Those of us who bear the scars of the banking collapse in 2008 can be forgiven for feeling a little uneasy about the Central Bank’s new consumer protection code which comes into effect this week. The numerous references to high-level principles behind the code carries a worrying echo of the principles-based regulatory regime that failed so spectacularly in preventing the banks from bankrupting themselves and the country.
The light-touch regime, as it was called, relied very heavily on the assumption that banks understood that it was in their best interests to act responsibly and manage risk. It turned out that they didn’t.
But this time it is different, says the Central Bank. At first glance it doesn’t seem that different. There are a number of concrete measures in the code such as banning automatic renewals of some insurance policies and requiring banks to inform you of cheaper mortgage options. Small businesses with a turnover of up to €5 million will be considered consumers.
But most of the code seems aspirational. Banks will have “to put your interests at the heart of how they design, sell and explain financial products and services”, according to the deputy governor of the Central Bank Colm Kincaid who launched the code this week. Leaving aside the questionable assumption that banks have a heart it all seems a tad optimistic.
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The code sets out a long list of things that banks “must” now do when dealing with you. They must communicate clearly and help you make decisions that are right for you. They must give you enough time to make decisions. They must provide you with extra support if you need it. They must make it simple for you to complain and must resolve issues with you quickly.
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The issue is that what all these “musts” look like in practice is left very vague. There is no template for what constitutes communicating clearly for example.
However, unlike the last time, the Central Bank will not be leaving it up to the banks to decide for themselves what constitutes meeting their obligations. It will be proactively inspecting the banks for breaches of their obligations, whatever they might be. Presumably the Central Bank will know breaches when they see them.
There is something more than a little Kafkaesque about this regulatory approach. Like a protagonist in one of Franz Kafka’s novels, the banks will go about their business obliged to follow laws without knowing what the laws are before eventually being put on trial for breaking one.
This is, of course, an exaggeration and it belies what is a genuine attempt to square the circle of how you regulate consumer banking and financial services without stifling competition through overly prescriptive regulation. The code has been framed in the context of the ongoing digitisation of finance and the need to future-proof it against as yet unknown innovations. The Central Bank also had to be cognisant of the need for banks to be able to differentiate themselves from one another in terms of products and customer service. They also have to be able to make money.
The Central Bank has given some guidance to the banks about how to navigate this new regime. Keeping with the Kafka analogy, it seems to amount to advice on how to prepare your defence for the crime that you didn’t know you were committing.
Of course, if you take the bank’s advertisements at face value, the risk of this happening is slim to non-existent. There is nothing more important to Irish banks than their customers interests, or so they tell us.
The legal advice being given to them seems to be that they should document how significant decisions were taken in line with the Central Bank guidance on what constitutes acting in the interests of customers. They will have to be able to show why they did what they did and why they believed it followed the guidelines. This will at least put them in a position to mount a defence at some point in the future if they are retrospectively accused of doing something that was not in a customer’s interests.
At a minimum this increase in the regulatory load will push up administrative costs. These could arguably be justified if the outcome results in anything more than a lot of precautionary box ticking.
Whether the new code achieves anything more than fostering a culture of backside covering remains to be seen. Comparisons between the new consumer code and the discredited light touch regulation of the 1990s and 2000s may be over done but one truth still holds: where there is money to be made principles tend to be seen as obstacles to be navigated rather than rules to be followed. This applies as much in Irish banking as anywhere else. Ask any Anglo Irish Bank shareholder.
