In November, the FSA is introducing BCOBS, an element of a new regime that will bring to an end the popular self-regulation of the retail banking business

Despite much industry support for the current voluntary regime of regulation of retail banking business, the days of self-regulation under the Banking Codes are numbered. On 1 November, 2009, the Financial Services Authority (FSA) will implement the new Banking and Payment Services Conduct Regime including a new Banking Conduct of Business Sourcebook (BCOBS). So what, in practise, does BCOBS mean for the future of UK retail banking?

The background to BCOBS

Currently, certain key commitments owed to customers by banks in relation to current accounts, personal loans and overdrafts, savings, card services and ATMs are set out in voluntary Banking Codes. Compliance with the codes is monitored and enforced by the Banking Code Standards Board (BCSB).

The Financial Services Authority (FSA) has, however, identified certain deficiencies in this voluntary regime, most notably that the BCSB has limited powers of enforcement and no power to impose fines. Additionally, the codes are based on prescribed rules rather than general principles favoured by the FSA and do not focus on desirable consumer outcomes.

In light of this, and coupled with the FSA's new role as the UK's regulator of payment services pursuant to the Payment Services Directive, which will see the FSA regulating payment transactions by banks and building societies from November 2009, the FSA believes the time is right to extend its remit to most aspects of retail banking.

The FSA's new regime

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 EEA branches of credit institutions and e-money issuers. The FSA's Principles for Businesses will be applied to the regulated activities of accepting deposits and issuing e-money.

The 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-focused rules primarily relating to the provision of information to retail banking consumers and small businesses outside the scope of the Payment Services Directive.

In essence, BCOBS will provide rules and guidance on communications with banking customers, post-sale service requirements and cancellation rights and will protect "banking customers", which will cover consumers, micro-enterprises and charities with an annual income of less than £1m.

For consumers, the central principle of BCOBS should be a welcome end to the voluntary regulation of their principal retail banking relationships. Consumers should be more certain what they can expect from their retail bank, with dissuasive punishment able to be imposed on non-compliant firms.

However, BCOBS does not tell the full story. Under the FSA's proposals it would only be responsible for regulating savings and current accounts but not credit products. This has created uncertainty about how the provisions of the Banking Codes relating to overdrafts, unsecured credit and credit cards will continue to apply and has attracted criticism from the industry.

The Office of Fair Trading (OFT) will continue to regulate the provision of consumer credit. However, although the exact fate of the Banking Codes has not yet been determined, it would seem impossible for them to survive in anything approaching their current form. Although the FSA has stated that it intends to work with the 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 cooperation and coordination to ensure consistency in their approach to regulation.

In pressing ahead with implementation on 1 November, when the exact fate of the Banking Codes is still uncertain, when the future role of the BCSB has not been finally agreed and when essential replacement industry guidance has not yet been issued, the FSA is risking creating a period of confusion for consumers and industry players, when the purpose of BCOBS is to couch consumers' main retail banking relationship in greater certainty.

So where do we go from here?

BCOBS will come into force on 1 November. Firms subject to BCOBS will need to consider the impact of the new regime on their internal compliance and other processes and systems, and on customer-facing documents. In light of the FSA applying the Principles for Businesses to deposit-taking, firms will need to reflect the overarching obligation to treat customers fairly throughout the entire product development, design, marketing, information and sales process for retail products covered by BCOBS. The FSA has made it clear it is not minded to grant firms anything other than very limited transitional provisions beyond 1 November.
Between now and November the regulators and industry players have to work together closely to agree, and communicate to the retail banking public, 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 FSA also plans to issue a further consultation paper in July consulting on transitional arrangements and other minor amendments to BCOBS. The landscape could change further 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. 

Gary MacDonald is a senior associate and Sarah Melaney a solicitor at Pinsent Masons.