Retail Distribution Review – independence, clarity and fairness

The Financial Services Authority began consultation earlier this summer (2009) on changes it proposes to its Retail Distribution Review.  The emphasis is on independence, clarity and fairness in the relationship between adviser and investor.  My firm, CMS Cameron McKenna are holding a briefing on RDR and on the FSA after the credit crunch: (how ARROW, Supervision, Policy and Enforcement have changed) in Edinburgh on 16th September 2009 and in London on 22 September.  Please email fs.seminars@cms-cmck.com if you would like a place.

Some recent issues

At a recent “round table”, I gave an overview of legal developments of interest to bank lawyers. Here is a summary:

Regulatory Reform

Is a perfect maelstrom of activity for obvious reasons, as banks are being handed birch twigs to beat themselves penitentially for not counting the pennies. Events have been moving faster than I can blog, and now in the FT we have talk of a turf war between the Bank of England and the FSA cuminating today in the threat of yet another Banking Act.  A few weeks ago, the House of Lords put the boot into the FSA by recommending reform of the tripartite system of FSA/BoE/HMT regulation. They want to reverse history and return supervisory powers to the BoE. You could feel sorry for the FSA. The BBA threw themselves into the job of replying to the FSA consultation “A regulatory response to the global banking crisis” and asked for much more thought to be put into the proposals. The BBA challenge the assumption that any additional regulatory requirement can be justified because “it can’t cost as much as the crisis”.  The FSA propose to take on enforcement of what used to be the BBA’s voluntary Banking Code in November, to levy fines on errant banks. And they have set out the final rules of BCOBS affecting retail banking for consumers and small businesses and requiring banks to help consumers to switch accounts promptly and efficiently.  On top of all this, the OFT are consulting on its Financial Services Strategy, in order to promote fairness and responsibility in the credit industry and its customers. The FSA, not being very busy, have also published a paper on Consumer Responsibility: consumers and lenders are expected to show responsibility, in lending, borrowing, mortgaging, using credit cards and when discussing the EU Responsible Lending Directive.  This hasn’t gone down well with consumer groups.

Registration of company charges

You will soon need to dust off your old files because the consultation is going to start up again in 2010. We will revisit the brave new world of electronic registration and start talking knowledgeably about New Zealand and Canadian personal property security law again as if we were all old hands.

Banking Act 2009

Then there is the Banking Act 2009 and its importance to financial stability. The continuity of banking services is now enshrined in law with a special insolvency position for banks: the special resolution regime. The Safeguards Order has posed some difficulty with its carve outs to the safeguards creating a lack of legal certainty that affected unqualified legal opinions for set off and netting arrangements. This is the “one bad apple” problem – if a failing bank undergoes a partial transfer of assets, the government should be able (to continue the fruity analogy) to cherry-pick assets from a netting arrangement with the Bank and avoid the bad apple. The concern was that the Safeguards Order as drafted would have lead to whole ISDA Master Agreements being taken down in a partial transfer of assets. The drafting problem was where assets in the netting arrangement were to be “solely” “financial instruments” – as defined in MIFID, which automatically excluded forwards, commodity derivatives, life insurance derivatives, spot and forward FX. Despite a few Parliamentary distractions recently, HMT laid a revised draft before Parliament for approval and the drafting error has been rectified. Considering the Order for approval under the affirmative resolution procedure will make a welcome relief from choosing a floating duck house that no duck wants to live in.

Payment Services Directive

The Payment Services Regulations, implementing the PSD nationally to harmonise payment systems across the EU will be thoroughly embedded in banks’ activities by now. The PSD will be implemented in November 2009, the FSA handbook will be amended and banks are well up on changing their payment systems to comply. Perimeter guidance has been issued by the FSA to help banks decide if their activities fall in the scope of the PSD.

Reform of OTC derivatives regulation

And finally, the US have proposed regulatory reform of OTC derivatives to prevent activities in the OTC derivatives markets from posing risk to the financial system; to promote the efficiency and transparency of the OTC derivatives markets; to prevent market manipulation, fraud, and other market abuses; and to ensure that OTC derivatives are not marketed inappropriately to unsophisticated parties.  Sonnenschein’s have a good note on it.

Equality Bill

The Government introduced the Equality Bill to the House of Commons on 27 April 2009.  The Bill is to strengthen existing equality law and introduce new measures against discrimination. The Bill makes it unlawful to discriminate against someone aged 18 or over when providing services, which will include the provision of financial services.  The second reading is due on 11 May 2009.

Consultation on the Consumer Credit Directive

The Department for Business, Enterprise and Regulatory Reform have begun the consultation on proposing the transposition of Directive 2008/48 (Consumer Credit Directive) into UK law. The Directive must be implemented by June 2010. It introduces: 

• a duty on the lender to provide adequate explanations about the credit on offer to the consumer; 
• an obligation on the lender to check creditworthiness before offering or increasing credit; requirements concerning credit reference databases; 
• a right for consumers to withdraw from a credit agreement within 14 days, without giving any reason; 
• requirements to inform consumers when debts are sold on; and 
• requirements for credit intermediaries to disclose fees and links to creditors.

s 75 CCA appeal has started in House of Lords

The appeal to the House of Lords on the applicability of s  75 Consumer Credit Act 1974 to overseas transactions has started, on 2 October 2007.  The issue is whether credit card issuers are jointly liable with overseas suppliers if the consumer has a valid claim for misrepresentation or breach of contract by the supplier, where the price of the purchase is between £100 and £30,000.  The hearing is expected to last two days and a judgment will be handed down at a later date.

The High Court ruled in November 2004 that section 75 applied to domestic credit card transactions only.  Then the Court of Appeal extended that to overseas transactions (on 22 March 2006).  Credit card issuers appealed that decision and this is the hearing.

The House of Lords judgment will show whether s. 75 covers overseas transactions where:

•  a consumer uses a UK credit card to buy goods abroad
•  a consumer orders goods from a foreign supplier while abroad for delivery into the UK
• a consumer in the UK buys goods which are delivered to a UK address from overseas by telephone, mail order or over the internet
• there is face-to-face pre-contract dealings with a foreign supplier temporarily in the UK, or with a UK agent of a foreign supplier, but the contract is not completed in the UK.

Home Credit Market Investigation Order 2007

The Home Credit Market Investigation Order 2007 will come into force on 4 October 2007.  The Order, which is made under sections 138 and 161 of the Enterprise Act 2002, contains provisions relating to the sharing of data on customers’ payment records, publication of prices, provision of information in client statements and rebates for early repayment of loans.

To explain, I can’t do better than to quote from the Competition Commission’s explanatory notes to the (draft) Order:  “On 30 November 2006, the CC published its report on its investigation into the home credit market. The report set out a number of remedies to address the adverse effects on competition that it found. The CC has drafted an Order to give effect to these remedies. The remedies seek to implement price transparency and decrease the information asymmetries between incumbent lenders and other lenders. We consider that this will contribute to the development of greater price competition among lenders and increase competition for home credit customers.”

PPI market investigation

More activity to report from the Competition Commission. It has published an issues statement as part of its investigation into the market for the supply of payment protection insurance in the UK. The issues statement identifies the specific questions and areas the CC believes are relevant in deciding whether any feature of the market for PPI products restricts, distorts or prevents competition. It will be used as the basis to guide collection of evidence including the first round of hearings with interested parties during the period May to July 2007.

Credit card interest calculations: super-complaint

The OFT has received a super-complaint from Which? relating to credit card interest rate calculation methods. The consumer campaign body has asked the OFT to look at concerns relating to the number of different methods used to calculate interest rates for credit cards. The OFT will fast track this complaint and announce within 90 days what action, if any, it proposes to take.

Personal Accounts: A New Way to Save

A White Paper has been issued by the Department for Work and Pensions .  This is part of the Government’s strategy to help people to help themselves by encouraging good savings habits for one’s own pension provision.  The Executive Summary weighs in at a hefty 40 pages; designed for the time-rich executive. 

The main point of the exercise, and the bits that relate to (bank) accounts are:

• seven million people are undersaving for retirement. The Government is reforming the private pensions system to simplify pensions and overcome the obstacles to saving.  

• all eligible employees will be automatically enrolled into either a personal account or an employer-sponsored scheme. Employees will contribute a minimum of 4 per cent, matched by a minimum 3 per cent employer contribution and around 1 per cent in the form of normal tax relief from the State. This will overcome the inertia and short-termism that characterise attitudes to saving;

• a new scheme of low cost personal accounts based on the approach outlined by the Pensions Commission. This approach will maximise coverage among our target group, minimising charges and delivery risk;

•  a new national minimum employer contribution to improve incentives to save and increase pension participation;

• an innovative approach to delivering the scheme using a delivery authority, staffed by individuals with expertise in business and financial services;

•  a governance scheme with operational independence, whose duty to consult members and act in their interests will insulate it from external pressures; and

•  a set of policies to ensure that personal accounts will complement, rather than compete with, existing high quality pension provision, including no transfers in and out of personal accounts and a maximum annual contribution of at least £5,000.