On November 4th 2008, FSA announced new proposals for the extension of its regulation of retail banking. This will bring to an end one of the last areas of self-regulation in retail financial services, the Banking Code regime operated by the Banking Code Standards Board (BCSB). These reforms go hand in hand with FSA assuming new responsibilities for payment services on implementation of the Payment Services Directive (PSD) in November 2009. The firm recently held a client seminar on implementation of the PSD and if you would like more information, please contact Jean Price - Head of Retail Banking and Consumer Finance for CMS Cameron McKenna (details below).
The latest proposals were published in a consultation paper entitled “Regulating retail banking conduct of business”. Click on these links to access the consultation paper (CP08/09) and newsletter. In this paper, FSA proposes a new framework for regulating the way banks treat their retail customers.
How is retail banking regulated today?
The current arrangements are a complex mix of overlapping self-regulation and statutory regimes involving the BCSB, OFT, FSA and FOS, with different cocktails of regulatory mix for lending and for deposit products. With sophisticated current account products that can include, not only an overdraft facility, but additional benefits such as interest payments on credit balances, travel insurance, mobile phone insurance and breakdown cover, ensuring compliance with all the required voluntary codes and statutory requirements has been something of a juggling exercise.
Self-regulation
The Banking Codes form a voluntary regime which sets standards of good banking practice for financial institutions when dealing with customers in the UK. Two codes exist, the Banking Code and the Business Banking Code, applying respectively to personal and business customers. Both codes apply across both deposit and loan products and to payment services i.e.
- Current accounts;
- Deposit accounts;
- Payment services;
- Cards and PINs; and
- Loans and overdrafts.
The Banking Codes do not cover mortgages, investments, insurance, Premium Bonds or currency accounts.
All banks, building societies and other financial services providers that accept deposits and/or carry on unsecured lending, such as credit card issuers, may apply to become subscribers of the Banking Codes and the codes have achieved very broad coverage of retail banking. Banking and Business Banking Code compliance is monitored by the BSCB and while it has certain powers in the event of a material breach of a code provision by a subscriber, including public censure, it does not have the power to levy fines.
Statutory Regulation: Deposit taking versus lending
Currently, the responsibility for statutory regulation of retail banking is split between FSA, covering the regulated activity of accepting deposits under the Financial Services and Markets Act 2000 (FSMA), and OFT, covering credit products under the Consumer Credit Act 1974 (CCA). Regulation of mortgages is split between the FSMA and CCA regimes.
Banks, building societies and other financial services providers that accept deposits must be authorised by FSA. However, to date, FSA has not created comprehensive rules governing the conduct of retail deposit-taking business, only doing so if required by European law or to deliver specific consumer outcomes for example, in relation to ISAs. FSA Principles are also heavily qualified by current policy to enforce them in respect of deposit taking and e-money only in a prudential context. Currently the main conduct of business regulation for bank accounts is via the detailed Banking Codes and BCSB monitoring. Where FSA COB requirements do apply to deposit-taking, most are monitored by the BCSB where the firm subscribes to the Banking Codes.
Credit providers (including FSA authorised firms) that offer lending not exclusively covered by the FSMA regime must be licensed by OFT, and these activities are regulated by the CCA. The CCA is highly prescriptive in nature and is in contrast with FSA’s focus on principles based regulation. In addition, OFT has in the past been constrained in its role as regulator by its limited enforcement powers.
Consumer credit regulation is currently in a state of flux. Whilst the introduction of the Consumer Credit Act 2006 has broadened OFT’s powers, including the power to issue civil penalties, and introduced concepts (unfair relationships) akin to FSA Principles, there is still a mismatch between OFT and FSA regulatory regimes. Implementation of the Consumer Credit Directive (due to be 2010) will again herald revised regulation of the industry. Amongst other things, the directive specifically addresses the topical issue of irresponsible lending by obliging lenders to check creditworthiness and provide information and explanations sufficient to allow borrowers to assess whether a product is adapted to their needs and financial situation.
The Financial Ombudsman Service (FOS) already has a broad jurisdiction with regard to retail banking activities – both deposit and loan, its jurisdiction having been extended in April 2007 in respect of non-FSA authorised credit providers.
The present framework’s deficiencies
FSA has proposed changes to the current framework for the following reasons:
- Concerns over the Banking Codes’ content and the confused four-way responsibility-relationship, between the BCSB, FSA, OFT and FOS;
- FSA Principle 6, “Treating Customers Fairly,” (TCF) does not have an equivalent in the current Banking Codes - there may be scope for consumer detriment, as at present the codes do not contain a sufficiently strong overarching fairness objective;
- In light of FSA taking on regulatory responsibility under the PSD, it seems sensible that FSA should now regulate retail customers’ core financial services relationships;
- FSA’s regulatory effectiveness will be enhanced when it can extend its regulation across all risks affecting firms’ retail market activities within the scope of FSMA; and
- The BCSB’s main weapon to deter firms is limited to the threat of publicity and resulting reputational damage - the BCSB lacks fining power and has a relatively low media profile.
The proposed new regime
FSA proposes to extend its regulation across all aspects of a bank’s relationship with its retail customers, excluding credit regulated by OFT.
The proposed new framework would be based on FSA Principles, the Unfair Terms in Consumer Contracts Regulations 1999, the proposed PSD Regulations and high level, outcome focused rules in a new Banking Conduct of Business Sourcebook (BCOBS).
The key principles that will set out the new framework for COB regulation include:
- Implementation of the PSD: FSA will be the competent authority in the UK. The PSD Regulations set out the COB requirements for payment services which will apply to authorised banks and building societies (as well as other payment institutions). Technically, FSA will operate under the PSD Regulations which are separate and distinct from the FSMA regime, but in practice the roles will be combined.
- A new Banking Conduct Of Business sourcebook (BCOBS), which will incorporate rules from the existing COBS Sourcebook and add new high level rules related to deposit-taking for consumers and micro-enterprises, dealing with the following:
- (BCOBS 2) communications and financial promotions;
- (BCOBS 3) rules stemming from the Distance Marketing Directive and the E-Commerce Directive;
- (BCOBS 4) pre and post sale information to be provided to banking customers;
- (BCOBS 5) post sale services; and
- (BCOBS 6) cancellation.
- Full application of FSA Principles to the regulated activities of accepting deposits and issuing e-money (note that this does not extend to the 50 small e-money issuers exempt from authorisation and supervision by FSA); and
- Monitoring and enforcement by FSA, which will be integrated into a wider risk-based approach to supervision of the relevant firms and groups. In contrast to the BSCB, FSA would be able to impose fines on firms and take disciplinary action against individuals (approved persons of an FSA authorised firm).
With regard to scope, the intention is for BCOBS to apply also to UK branches of credit institutions authorised in another EEA state; only a few of which currently subscribe to the Banking Codes. BCOBS may not extend to larger companies which currently benefit from the Business Banking Code.
Impact
Deposit products will now be fully regulated and supervised by FSA. The retail banking industry will move from self-regulation under the Banking Codes into full FSA regulation of these products, subject to the attendant range of enforcement powers, including fines.
TCF regulation will apply to deposit-taking and e-money. TCF will no longer be considered in simply a prudential context and firm’s will therefore need to ensure full compliance with FSA’s developing principles-based regime.
New terms of business for November 2009. As a result of the November 2009 changes, the banking industry will need to amend its customer terms of business.
Extension of regulation to EEA branches. The proposal to extend BCOBS to branches of EEA credit institutions will need to be considered by these firms, particularly with regard to compatibility with EU law and in light of the fact that many do not currently comply with the Banking Codes.
Retail banking regulation will remain fragmented. Given that FSA will take over responsibility for payment services, it seems logical that it now assumes full regulation of deposit-taking. These proposals are clearly intended to deal with the non-lending side of retail banking but the future model continues to exclude unsecured lending from FSA’s remit. The proposals still therefore leave a complicated mesh of responsibility between FSA and OFT. Such piecemeal regulation of retail lending has been largely unsatisfactory both for the industry and consumers and, although FSA is reluctant to extend its responsibilities to CCA regulated products, the question remains as to whether it is now logical for it to take responsibility for this market in the future, at least in relation to FSA authorised persons.
What is the future for self-regulation and industry codes? The banking industry must consider how to structure, and the scope of, continuing industry sponsored standards. At present, the Banking Codes offer an overarching form of COB regulation absent in both the CCA and FSMA regimes. It seems likely that there will be a residual role for industry guidance on standards in specific areas, at least some of which is confirmed by FSA under its policy in relation to industry guidance, for example, clearing information, on-line banking, basic bank accounts and provision of information on interest rate changes for non-payment accounts. However, given the current and upcoming developments in consumer credit regulation, it is not clear how industry standards will evolve for the lending side of retail banking.
Important Dates
Comments can be made on the consultation until 16th February 2009. The new regime’s advent will coincide with the coming into force of the PSD in November 2009.
