The paper delivered by Steven Walker, Advocate at the Edinburgh Centre of Commercial Law seminar on "The Renaissance of Scottish International Arbitration" on 24th November can be read in full here. Our many thanks to Steven for allowing us to post this to our website.
This blog deals with recent developments in banking law on two fronts:
(a) the “regulatory” front, in which we now have a new regime of regulation, and
(b) the case law front, with the (inevitable) Supreme Court judgement in the “bank charges” case.
[A] THE NEW “REGULATORY” REGIME
On 1st November, 2009, a series of significant changes or reforms (both “hard law” and “soft law”) came into effect regarding the regulation of banking in the United Kingdom.
These changes relate, primarily, to the Financial Services Authority, which, from that day, “beg[an] regulating banks’ and building societies’ day-to-day contact with their customers … , covering everything from direct debits, payments, instant access and savings accounts through to unauthorised transactions and notification of interest rate changes.”: see FSA Press Release, 28th October, 2009, available at: www.fsa.gov.uk/pages/Library/Communication/PR/2009/146.shtml
The genesis of this was the FSA’s consultation document CP08/19: www.fsa.gov.uk/pubs/cp/cp08_19.pdf
See on this, the FSA Newletter, containing Policy Statement (PS09/6), available at www.fsa.gov.uk/pubs/policy/ps09_06_newsletter.pdf
Set out below, in very brief detail, is a summary of the main regulatory changes. This is a “thumb nail sketch” in extremis. The aim is to alert readers of this blog to the changes, although what is said is not intended to be definitive in any way.
The main “regulatory” changes involve the following three developments:
(i) Payments Services Regulations 2009 (SI 2009/209, as amended by SI 2009/2457);
(ii) Banking Conduct of Business Sourcebook (“BCOBS”);
(iii) the Lending Code (2009), which replaces the Banking Code and the Business Banking Code.
(I) PAYMENT SERVICES REGULATIONS 2009
These regulations implemented the EC Payment Services Directive, Directive 2007/64/EC/, OJ L 319/1- 319/36, 5/12/2007, amongst other things. (The Directive is available at www.eur-lex.europa.eu/). The 2009 Regulations are over 100 pages long, and have over 120 regulations contained in 9 parts.
FSA Register of “Authorised Payment Institutions” and “Small Payment Institutions”
Under the 2009 Regulations, the Financial Services Authority (“FSA” – referred to in the legislation as “the Authority”) is responsible for having “a register of”: (i) “authorised payment institutions and their EEA branches”, (ii) “small payment institutions”, and (iii) their “agents” (reg 4). Existing “financial institutions”, e.g., banks authorised under the Financial Services and Markets Act 2000 regime, are, in effect, given an exemption from having to apply for registration (regs 121-122; see also reg 123).
For would be applicants, there is a “fit and proper person” test (reg 6(6)), with “bodies corporate” needing to show, amongst other things, they can deal with “risk” properly and have the necessary “internal control mechanisms” (reg 6(5)). It is a criminal offence to provide “payment services” if you are not authorised (reg 110), or if you wrongly pretend to be authorised (reg 111), subject to a defence of taking “all reasonable precautions and exercis[ing] all due diligence” (reg 112).
Moreover, under the 2009 Regulations, there are requirements imposed upon the “authorised payment institutions” regarding maintaining stated “capital” requirements “at all times” (reg 18, and Sch 3, Pt 2); safeguarding “relevant funds” (reg 19); notifying the FSA about proposed “outsourcing”, and complying with the conditions related to it (reg 21); and complying with the “record keeping requirements” (reg 22).
Apply to “Non-Paper Based” Transactions
The 2009 Regulations apply essentially to “non-paper based” “payment services”, so “cheques” and “postal orders”, and “bankers’ drafts”, are excluded (see definition of ‘“payment services”’ in reg 2(1) and Sch 1, Pt 2, para 2(g)), but “direct debits”, “standing orders”, “cash withdrawals” and card payments are included (see definition of “payment services” in reg 2(1) and Sch 1, Pt 1, para 1). As well as providing payment services, “authorised payment institutions” plus “small payment institutions” can provide “ancillary services”, such as, “foreign exchange”, and storing “data” plus “processing” it. (reg 27(1)).
FSA Carrying Out Functions
In carrying out its “functions”, under the 2009 Regulations, the FSA must, amongst other things, use “resources” efficiently and economically; respect “the international character of financial services and markets and the desirability of maintaining the competitive position of the United Kingdom”; and “minimise the adverse effects on competition” (reg 80(2)).
FSA Powers of Enforcement
Under the Regulations, the FSA has various “tools” and powers regarding enforcement, such as: (i) “monitoring and enforcement” powers (reg 81); power to compel the giving of “information” (reg 82); power to enter premises “without a warrant” and look at, and “take copies of”, documents (reg 83); power to “name and shame” (reg 84); power to impose “financial penalties” “of such amount as [the FSA] considers appropriate” (reg 85); a power to apply for an interdict (reg 87); powers to make a party to make restitution (regs 88-89), and to apply to the court for a “restitution order” (reg 90).
In addition to the above, and to aid compliance, the FSA has a “guidance” powers regarding the 2009 Regulations’ “operation”, and their own “functions” (reg 93).
No Damages Claims Against FSA
The FSA’s “functions” are exempt from liability for damages, pursuant to Sch 1, Pt 4, para 19 of the Financial Services and Markets Act 2000 (reg 94).
“EEA Passport Rights”
The 2009 Regulations also “beef up” provisions regarding EEA “banking passport rights”, under which a bank with consent of a home regulator, may carry on business in other EEA member states, rather than having to receive consent from each home regulator. Oddly, under the Scheme, it is the original home regulator, rather than the host regulator, who bears the major responsibility for supervision, in the main. These “passport rights” are set out ss 34 and 37 and Sch 3 of the Financial Services and Markets Act 2000. However, the adequacy of such supervision has been criticised. In the 2009 Regulations, the supervision of financial institutions involved using “banking passport rights” has been stepped up.
Under those Regulations, “first time” users of the scheme, will need to give “notice” to the FSA that they wish to exercise such rights, and the FSA will notify the “host state competent authority” (regs 23(1), (2)). The FSA can “refuse to register” “an EEA branch” (under reg 4), “or cancel” an existing registration where “it has reasonable grounds” (which may include “information … from a host state competent authority”) for suspecting involvement in “money laundering or terrorist financing” (reg 24).
Further, under reg 25, greater co-operation between the FSA and respective “host and home state competent authorities” is envisaged, with “on-site inspections by the FSA, with appropriate approval by such an authority, as well as providing information to these authorities, and infoming them about suspected “money laundering or terrorist financing” activities on “reasonable grounds”.
“Payment Service User” Rights
In addition, under Part 5, the “payment service user” has various rights. For example, such a “user” has a right to have information about “transactions” provided to him to be “in English”, and in a way which is both “easily accessible” and “easily understandable” (reg 47), and for which there is to be no “charge”, although “additional information” may be charged for (reg 48). Further, where there are “currency conversion services”, the charges plus “the exchange rate” have to be disclosed prior to “the payment transaction” (reg 49); also, “information” regarding extra charges or reductions, must be disclosed prior to “the payment transaction”
“Unauthorised Payment Transactions”
Where a “payment instrument” has been “lost or stolen”, or there is a failure by the “the payer” to keep its “personalised security features” secure, and the “instrument” has been “misappropriated”, then “the payer” (e.g., card holder) will be liable for the first £50.00 only (reg 62). This is subject to exceptions concerning: (i) fraud, or (ii) “gross negligence” where the “payment instrument” has not been used as per “the terms and conditions” of usage, or there has been a failure to report “without undue delay” a “loss, theft, misappropriation or “unauthorised use of the payment instrument” (reg 62(2), referring to reg 57). There are similar provisions in the BCOBS (BCOBS 5.1.12R and 5.1.13R, and the Lending Code, paras 112 and 113)
Nonetheless, subject to certain conditions, where there has been an “unauthorised payment transaction”, “the payer” is liable to a “full” “refund” from “the payment service provider”. (reg 63) This is consistent with the position under the general law, where there would be an action for debt.
Private Right to Sue
Also, a “private person” has a limited private right to sue for breach of certain regulations (reg 120).
Lastly, where there are restrictive practices, which are prohibited, concerning “access to, or participation in, a payment system”, (reg 97), the Office of Fair Trading has investigative powers (reg 98); information gathering powers (regs 99-103); “enforcement” powers (regs 104-105); including a power requiring the provision of relevant information (reg 99 and 100). The 2009 Regulations deal, amongst other things, with the “Exercise of Passport Rights” (Part 3, of 2009 Regulations, regs 23-26), and the “Payer’s liability for unauthorised payment transactions” (reg 63 of the 2009 Regulations), which seemingly replicates the 50.00 “maximum” threshold for cardholders under the (now almost obsolete) Banking Codes.
Co-operation between Regulators and Competition Bodies
Under reg 119, there is a requirement of co-operation between the FSA, the OFT and the Competition Commissioners.
Amendments to Other Legislation
The 2009 Regulations amend, amongst other things, the Money Laundering Regulations 2007 (SI 2007/2157, as amended by SI 2007/3299), and the Financial Services and Markets Act (Regulated Activities) Order 2001 (SI 2001/544 (as amended)) : see Sch 6, Part 2 of the 2009 Regulations.
FSA “Approach” regarding the Payments Services Regulations 2009
The FSA has set out “guidance” regarding the implementation and application of the Payment Services Regulations 2009, entitled “The FSA’s role under the Payment Services Regulations 2009: Our approach”. The guide is over 140 pages long. It can be accessed at the following web address:
(II) BANKING CODE OF BUSINESS SOURCEBOOK (“BCOBS”)
In addition to the 2009 Regulations, and the powers they give the Financial Services Authority, the FSA has supplemented these Regulations via its “Handbook” with the BCOBS. It is available on the Financial Services Authority’s website under the “Handbook” section: www.fsa.gov.uk/Pages/handbook
The BCOBS is applicable to a company which accepts “deposits from banking customers” (“consumers”, “micro-entities” and “charities” with “an annual income of” under £1m) within “the United Kingdom and activities connected with” the acceptance of “deposits”: see BCOBS 1.1.1R and the Glossary. A ‘“micro enterprise”’ is a business employing less than 10 persons whose “annual turnover” is under Euros 2m: see Glossary.
"Fair Communications" and Treatment
It is reinforces two principles from the FSA’s Principles for Businesses in their Handbook: (i) Principle 6, concerned with taking account of the customers’ interests and treating them fairly) and (ii) Principle 7, concerned with taking account of the customer’s “information needs” and providing “information” in “clear, fair and not misleading” manner: see BCOBS 2.1.1G. These principles are then applied in Chapter 2 of the BCOBS (“fair, clear and not misleading” “communications”) to “financial promotions” regarding “retail banking services”: BCOBS 2.1.1R. The chapter also applies in relation to “communication” with “banking customers” regarding “accepting deposits”: see BCOBS 2.1.3R. Under Chapter 2, “communications” are to be “appropriate and proportionate”: BCOBS 2.2.2G.
The BCOBS also deals with “Distance marketing” (Chapter 3, including “E Commerce” (BCOBS 3.2)); and “Post sale requirements” of customers (under Chapter 5, which includes giving a “prompt, efficient and fair” “service” to a “banking customer” regarding “a retail banking service”: BCOBS 5.1.1R).
Information Allowing “Informed Decisions”
Chapter 4 of the BCOBS imposes requirements concerning “appropriate information” being given, regarding “retail banking services” and any related “deposits”, “in good time”, “in an appropriate medium” as well as “in easily understandable language and in a comprehensible form” in order to the making of “decisions on an informed basis” by “banking customers”: BCOBS 4.1.1R. Where there are changes to “terms and conditions”, there should be “reasonable notice” to the “banking customer”: BCOBS 4.1.2G.
Like the 2009 Regulations, a bank has to “refund” “within a reasonable” time the sum of an “unauthorised payment”, with the onus being on the bank: BCOBS 5.1.11R. And, like the 2009 Regulations, there is a £50.00 excess on a customer for “unauthorised payments where the payment was due to “a lost or stolen payment instrument”, or a failure “to keep the security features safe”: BCOBS 5.1.12R. Where there has been fraud or “gross negligence” by the customer, then a bank can “provide for a banking customer to be liable for all losses” regarding “unauthorised payments”: BCOBS 5.1.12(2)R. (See also BCOBS 5.16R regarding “non-executed or defective payments”.)
Under Chapter 6, there is a 14 day cancellation right regarding a “rental banking service” agreement – a record of which must be kept for three years by the bank: BCOBS 6.2.3R.
Private “Rights of Action”
In addition to FSA sanctions, there can be private “rights of action”, pursuant to s 150 of the Financial Services and Markets Act 2000: BCOBS Sch 5.
In many cases, there is a six month transitional period, although in one case (BCOBS 5.1.13R), the period is three months: see BCOBS TP 1 Transitional Provisions and Schedules (BCOBS transchedule).
The 2009 Regulations or the BCOBS?
One concern raised by the British Bankers’ Association is the degree of “overlap” between the 2009 Regulations and the BCOBS, i.e., which regime (the 2009 Regulations or BCOBS or both) applies: see “Where do the PSRs end and BCOBS begin?” in “In memory of the Banking Code”, dated 11th November, 2009, available on the BBA website at www.bba.org.uk/bba/jsp/polopoly.jsp?d=140&a=16801
It is suggested, however, that, as the Regulations are implementing an EC Directive, they should take primacy over the BCOBS, on the basis that the BCOBS will have to be compliant with the EC Directive, and, hence, the 2009 Regulations.
Replacement of the Banking Codes
It is clear that the BCOBS would “replace the “two Banking Codes”: see page 2 of the FSA Newletter, containing a summary of Policy Statement (PS09/6), available at www.fsa.gov.uk/pubs/policy/ps09_06_newsletter.pdf
See also the BBA on this in: “In memory of the Banking Code”, dated 11th November, 2009, available on the BBA website at www.bba.org.uk/bba/jsp/polopoly.jsp?d=140&a=16801
(III) THE NEW LENDING CODE
This replaces the Banking Codes. It is a code signed up for by the British Banking Association members, Building Societies Association and the UK Cards Association, and came into effect on 1st November, 2009: see the BBA summary of the changes: “In memory of the Banking Code”, dated 11th November, 2009, available on the BBA website at www.bba.org.uk/bba/jsp/polopoly.jsp?d=140&a=16801 However, there is a six month transition period: see para 9 of the Lending Code.
The Lending Code is available on the BBA website: www.bba.org.uk/bba/content/1/c6/01/68/32/The_Lending_Code.pdf
The Lending Code applies to: (i) “consumers”, as well as (ii) “micro-enterprises” which have less than 10 employees and a turn-over or annual balance sheet of less than £2m, and (iii) “charities”, whose “annual income” is below £1m: see para 1 and fn 1 of the Lending Code.
The Lending Code does not, however, deal with loans for mortgages to buy a house, which are the domain of the FSA under its Handbook: see "Mortgages and Home Finance: Conduct of Business Sourcebook" (“MCOB”); or “merchant services”, or “sales finance”: see para 2. Moreover, the Code is independent of the FSA: see para 5. However, the Lending Standards Board will be an independent monitor of Code compliance: see para 4. The Lending Standards Board replaced the Banking Code Standards Board: see below. What is also interesting is that parties to the Code have revived their old 1997 “Statement of Principles”, which were, in effect, superseded by the Business Banking Codes. A revised version is contained in Annex B of the Lending Code.
Credit Reference Agencies
The Code contains 11 sections. Of these it is worth noting that in Section 3, which deals with “credit reference agencies”, and is in terms similar to the Banking Codes, the new Lending Code refers to unilateral disclosure by the lender, with "28 days’" "notice", to rectify the matter: see paras 35 and 36.
Also, in section 7 on “Loans”, there is a section on “guarantees”, in which reference is made to the confidentiality aspects of obtaining information about the principal debtor’s account with their approval: see paras 119 and 120 of the Lending Code. And it is stated so-called “unlimited guarantees” “should not be taken … from individuals”, by lenders, except to “support a customer’s liabilities under a merchant agreement”: see para 123. Nonetheless, “other” types “of unlimited third party security” is able “to be taken from an individual”, on condition that there is an explanation of what the guarantor will be liable for: see para 123.
“Unauthorised” Card Usage
Where there is “unauthorised use” of a customer’s card, then there is a £50.00 excess, subject to the fraud and negligence exceptions: see para 111-114. The lender bears the onus of proof in disputed claims: see para 115.
Other parts of the Code refer to: “Communications and Financial Promotions” (which are also dealt with in Chs 2 and 4 of the BCOBS); “Credit Assessments” (section 4); “Current accounts overdrafts” (section 5); “Credit Cards” (section 6); “Terms and Conditions” (section 8); “Financial Difficulties”, which requires lenders to “be sympathetic and positive when considering a customer’s financial difficulties”: see para 137 (section 9); “Complaints” (section 10); and “Monitoring” (section 11).
Lending Code Standards Board
With the demise of the Banking Codes, the Banking Code Standards Board ceased to exist, and was replaced by the Lending Code Standards Board, as indicated above. It came into effect on 2nd November, 2009: see “About Us” at www.lendingstandardsboard.org.uk
The Board can be found at www.lendingstandardsboard.org.uk.
A very brief summary of the new regime, with critical comments, can be found on the British Bankers’ Association website, under the heading: “In memory of the Banking Code”, dated 11th November, 2009, available on the BBA website at www.bba.org.uk/bba/jsp/polopoly.jsp?d=140&a=16801
These changes, which have something of a “run in time”, come against the background of recent discussions between European Union finance ministers about having a something like a “super EU financial regulator”, and a recent G20 summit concerned with, amongst other things, bankers’ bonuses.
Without wishing to comment on those two events, it is to be wondered, at least at a national level, whether “more regulation is necessarily better regulation”. The FSA Handbook, as anyone who has looked at it will know, is already voluminous in its list of “commands” as to what people and companies in the financial services profession can and cannot do. It is to be wondered if there is not an element of “reinventing the wheel” here.
[B] CASE LAW – “BANK CHARGES CASE”
As readers of this blog will be aware, the Supreme Court has delivered its judgement in the controversial bank charges case: Office of Fair Trading v Abbey National plc  UKSC 6.
It will be recalled that the case concerned the legitimacy of the Office of Fair Trading challenging “the fairness of bank charges”, where a customer exceeded the authorised overdraft limit on their current account, and were charged a set fee for doing so: see at para 3. The issue before the Court, as their Lordships were at pains to point out (see, for example, Lord Walker, at paras 1 and 3), was not whether the bank charges were “fair”, but whether the OFT had jurisdiction, under the Unfair Terms in Consumer Contracts Regulations 1999 (SI 1999/2083), to consider their “fairness”.
The key provision was Reg 6(2) of the 1999 Regulations, which says that:
“In so far as it is in plain intelligible language, the assessment of fairness of a term shall not relate-
(a) to the definition of the main subject matter of the contract, or
(b) to the adequacy of the price or remuneration, as against the goods or services supplied in exchange.”
It will be recalled that, under reg 5 “a contractual term … not … individually negotiated” is deemed “unfair” where, “contrary to … good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer.” The remedy, under reg 8(1), is that such a provision is “not binding on the consumer”, although, under reg 8(2), this will not affect the validity of the contract if severance is possible.
The Office of Fair Trading, which was investigating how “fair” charges for current accounts were, brought proceedings as, under reg 10 of the 1999 Regulations, it is obligated to investigate a “complaint” that a contractual provision is “unfair”, where that provision is in “general use”, and, pursuant to s 213(1) of the Enterprise Act 2002, is “a general enforcer”, who can seek “an enforcement order”, pursuant to s 215(2) of the Enterprise Act 2002: see the judgement at first instance:  EWHC 875 (Comm), ;  2 All ER (Comm) 625, para 3, per Andrew Smith J.
Held by the Supreme Court
In coming to their conclusion to overturn the decisions at first instance and in the Court of Appeal, their Lordships held, in effect, that the overdraft facility and associated fee structure, formed part of the pricing of “the services” provided by banks.
The Court felt that “the services” provided by banks to holders of current accounts included: “the collection and payment of cheques, other money transmission services facilities for cash distribution (mainly by ATM machines either at manned branches or elsewhere) and the provision of statements in printed or electronic forms”: see Lord Walker (who gave the leading judgement), at para 40; see also Lord Phillips at para 53.
The key issue was whether reg 6(2) applied, so that the term’s “unfairness” could not be considered by the OFT: see para 47. In this regard, Lord Walker said:
“Charges for unauthorised overdrafts are money consideration for the package of banking services supplied to personal current account customers. They are an important part of the banks’ charging structure, amounting to over 30 per cent of their revenue stream from all personal current account customers. The facts that the charges are contingent, and that the majority of customers do not incur them, are irrelevant. On the view I take of the construction of Regulation 6(2), the fairness of the charges would be exempt from review in point of appropriateness under Regulation 6(2)(b) even if fewer customers paid them, and they formed a smaller part of the banks’ revenue stream.”
See also Lord Phillips, at para 88 (who, at para 90, also agreed with Lord Walker); Lady Hale, at para 92; Lord Mance, at paras 104, and 114; and Lord Neuberger, at para 119.
However, the Court did feel it was a matter that Parliament may wish to look at again, given that “in an era of so-called ‘light-touch’ regulation, to transpose the [Council] Directive [93/13/EEC on unfair terms in consumer contracts”] as it stood rather than to confer the higher degree of consumer protection afforded by national laws of some other member states”: see Lord Walker, at para 52; Lady Hale, at para 93; and Lord Mance, at para 118; see too Lord Phillips regarding other avenues for the OFT.
On a subsidiary point, the Supreme Court refused an Article 234 reference to the European Court of Justice, although Lord Phillips was dubitante.
It was inevitable that this case would go to the highest court in the land, given what was at stake, and the respective strengths of the two parties: the OFT and the banks.
Whilst a general regulatory action, by the OFT, on behalf of a large body of persons has been rejected, the individual concerned could try to challenge any payment on the basis that it is a penalty, and not proportionate” to the loss suffered, e.g., for being overdrawn £2.00, they were charged £30.00, particularly if the outstanding sum was repaid quickly. The position would be different for a party who was substantially overdrawn. In the former case, the bank is very likely to settle rather than go to court
“Victims” and “Villains” of the Global Recession: the Judicial View
And, lastly, the Supreme Court has, obiter, given its views of the possible “victims” and “villains” regarding the current global recession.
In Re Sigma Finance Corpn (in administrative receivership)  UKSC 2, Sigma, “a structured investment vehicle, whose business involved acquiring asset-backed securities and other instruments, using funds raised by issuing or guaranteeing US dollar and Euro medium term notes (MTNs) as well as liquidity from other sources, such as facilities, derivatives, repurchase (or ‘repo’) contracts and capital notes … ” which subsequently had liquidity problems, was described, together with “those who invested in it”, by Lord Mance, at para 1, as “victims of the current financial crisis”. (Underlining added.)
However, at para 39, in dissent, Lord Walker (who later, in the “Bank charges” case (above), took a swipe at “so-called ‘light-touch’ regulation”), had a more robust and less charitable view, when he said:
“These appeals will determine how the enormous loss incurred by Sigma Finance Corporation is to be borne as between the anonymous investment banks, hedge funds and other entities which are its secured creditors. Lord Mance refers to them as victims of the current financial crisis. An alternative view would be that they are among the authors of the crisis. But that is not an issue for the Court.” (Underlining added.)
It is good to see vigorous debate in the final court of appeal.