of payment such as cash or cheques, but it does apply whether or not the institution is a bank. The Directive and Regulation set out some sensible rules on the registration of payment service providers, information required to be provided regarding the payment service and, in particular, the time of payment, the time when an instruction can be revoked and liability for unauthorised payments.
One measure worthy of note is that charges for payment services can only be levied if ‘such charges reasonably correspond to the payment services provider’s actual costs’ (Regulation 54(1)). It was, of course, a regulation controlling the fairness of provisions for charges in the Unfair Terms In Consumer Contracts Regulation 1999 SI 1999/2083 that was applied by the OFT to set a limit for default charges levied by credit card companies, and has been relied on in the continuing dispute between the OFT and banks over default charges.
There is an obvious question as to whether or not regulation 54 of the Payment Services Regulation will be used against banks in the future in relation to charges for electronic transfers.
The second element of the Banking and Payment Services Regime is BCOBS, which is a new section of the FSA Handbook. BCOBS covers payments by cash or cheque, and other methods not covered by the payment services regulation. Again, BCOBS provides sensible rules regarding the provision of information. There is a general requirement that any communication is ‘fair, clear and not misleading’. There is also a general comment that the firm must provide a service in relation to a retail banking service that is ‘prompt, efficient and fair’.
One particular provision of the BCOBS again stands out. It is required that a firm ‘should deal fairly with the banking customer whom it has reason to believe is in financial difficulty’ (5.1.5).
The way in which a bank deals with a customer in financial difficulty (outside the Consumer Credit Act 1974) will therefore be subject to a requirement of fairness, breach of which may give rise to a claim by the customer against the bank for compensation under s150 of the Financial Services and Markets Act 2000. This requirement links up with the requirement, from April 2008, that the OFT has regard to whether or not an applicant is involved in ‘irresponsible lending’ when deciding whether or not to grant a credit licence. However the latter provision does not provide a customer with a claim in damages, unlike BCOBS 5.1.5.
Obvious questions may arise as to, for example, the time in which payment is required, the amounts required to be paid in instalments, the selection of the time at which to enforce security and the manner in which the security is enforced. The fairness obligation in BCOBS 5.1.5 will apply to the bank’s conduct in such matters. If the bank has a policy in relation to these issues, it may be that a great many cases could be involved, over a period of time. after which the charges or policies were to be challenged. It would be better for both banks and customers if potential issues were, so far as possible, anticipated and resolved with the approval of the FSA. Fortunately, the FSA has already made clear that there is a role for the approval of industry guidance in relation to regulated activity (FSA Confirmation Of Industry Guidance, September 2007).
If industry guidance is given over charges in respect of electronic transfers or policies in relation to customers and financial services, and is approved by the FSA, there would be an argument that the resultant policy was best practice. In relation to the charges levied in respect of electronic transfers, the industry practice may relate to the elements to be taken into account in assessing the costs of the transfer. In relation to customers in financial difficulty, the industry practice may relate to time periods and steps to be taken. The chances of a customer being treated unfairly and successfully complaining that steps taken by a bank in accordance with the industry guidance approved by the FSA had been in breach of the recurrence and caused loss would be minimised. The new banking payment services regime holds threats but also offers opportunities to banks to manage their risks in relation to the conduct of business.
By Raymond Cox QC, Fountain Court Chambers.Eemail@example.com