the Banking Code

This summary focuses on major issues of principle, and so excludes areas where we consider the Code could be improved by minor drafting changes.

Introduction (1*)

Treating personal and small business customers alike
The 2001 Code is for personal customers only. A small business version of the Code is to be launched soon. It is almost identical to the personal Code. We welcome that. Maximum commonality facilitates promotion of the Code principles and staff training. These objectives would be simpler to achieve if the personal and small business versions of the Code were amalgamated.

Observing the spirit, as well as the letter, of the Code
As the Guidance now states, the Code is a statement of principles – to be applied in the spirit as well as the letter. That is a crucial statement, which should be in the Code itself. And in many areas (eg superseded accounts) the Code is drafted in a level of detail that encourages some subscribers to worm their way around the letter, while ignoring the spirit.

Observing the law as well
Some subscribers think the Code is a definitive statement of their obligations. It should be stated that compliance with the Code does not absolve the subscriber from complying with the general law. And Code provisions that are out of line with the law should be altered. We give two instances of such provisions in the comments below.

No duty to offer advice
Subscribers and lawyers know that subscribers are not required to volunteer advice – though any advice they actually give must not be negligent. The fact that subscribers have no duty to volunteer advice should be stated. Many customers have been led to think of their banker as a professional adviser. It comes as a shock to discover the banker can see them walking into danger without having to say anything.

Interest rates (4*)

This section of the Code causes us vastly more difficulty in practice than any other.

Communicating interest rate changes
The Code does not limit the ability to avoid personal notification of interest rate changes on branch-based accounts to cases where the change is for a valid reason specified in the contract. So the Code requirement does not comply with the Unfair Terms in Consumer Contracts Regulations.

In any event, the alleged distinction between branch-based and other accounts is outmoded in practice. It enables some subscribers to downgrade interest rates to a comparatively nominal figure without properly letting customers know. Elderly people with a nest egg are particularly vulnerable.

Where a credit interest rate is reduced or a debit interest rate is increased, the Code should require personal notification to the customer, in a form that brings the change home to the customer. This should apply whether or not the account is described as branch-based.

The requirement to notify could be subject to an appropriate de minimis mechanism that excludes circumstances where, because of the amount involved, there is little prospect of significant detriment to the customer. That could be achieved in a number of ways, but the Code should specify one – to give customers clarity.

It is for consideration whether it is possible to devise a workable method of ensuring customers are also notified when a credit interest rate is not increased following an increase in Bank of England repo rate, or when a debit interest rate is not reduced following a reduction in Bank of England repo rate.

Tracker accounts that are linked to Bank of England repo rate could be exempted from the requirement for personal notification, provided the account terms clearly state the differential and the time limit within which any change in Bank of England repo rate will be followed.

Superseded savings accounts
If there were a robust and transparent regime for communicating interest rate changes to customers, it is possible that the superseded savings accounts provisions would become redundant. Aspects of the existing provisions have proved difficult to apply – particularly, whether or not an account is actively promoted (paragraph 4.9*).

Whether and how the current provisions apply to Tax Exempt Special Savings Accounts (TESSAs) has been the subject of contention between various subscribers and/or industry bodies on the one hand and the Financial Ombudsman Service and/or the Banking Code Standards Board on the other.

The drafters of the Code did not foresee the circumstances of the government’s withdrawal of TESSAs. If the Code provisions had concentrated on the underlying principles, there might have been less dispute about what those principles were – leading to less dispute about whether, and how, they applied to this unforeseen situation.

Lending (11*)

Financial assessment
The purpose should be made clear. At present, it is open to misunderstanding. Subscribers tend to think the assessment is solely for the lender’s protection. Customers tend to think it is also for the borrower’s protection, and absolves them from liability if (in practice) they find they cannot afford to pay.

Guarantees
The final bullet point (‘tell them what their liability will be’) is generally interpreted as meaning the maximum liability. But the person who gave the guarantee or security also needs the right to ask from time to time the amount of their current liability.

A third-party security has the same effect, in practice, as a guarantee. So the prohibition of unlimited guarantees should be extended explicitly to prohibiting unlimited third-party guarantees. In Scotland, for technical reasons relating to Scots law, that might have to be effected by coupling an unlimited security with a side letter.

Confidentiality (13*)

Credit reference agencies
The effect of paragraph 13.4* is open to misunderstanding. Customers tend to think it refers to permission to be given at the time of the disclosure. Subscribers use it to refer to permission already given in the application to open the account.

Customers are not surprised to discover that serious defaults are communicated to credit reference agencies. But they are surprised to discover that: the monthly status of payments on all their credit products is routinely registered; credit searches are registered; and the number of credit searches is taken into account in credit-scoring, so that they can acquire a ‘bad’ record simply by shopping around.

Protecting your accounts (14*)

Paragraph 14.8* refers to customers acting ‘without reasonable care’. One has to go to the Guidance to discover that this actually means ‘gross negligence’, which is quite different. If ‘gross negligence’ is considered not to be plain English, another synonym is required.

In any event, the application of this provision in some cases is unlawful. Where the card was used as a credit token (e.g. to create an overdrawn balance on a current account) without authority, the customer’s liability is limited to £50 by the Consumer Credit Act 1974 – whether or not there has been gross negligence.

Complaints (17*)

The Code should summarise the key features of the FSA-specified regime – viz, unless the problem is solved by close of business on the next business day:

• Within 5 days: the subscriber must send an acknowledgement.
  
  
• Within 4 weeks: the subscriber must send either a final response, confirming the customer can go to the ombudsman if still dissatisfied, or a holding response explaining why the subscriber needs more time.
  
  
• Within 8 weeks: the subscriber must send a final response – and, even if no final response is sent, the customer can go to the ombudsman if still dissatisfied.

* the numbers refer to the numbered sections of the Code.