Policy
Response
BSA response to FSA CP 08/19: Regulating Retail Banking Conduct of Business
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Contact: Andrew Hopkins Date: 16 Feb 2009 |
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The Building Societies Association (BSA) welcomes the opportunity to respond to the FSA consultation on the proposed new framework for regulating retail banking conduct of business.
The BSA represents all 55 building societies in the United Kingdom. Building societies have total assets of £395 billion and, together with their subsidiaries, hold residential mortgages of £250 billion, more than 20% of the total outstanding in the UK. Societies hold over £235 billion of retail deposits, accounting for more than 20% of all such deposits in the UK. Building societies also account for about 37% of all cash ISA balances. Building societies employ over 51,500 full and part-time staff and operate through more than 2,000 branches.
The BSA is a sponsor of the Banking Code (the Code). The Code has set standards of good banking practice and has provided valuable consumer protection for over 16 years. It is clear, transparent and independently reviewed on a regular basis. It has been described by DeAnne Julius as “something of an exemplar” and the then Financial Secretary, Stephen Timms MP, as “an excellent example of self-regulation”. It covers current and savings accounts, unsecured loans and credit cards. The proposed new framework for regulating retail banking would cut across the Code’s remit, carving out regulatory responsibility for current and savings accounts for the FSA. This would effectively finish the Code as it is unlikely the Banking Code Standards Board (BCSB) would remain viable in its current form if it only covered the remaining financial products and consumer protections.
The BSA supports voluntary self-regulation. It has worked well and, unlike some statutory regulatory regimes, can be quickly amended to take account of emerging issues or concerns. As the FSA points out, many of its concerns regarding the existing regime could be addressed through work with stakeholders, including the Code Sponsors and the BCSB. The BSA would be happy to work with the FSA on the issues it has identified. The only significant concern that cannot be addressed is the apparent anomaly of voluntary regulation. The BSA does not believe that this argument alone is enough to justify the move to the proposed statutory regime.
The BSA does not object to statutory regulation of retail banking. Indeed, it would support responsibility for regulating all retail banking, including credit, moving to the FSA, because, in principle, there is much to recommend in having a single regulator. However, that is not what is proposed in the consultation paper. Under the proposals, the FSA would be responsible only for regulating savings and current accounts (but not current account overdrafts). Responsibility for regulating credit products would technically fall under the OFT’s remit.
The BSA is concerned that there is a danger of regulatory double jeopardy under the proposed regime and the potential loss of valuable consumer protection. The Association’s specific concerns are set out in response to the consultation questions below.
Despite these concerns, the BSA would be willing to engage constructively with the FSA should it decide to go head with the introduction of BCOB. The BSA would support and actively participate in the creation of industry guidance under BCOB. However, it would be crucial that whatever replaced the Code was capable, in practice, of ensuring even better and more effective regulation.
Q1: Do you have any comments on our analysis in Chapter 3 and our reasons for proposing a new framework?
The BSA welcomes the FSA’s findings that the Codes are seen as generally clear, user-friendly statements of good business practice, of value to both consumers and firms and that the BCSB’s supervisory tools and processes seem appropriate to meet its supervisory objectives.
The BSA acknowledges the FSA’s criticisms of the Code and would be happy to work with it to tackle these issues. The only significant concern which could not be addressed under the current regime is the apparent anomaly of self regulation. This alone is not enough to justify a move to the proposed regime, particularly as the move would mean splitting regulation of retail banking in two and potentially cause new uncertainties to the detriment of consumers and firms. The BSA is concerned that the split of retail banking regulation between the FSA and the OFT would lead to regulatory double jeopardy for firms. This is especially the case in areas like financial difficulties, where both regulators have responsibility. There is also the anomaly whereby both regulators would have responsibility for different aspects of the same product. Under the proposals, the FSA would have regulatory responsibility for current accounts where they are in credit and the OFT would have responsibility for current accounts where they are in overdraft.
The BSA is aware that the FSA is working with the OFT to produce a concordat to clarify where the boundaries lie between the two. This is a welcome move, but it is not clear to what extent either regulator would be able to fetter their responsibilities to allow the other to take the lead on matters which fall within both regulators’ remits (as the FSA document ‘The roles and responsibilities of the FSA and the OFT’ demonstrates, their respective roles are already complicated). It is important that the industry is permitted to actively participate in the drafting of the concordat.
A preferred approach would be to give the FSA responsibility for all retail banking regulation, but this would require amendment of primary legislation and could not be achieved quickly.
The other significant concern identified by the FSA, that sticking with the current regime would mean there is scope for consumer detriment, could be countered by the argument that valuable consumer protection requirements currently covered in the Code could fall away under the proposed regime. For example, 7.8 of the Code states that the subscriber will tell the customer at least 12 weeks beforehand if it plans to close or move his branch. This is not covered in the proposed BCOB and would not appear to fall under any other regulator’s remit.
This and other consumer protection measures could be incorporated into industry guidance under BCOB. However, the FSA cannot confirm the guidance on these specific measures which are outside of its remit and it is not clear how they would be policed. Even where it could be argued that a requirement, which otherwise would be outside FSA scope, would fall under the FSA’s Treating Customers Fairly initiative, there would be significant scope for firms to apply different approaches and argue that they were compliant with the principle. This means moving away from a level playing field where every firm has to comply with the same rules and is subjected to similar burdens.
Q2: Do you agree with our proposal to apply all the Principles fully for all firms that accept deposits or issue e-money (Chapter 4)?
If BCOBS goes ahead, the BSA agrees with the proposal to apply all the Principles fully for all firms that accept deposits or issue e-money.
Q3: Do you have any comments on our proposals for a Banking Conduct of Business sourcebook (Chapter 4) and the draft Handbook text in Appendix 1?
The BSA supports the British Bankers’ Associations comments on the draft BCOBS sourcebook and draft Handbook text (as set out in the annex to its response to CP 08/19).
Q4: Do you have any comments on our proposed use of the definition of micro-enterprise to cover business banking customers (Chapter 4)?
Societies do not subscribe to the Business Banking Code as they tend to provide retail products rather than business. Our concern with the use of the definition of micro-enterprise to cover business banking customers is that it may potentially cover charities and trustees, which some societies provide products for. This may result in the need to amend literature and systems to bring them in-line with BCOBS when they previously were not subject to the Business Code. Additional compliance costs would be passed on to the customer.
Q5: Do you have any comments on the proposed application of BCOBS to incoming EEA branches and e-money issuers (Chapter 4)?
If BCOBS goes ahead, the BSA agrees that it should apply to incoming branches and e-money issuers. The BSA believes that there should be a level playing field for all firms operating in the UK.
Q6: Do you have any comments on the proposed application of the requirements in BCOBS to credit unions (Chapter 4)?
No comment.
Q7: Do you think there are elements of the current Banking Codes and other relevant codes/guidelines that would not appear in the PSD Regulations or BCOBS (as proposed in this CP) but which ought not to be lost?
The following are examples of areas currently covered in the Code that do not appear in the PSD regulations or BCOBS, but which ought not to be lost -
• ATM charges
• Account closure
• Branch closure
• Liabilities for losses
• Key commitment to lend responsibly and all other credit related requirements.
Most of these could be incorporated into industry guidance under BCOBS, although it is not clear how many would potentially fall outside of the FSA’s TCF scope. As stated earlier, the BSA would support responsibility for regulating credit products moving to the FSA.
Q8: Do you have any comments on our proposed approach to operationalising the new framework (Chapter 4)?
No comment beyond highlighting the difference between the rules-based system under the Code and the proposed principles-based regulation under BCOBS. Staff dealing with retail banking at the moment are geared up to the rules-based system and would require training in how the new regime would be monitored and enforced. This should be factored in when considering transitional arrangements. That said, we understand that all societies apply TCF across their business regardless of whether or not the FSA currently monitors and enforces in those areas. The BSA looks forward to the opportunity to comment on the FSA’s high–level supervisory strategy.
Q9: Do you agree that the proposed new framework should come into effect at the same time as the PSD in November 2009 (Chapter5)?
The BSA does not agree with the FSA assessment that delivery of BCOBS in November 2009 is achievable. In the event that the FSA confirms that it will go ahead with the introduction of BCOBS, the industry would have very little time to prepare for implementation. Once finalised, any requirements which differ from the current requirements in the Code would require systems changes. This would have a significant impact on firms’ resources at a time when they are implementing systems changes for numerous other regulatory requirements and dealing with the wider challenges currently facing the industry.
The last time such a major regulatory regime change was introduced, ie the move from voluntary self-regulation under the Mortgage Code to MCOB, the industry was given 12 months to prepare. It would make sense to have a similar period of time for preparation for the move from voluntary-self regulation under the Code to BCOBS. Whilst not a matter for the FSA another option would be to delay UK implementation of the Payment Services Directive, as has happened with other EU Directives (for example the Unfair Commercial Practices Directive).
Q10: In which areas do you think transitional provisions would be desirable and for how long (Chapter 5)?
It is difficult to identify specific areas where transitional provisions would be necessary. The length of the transitional period would also vary depending on the area. As a general rule of thumb, a period of 12 months would be sensible. This would match the approach taken in the move from the Mortgage Code to MCOB and would make the effective date for total implementation of BCOB 1 November 2010.
Q11: Will a change to the proposed new framework generate any further costs that have not been identified in Annex 2?
The BSA has not identified any additional costs.
Q12: Will a change to the proposed new framework generate any further benefits that have not been identified in Annex2?
The BSA has not identified any additional benefits.
Q13: Do you have any other comments on our CBA (Annex 2)?
No comment.
Q14: Do you agree with the compatibility statement in Annex 3?
Consumer protection – The BSA agrees that extending the protection of TCF to retail banking customers would be a benefit. However, we understand that societies already extend TCF principles across the board. The benefit of gaining TCF protection should also be judged against the potential loss of valuable consumer protection in the Code which would not fit within the FSA’s or other regulators’ remits (see responses to Q1 and Q7).
Promoting public awareness – We doubt that the introduction of BCOBS would increase the public’s awareness of retail banking regulation beyond existing awareness. Customers are made aware of the Code via a Code flyer and it is available on line and displayed prominently in branches. The Code is crystal marked by the Plain English Campaign and provides a one-stop shop for information on what retail banking customers can expect from firms. While it is perhaps not a fair comparison, BCOBS is certainly not written in easily understood language and neither does it cover all retail banking areas.
Conclusion
The BSA support voluntary self-regulation via the Code. It has worked well over the years and provides a one-stop shop for all retail banking regulation matters. The BSA does not object to statutory regulation, but believes that the proposed BCOB only provides a half way house. The BSA would support responsibility for all retail banking regulation, including credit, migrating to the FSA. This would avoid the problems of regulatory double jeopardy for firms and potential confusion for customers over who regulates what.
If BCOBS does go ahead, the BSA would engage constructively with the FSA to seek to ensure smooth implementation. The BSA would support and help to produce industry guidance under BCOB to aid firms with compliance and help prevent the loss of the existing consumer protections in the Code. However, as we have noted above, the challenges would be considerable and it would be imperative to allow adequate time for the exercise.
The BSA represents all 55 building societies in the United Kingdom. Building societies have total assets of £395 billion and, together with their subsidiaries, hold residential mortgages of £250 billion, more than 20% of the total outstanding in the UK. Societies hold over £235 billion of retail deposits, accounting for more than 20% of all such deposits in the UK. Building societies also account for about 37% of all cash ISA balances. Building societies employ over 51,500 full and part-time staff and operate through more than 2,000 branches.
The BSA is a sponsor of the Banking Code (the Code). The Code has set standards of good banking practice and has provided valuable consumer protection for over 16 years. It is clear, transparent and independently reviewed on a regular basis. It has been described by DeAnne Julius as “something of an exemplar” and the then Financial Secretary, Stephen Timms MP, as “an excellent example of self-regulation”. It covers current and savings accounts, unsecured loans and credit cards. The proposed new framework for regulating retail banking would cut across the Code’s remit, carving out regulatory responsibility for current and savings accounts for the FSA. This would effectively finish the Code as it is unlikely the Banking Code Standards Board (BCSB) would remain viable in its current form if it only covered the remaining financial products and consumer protections.
The BSA supports voluntary self-regulation. It has worked well and, unlike some statutory regulatory regimes, can be quickly amended to take account of emerging issues or concerns. As the FSA points out, many of its concerns regarding the existing regime could be addressed through work with stakeholders, including the Code Sponsors and the BCSB. The BSA would be happy to work with the FSA on the issues it has identified. The only significant concern that cannot be addressed is the apparent anomaly of voluntary regulation. The BSA does not believe that this argument alone is enough to justify the move to the proposed statutory regime.
The BSA does not object to statutory regulation of retail banking. Indeed, it would support responsibility for regulating all retail banking, including credit, moving to the FSA, because, in principle, there is much to recommend in having a single regulator. However, that is not what is proposed in the consultation paper. Under the proposals, the FSA would be responsible only for regulating savings and current accounts (but not current account overdrafts). Responsibility for regulating credit products would technically fall under the OFT’s remit.
The BSA is concerned that there is a danger of regulatory double jeopardy under the proposed regime and the potential loss of valuable consumer protection. The Association’s specific concerns are set out in response to the consultation questions below.
Despite these concerns, the BSA would be willing to engage constructively with the FSA should it decide to go head with the introduction of BCOB. The BSA would support and actively participate in the creation of industry guidance under BCOB. However, it would be crucial that whatever replaced the Code was capable, in practice, of ensuring even better and more effective regulation.
Q1: Do you have any comments on our analysis in Chapter 3 and our reasons for proposing a new framework?
The BSA welcomes the FSA’s findings that the Codes are seen as generally clear, user-friendly statements of good business practice, of value to both consumers and firms and that the BCSB’s supervisory tools and processes seem appropriate to meet its supervisory objectives.
The BSA acknowledges the FSA’s criticisms of the Code and would be happy to work with it to tackle these issues. The only significant concern which could not be addressed under the current regime is the apparent anomaly of self regulation. This alone is not enough to justify a move to the proposed regime, particularly as the move would mean splitting regulation of retail banking in two and potentially cause new uncertainties to the detriment of consumers and firms. The BSA is concerned that the split of retail banking regulation between the FSA and the OFT would lead to regulatory double jeopardy for firms. This is especially the case in areas like financial difficulties, where both regulators have responsibility. There is also the anomaly whereby both regulators would have responsibility for different aspects of the same product. Under the proposals, the FSA would have regulatory responsibility for current accounts where they are in credit and the OFT would have responsibility for current accounts where they are in overdraft.
The BSA is aware that the FSA is working with the OFT to produce a concordat to clarify where the boundaries lie between the two. This is a welcome move, but it is not clear to what extent either regulator would be able to fetter their responsibilities to allow the other to take the lead on matters which fall within both regulators’ remits (as the FSA document ‘The roles and responsibilities of the FSA and the OFT’ demonstrates, their respective roles are already complicated). It is important that the industry is permitted to actively participate in the drafting of the concordat.
A preferred approach would be to give the FSA responsibility for all retail banking regulation, but this would require amendment of primary legislation and could not be achieved quickly.
The other significant concern identified by the FSA, that sticking with the current regime would mean there is scope for consumer detriment, could be countered by the argument that valuable consumer protection requirements currently covered in the Code could fall away under the proposed regime. For example, 7.8 of the Code states that the subscriber will tell the customer at least 12 weeks beforehand if it plans to close or move his branch. This is not covered in the proposed BCOB and would not appear to fall under any other regulator’s remit.
This and other consumer protection measures could be incorporated into industry guidance under BCOB. However, the FSA cannot confirm the guidance on these specific measures which are outside of its remit and it is not clear how they would be policed. Even where it could be argued that a requirement, which otherwise would be outside FSA scope, would fall under the FSA’s Treating Customers Fairly initiative, there would be significant scope for firms to apply different approaches and argue that they were compliant with the principle. This means moving away from a level playing field where every firm has to comply with the same rules and is subjected to similar burdens.
Q2: Do you agree with our proposal to apply all the Principles fully for all firms that accept deposits or issue e-money (Chapter 4)?
If BCOBS goes ahead, the BSA agrees with the proposal to apply all the Principles fully for all firms that accept deposits or issue e-money.
Q3: Do you have any comments on our proposals for a Banking Conduct of Business sourcebook (Chapter 4) and the draft Handbook text in Appendix 1?
The BSA supports the British Bankers’ Associations comments on the draft BCOBS sourcebook and draft Handbook text (as set out in the annex to its response to CP 08/19).
Q4: Do you have any comments on our proposed use of the definition of micro-enterprise to cover business banking customers (Chapter 4)?
Societies do not subscribe to the Business Banking Code as they tend to provide retail products rather than business. Our concern with the use of the definition of micro-enterprise to cover business banking customers is that it may potentially cover charities and trustees, which some societies provide products for. This may result in the need to amend literature and systems to bring them in-line with BCOBS when they previously were not subject to the Business Code. Additional compliance costs would be passed on to the customer.
Q5: Do you have any comments on the proposed application of BCOBS to incoming EEA branches and e-money issuers (Chapter 4)?
If BCOBS goes ahead, the BSA agrees that it should apply to incoming branches and e-money issuers. The BSA believes that there should be a level playing field for all firms operating in the UK.
Q6: Do you have any comments on the proposed application of the requirements in BCOBS to credit unions (Chapter 4)?
No comment.
Q7: Do you think there are elements of the current Banking Codes and other relevant codes/guidelines that would not appear in the PSD Regulations or BCOBS (as proposed in this CP) but which ought not to be lost?
The following are examples of areas currently covered in the Code that do not appear in the PSD regulations or BCOBS, but which ought not to be lost -
• ATM charges
• Account closure
• Branch closure
• Liabilities for losses
• Key commitment to lend responsibly and all other credit related requirements.
Most of these could be incorporated into industry guidance under BCOBS, although it is not clear how many would potentially fall outside of the FSA’s TCF scope. As stated earlier, the BSA would support responsibility for regulating credit products moving to the FSA.
Q8: Do you have any comments on our proposed approach to operationalising the new framework (Chapter 4)?
No comment beyond highlighting the difference between the rules-based system under the Code and the proposed principles-based regulation under BCOBS. Staff dealing with retail banking at the moment are geared up to the rules-based system and would require training in how the new regime would be monitored and enforced. This should be factored in when considering transitional arrangements. That said, we understand that all societies apply TCF across their business regardless of whether or not the FSA currently monitors and enforces in those areas. The BSA looks forward to the opportunity to comment on the FSA’s high–level supervisory strategy.
Q9: Do you agree that the proposed new framework should come into effect at the same time as the PSD in November 2009 (Chapter5)?
The BSA does not agree with the FSA assessment that delivery of BCOBS in November 2009 is achievable. In the event that the FSA confirms that it will go ahead with the introduction of BCOBS, the industry would have very little time to prepare for implementation. Once finalised, any requirements which differ from the current requirements in the Code would require systems changes. This would have a significant impact on firms’ resources at a time when they are implementing systems changes for numerous other regulatory requirements and dealing with the wider challenges currently facing the industry.
The last time such a major regulatory regime change was introduced, ie the move from voluntary self-regulation under the Mortgage Code to MCOB, the industry was given 12 months to prepare. It would make sense to have a similar period of time for preparation for the move from voluntary-self regulation under the Code to BCOBS. Whilst not a matter for the FSA another option would be to delay UK implementation of the Payment Services Directive, as has happened with other EU Directives (for example the Unfair Commercial Practices Directive).
Q10: In which areas do you think transitional provisions would be desirable and for how long (Chapter 5)?
It is difficult to identify specific areas where transitional provisions would be necessary. The length of the transitional period would also vary depending on the area. As a general rule of thumb, a period of 12 months would be sensible. This would match the approach taken in the move from the Mortgage Code to MCOB and would make the effective date for total implementation of BCOB 1 November 2010.
Q11: Will a change to the proposed new framework generate any further costs that have not been identified in Annex 2?
The BSA has not identified any additional costs.
Q12: Will a change to the proposed new framework generate any further benefits that have not been identified in Annex2?
The BSA has not identified any additional benefits.
Q13: Do you have any other comments on our CBA (Annex 2)?
No comment.
Q14: Do you agree with the compatibility statement in Annex 3?
Consumer protection – The BSA agrees that extending the protection of TCF to retail banking customers would be a benefit. However, we understand that societies already extend TCF principles across the board. The benefit of gaining TCF protection should also be judged against the potential loss of valuable consumer protection in the Code which would not fit within the FSA’s or other regulators’ remits (see responses to Q1 and Q7).
Promoting public awareness – We doubt that the introduction of BCOBS would increase the public’s awareness of retail banking regulation beyond existing awareness. Customers are made aware of the Code via a Code flyer and it is available on line and displayed prominently in branches. The Code is crystal marked by the Plain English Campaign and provides a one-stop shop for information on what retail banking customers can expect from firms. While it is perhaps not a fair comparison, BCOBS is certainly not written in easily understood language and neither does it cover all retail banking areas.
Conclusion
The BSA support voluntary self-regulation via the Code. It has worked well over the years and provides a one-stop shop for all retail banking regulation matters. The BSA does not object to statutory regulation, but believes that the proposed BCOB only provides a half way house. The BSA would support responsibility for all retail banking regulation, including credit, migrating to the FSA. This would avoid the problems of regulatory double jeopardy for firms and potential confusion for customers over who regulates what.
If BCOBS does go ahead, the BSA would engage constructively with the FSA to seek to ensure smooth implementation. The BSA would support and help to produce industry guidance under BCOB to aid firms with compliance and help prevent the loss of the existing consumer protections in the Code. However, as we have noted above, the challenges would be considerable and it would be imperative to allow adequate time for the exercise.
