At a time when banks in Europe, the US, Japan and Britain are imploding and every jurisdiction is enforcing legal requirements on financial institutions, the authorities in Barbados have come up with a wonderful idea of a voluntary code – see Feedback Invited On Draft Banking Code Of Conduct. It is interesting that many of the features of this draft code are similar to those of the now abandoned British banking code, which too was voluntary until November 2009.
Paragraph 2.4 of the draft is of no use for a large number of people in Barbados who do not have access to the internet.
Paragraph 3.2, on unfair contract terms should be a legal requirement, not a voluntary one. The second section of the above paragraph reads: “Financial institutions will also ensure that employees and agents who are authorised to give advice on the financial services offered are properly trained to competently, knowledgeably, efficiently and accurately render such service.” These basic requirements should be legally compulsory on every count. First, agents and employees are working on behalf of the financial institution, not of the customer, and in the case of the agent the form of remuneration is just as important. If s/he is being remunerated by commission, then the sale is more important than advising the customer on his or her consumer rights or even if the product is the right one for them.
All financial advisers should be required to undergo legally compulsory training on financial advice leading to a globally recognised qualification, and which they should be compelled to obtain continuing professional development (CPDs) annually before their practice certificates are renewed.
Paragraph 3.3 is hilarious: “Where necessary, financial institutions will also refer existing and potential customers to external sources of independent advice, such as any applicable governmental authorities or an attorney at law.” This paragraph is misleading. Financial institutions are in the business of selling products, be there annuities or life cover, and will find it rather difficult to refer a would-be customer to an ‘independent’ adviser who may advise them not to go ahead with the purchase. In any case, how do they intend to define ‘independent.’ I suggest the only way to do this is through an approved course and by examination.
Further, suggesting that people get ‘independent’ advice from government authorities is so ridiculous it should be dismissed. Which department, who in that department, would they be properly trained? The same goes for attorneys at law. A law is not a financial adviser, nor for that matter is an accountant, although members of both professions would pretend they do. It then goes on to list eight pieces of legislation which govern the giving of financial advice. It is not surprising that lawyers are writing themselves in to the picture. What is needed is a single piece of legislation covering retail financial products and advice.
Para 5.2.1 goes on to call for suitable seating arrangements for the elderly, pregnant and other special services customers. Of course, this is just good customer relations, but it really amounts to a bank giving you a nice cup of tea while charging you an arm and a leg for it. Customers want good, transparent service and not just soothing words and comfortable seats when dealing with banks. In any case, the provision of wheelchair facilities should be covered under the relevant disability legislation, not some bogus voluntary code.
Then there is a list of charges which should be questioned by every single account holder: photocopying, monthly service charge, cheques/debit card fees, withdrawals, deposits (paying to withdraw and deposit money on accounts), inactive account fees, ATM transaction fees, then it states: “Financial institutions will not impose any hidden charges on a customer in respect to the provision of financial services.” They do not have to when they have already listed charges for everything the customer does.
Paragraph 8.1.7 recommends a time frame for making complaints. Is this to be two weeks, two months, two years. This is a regulatory issue and depends on the nature of the product. If someone takes out a pensions scheme at age 25 with the intention of retiring at age 65, they are not going to go back to the documents and re-read them every month. What most people do is to put the documents safely aside until approaching retirement. If at that point they then find out that some of the details are incorrect, having been paying in to their pension for forty years, then what? Would they be told it is too late to complain?
Paragraph 8.5 is not only irresponsible, but dangerously so for the reasons stated. It is a get out clause for the banks. All notification must be in writing to the last known address. Customers must have a choice of communication method, electronic or hard mail. That is simple. Advertising cannot be part of any voluntary code, this is the responsibility of the advertising authorities.
By far the biggest rip off by banks and other financial institutions is in charging, and here we have authorities in Barbados asking these very institutions to enter a voluntary code on charging. A meaningless phrase about Unfair Contract Terms will not stop banks from charging customers for using cheques to access their own money, nor the astronomical charges on credit cards. By far the biggest bank rip-off as far as charges go is the almost routine practice of Barbadian banks to pay interest rates below the rate of inflation for savings accounts. What this means in real terms is that inflation eats away at people’s savings and every day the purchasing power of their money is eroded by inflation. That means that although a saver may still have a nominal $100 in his or her account, what that money can purchases diminishes as the costs of food and other commodity inflation continue on their upward trajectory. That is where effective consumer protection comes in.
Banking and Regulation:
The big regulatory issue with retail banks is consumer protection, protecting the savings of ordinary account holders and household borrowers, basically the activities of these banks that pose systemic risks. It is for these savers and borrowers that the central banks, whether it is formally part of its remit or not, becomes the lender of last resort. In simple terms, if there is a run on a retail bank and it looks as if savers/household borrowers are at risk of losing their money, it is incumbent on the central bank to step in and guarantee these people their money, at least to a publicly known level.
If the central bank does not carry out this function then, at the very least, the ruling politicians can kiss the next general election goodbye. At best, such a failure would lead to the undermining of the banking system and the entire system would grind to a halt. However, there is a flip side to this. If the directors and executives of a retail bank know that the central banks i.e. the taxpayers, will step in to rescue them if they run in to trouble, then it creates a moral hazard in that there will be no ethical restrictions on them to compel them to behave prudently.
Therefore it is important that there are regulatory penalties to restrain bankers from behaving badly or simply recklessly with savers’ money. Nothing in this voluntary code addresses these risks nor even suggest that the authors of the code have given any serious consideration to the failure of risk perception or risk management on the part of the bankers. Apart from this, it is important that any stress test includes the long-term viability of the parent bank, if it is a branch, and of the provisions made by any stand-alone or branch of it has an unexpected liquidity crisis. This is where stress-testing will play a key role, and this is the responsibility of the central bank, the regulator of retail banks.
Apart from stress-testing the viability of these banks, it is also important to regulate their charging structures. As it is, savers with accounts have to pay to obtain cheque books and every time they use a cheque for payment or ATM; in other words, they have to pay the bank to access their own money. This is not only exorbitant, it borders on outright theft.
Para 16.1 states: “A financial institution who receives a complaint relating to a breach of any of the provisions of this code of conduct by that financial institution will promptly investigate the complaint in accordance with the internal dispute resolution process of paragraph 12 of this code of conduct and rectify the breach within seven (7) days. 16.2 adds: “Where the breach of the code of conduct is not rectified to the reasonable satisfaction of the customer, the customer may invoke the external dispute resolution procedures of paragraph 13 of this code of conduct.” Ultimately, the penalties that companies and individuals face if they break the rules will determine the effectiveness of the so-called voluntary banking code.
If businesses know that they face hefty fines, and even being banned from carrying out further business in the financial services sector, or individuals know they face having all their assets seized and a lifetime ban, they will not behave badly. One precautionary measure is to impose an industry-wide levy on all financial services firms, including brokers and advisers, which would form a compensatory pot for consumers who have been mis-sold products or in any other way been treated unfairly by providers and advisers. If the only penalty they face is a slap on the wrist they will make a conscious calculation – on the immoral basis that British tabloid newspapers do when publishing sleaze about individuals – that the benefits outstrip the likely costs. I will give a personal example here, as an illustration. A few years ago my wife and I were walking in Broad Street when we were approached by a woman selling timeshare for a South Coast firm. The attraction was, for a plate of rice and chicken (we clearly looked hungry) all we had to do was to drop in and the women would get her commission. To cut a long story short, my wife decided she liked the apartment we were shown and though it would be a good idea to buy a timeshare. The firm asked for an immediate down payment of about Bds$1000 in cash, which to my mind is always a sign of dubious business practice, but I made the deposit, with the intention of talking my wife out of the idea and getting my money back within the cooling off period. To my dismay, I discovered there was no cooling off period, or at least the hotel’s management denied me one and no return of the deposit. It had been sucked up in ‘administration’.
Analysis and Conclusion:
Britain abandoned its voluntary banking code in November 2009 after years of criticism. So, to now find that Barbados is about to launch a voluntary banking code is like going back in time. Do turkeys vote for Christmas. What makes all this even worse is that at a time when we have had enough banking scandals to sink a ship, the department of commerce and consumer affairs – not the central bank, which is the banking regulator – has taken this initiative. It is misguided, out of date, out of synch with global financial regulation and could lead to consumer detriment.
What Barbados really needs is a robust consumers’ association that is fully aware of its strength and is prepared to use it. They must be aware that they have all the aces in their hands when it comes to banks, from closing their accounts with the foreign-owned banks and other institutions, to refusing to do business with the motor insurance companies that are just a legal way of mugging people. They must get over their inertia and move their business to providers who provide a better customer service. Part of knowing our strengths is to recognise when we can take our destinies in our own hands.
In the final analysis, consumer protection is going to be more than just close scrutiny of the fine print in contracts. This can easily be dealt with. What will become more important, and is concentrating minds all over the world, is the ownership of banks, their capital and liquidity. It is prudential supervision and regulation, in the widest sense, that will determine the quality of the financial system in Barbados, not just wishful thinking. To do this competently, the regulator, the Financial Services Commission, must have the macro-prudential policy tools, and, with respect, this parliament is not equipped to shape and deliver these tools (judging from debates up until now) and the make-up of the regulatory authority.
Finally, the Barbados National Bank was told to the Trinidadians and staff first knew about it by CBC news, to this day Republic Bank has not written to account owners to notify them of the change of ownership, that is how much they take customer care seriously. It has now changed the name again, and once more it has not had the common courtesy to inform account owners. Do you seriously think such a bank, owned by foreigners, gives any serious consideration to what its local customer think and feel?