Retail depositors, conduct of business and sanctioning
| Published date | 24 July 2009 |
| Date | 24 July 2009 |
| DOI | https://doi.org/10.1108/13581980910972241 |
| Pages | 302-317 |
| Author | Peter Cartwright |
| Subject Matter | Accounting & finance |
Retail depositors, conduct
of business and sanctioning
Peter Cartwright
School of Law, University of Nottingham, Nottingham, UK
Abstract
Purpose – The purpose of this paper is to consider whether a move from self-regulation in the form
of the Banking Code to statutory regulation by the Financial Services Authority (FSA) of retail
banking conduct of business is to be supported.
Design/methodology/approach – The paper begins by examining the nature of the self-regulatory
process and then considers its strengths and weaknesses in the context of the Banking Code. It then
looks at the changes proposed by the FSA. Focusing in particular on the issue of enforcement,
the paper contrasts the powers of the Banking Code Standards Board and the FSA.
Findings – The paper concludes that, while a move to statutory regulation is to be supported, there
is concern about whether such a move will bring the benefits that might have been expected.
Practical implications – More attention needs to be paid to the ways that different forms of
regulation operate in practice, with empirical research particularly valuable.
Originality/value – The paper adds to the (relatively brief) literature on consumer protection in
banking, and the even briefer body of research on self-regulation.
Keywords Consumer protection,Banking, Regulation, Savings,United Kingdom
Paper type Research paper
Introduction
Consumers are more likely to deal with banks than with any other provider of financial
services, and among banking products are most likely to have current and savings
accounts. As the Financial Services Authority (FSA) has noted, these products (along
with consumer credit) most obviously constitute “retail banking”. However, when the
FSA was given powers to regulate financial services in the UK, it was notable that
it made few detailed rules in the area of retail deposit taking, and it did not take on
responsibility for consumer credit.
Unlike consumer credit (which is the responsibility of the Office of Fair Trading
(OFT), deposit taking is an activity for which the FSA has responsibility under the
Financial Services and Markets Act 2000 (FSMA). However, the FSA has largely
allowed the banking industry to regulate itself through the provisions on the Banking
Code[1]. The Banking Code was created as a result of recommendations made by the Jack
Committee, which had been established to examine the law relating to the provision of
banking services to personal and business customers in the UK (Jack, 1989, Cm. 622).
More specifically, the Committee was asked “if appropriate and after consultation to
recommend the introduction of codes of good practice (on such matters as model contract
terms, information for customers or new banking procedures)”[2]. The Jack Committee
recommended that banks should develop a code of banking practice based on standards
of best practice that the Committee set out. If the Government did not consider this to be
an adequate response to the Report, it was recommended that it should conside r enacting
enabling legislation to support a statutory code of Banking Practice, and an associated
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JFRC
17,3
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Journal of Financial Regulation and
Compliance
Vol. 17 No. 3, 2009
pp. 302-317
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/13581980910972241
duty to trade fairly with their customers. The first code came into effect in 1992, an d the
most recent was published in 2008.
The FSA published a consultation paper in November 2008 which proposes a new
framework for regulating retail banking conduct of business (FSA, 2008b). The
principal impetus for this reappraisal comes from need to the implement the Payment
Services Directive in the UK (to be done via the Payment Services Regulations).
However, also relevant is the FSA’s (2008b, para. 1.6) desire to “address more
comprehensively and effectively prudential and conduct risks affecting the whole of
firms’ retail market activities”. More specifically, the FSA has identified the following
justifications for change (FSA, 2008b):
.it is increasingly anomalous that the FSA does not regulate retail consumers’
core financial services relationship especially now that we are to regulate
payments services;
.this anomaly potentially restricts our regulatory effectiveness because we are
unable to look comprehensively across all risks affecting firms’ retail market
activities within our scope;
.there may be scope for consumer detriment because in this key sector we are not
enforcing Principle 6 (a firm must pay due regard to the interests of its customers
and treat them fairly), the cornerstone of our regulatory approach; and
.our risk-based approach has affected the cost benefit case for voluntary self
regulation of retail banking services.
The purpose of this paper is to consider whether a move from self-regulation in the
form of the Banking Code to statutory regulation by the FSA of retail banking conduct
of business is to be supported. Particular attention is paid to the monitoring and
enforcement powers that are, and will be, available. The paper begins by examining
the nature of the self-regulatory process, and considering some of its strengths and
weaknesses in the context of the Banking Code. Next, it looks at the regulatory changes
proposed by the FSA. The paper then concentrates on examining the monitoring and
enforcement powers held by the BCSB and contrasts these with the powers that will be
available to the FSA. The paper will argue that while on the balance the move to
statutory regulation is to be supported, there is room for concern about whether the
move will bring the benefits that might have been expected.
Self-regulation and the Banking Code
Self-regulation is capable of different meanings. As Morgan and Yeung (2007, para.
3.2.3) observe:
This term is used throughout academic literature to encompass a broad array of regulatory
arrangementsthat may vary along a number of dimensions,including the characterand level of
state involvement,the degree of formality with which theself-regulatory body exerts exclusive
or monopoly controlover the regulated activity andthe level at which behaviour is regulated.
Baldwin and Cave refer to “simple self regulation” which:
[...] usually involves an organisation or association (e.g. a trade association) developing
a system of rules that it monitors and enforces against its own members or, in some cases,
a larger community (Baldwin and Cave, 1999, p. 39).
Conduct
of business
and sanctioning
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