FSA three pronged approach to enhance the regulation of the Banking sector

Updated January 2009

Retail banking involves the sale of current and savings accounts and credit products. Responsibility for its regulation is split mainly between the Financial Services Authority (FSA), covering deposit taking under the Financial Services and Markets Act 2000, and the Office of Fair Trading, covering credit products under the Consumer Credit Act 1974 (as amended). Most Banks are also voluntary members of the Banking Code, which contains more detailed conduct of business rules than those provided for by the FSA.

In keeping with its risk based approach the FSA has not previously considered it necessity to provide comprehensive rules on retail deposit taking business. The current COBS sourcebook contains some provisions relating to retail banking conduct of business to address the requirements of European legislation (e.g. the Distance Marketing Directive) and specific consumer outcomes. In practice most of the banking requirements are set out in the Banking Code.

This is currently monitored and enforced by the Banking Code Standards Board (BCSB). The BCSB monitors compliance with most of the applicable FSA rules on the FSA's behalf for those firms that subscribe to the Banking Codes. The FSA, whilst broadly endorsing its lighter touch approach to regulation, recognises that there are some gaps between its requirements and the Code and acknowledges that the BCSB powers of deterrent are limited.

In November 2009 the FSA will become the main competent authority for the Payment Services Directive (PSD). The PSD will introduce conduct of business rules for payment transactions which will apply to the majority of retail banking accounts. The FSA is using this as an opportunity to introduce further regulation of retail deposit taking businesses.

The FSA proposes the following new framework:

• full application of the Principles to the regulated activities of accepting deposits and issuing e-money (to the extent compatible with European law);
• some new high-level rules applying to retail banking services outside PSD scope for consumers and small businesses in a short Banking Conduct of Business sourcebook (BCOBS);
• transfer of existing COBS rules and guidance applying to deposit taking to BCOBS; and
• monitoring and enforcement by the FSA, that is integrated into its wider risk-based approach to the supervision of the relevant firms and groups.

The implementation will be the same date as the PSD comes into effect (1 November 2009), with appropriate transitional provisions where possible. 

The consultation paper will be open for responses until 16 February 2009.

It remains to been seen how these changes will be implemented and whether the Code will become redundant. For those still grappling with the operational and IT issues presented by the Consumer Credit Act 2006's requirements it may be a relief to hear that the FSA will be "working with the OFT… to ensure the protections given by the current arrangements [for credit cards and other consumer credit] are preserved" so it's status quo (for now) for credit.

The FSA has timed the proposed new framework to coincide with its requirements to implement under the PSD so that one off costs will be lower (to make both set of changes at the same time). However, given the current challenges firms face having to review another set of changes to the regulatory regime at a time when resources are at a premium may feel like a regulatory and financial burden which will result in very little benefit.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at January 2009. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.