Banks hold their noses for a new dose of self-discipline

Tighter lending rules could be on the cards as the industry code of practice is reviewed

Your bank is about to look again at the way that it deals with you.

The Banking Code, a voluntary set of rules devised by banks and building societies and governing their conduct towards customers, is up for review.

Held every three years, the review is a chance for the industry to analyse its behaviour and make sure consumers are being dealt with fairly. Last week saw the deadline pass for submissions.

Up to 30 documents were handed in to Mike Young, the code's independent reviewer, formerly of the Bank of England and the British Bankers' Association. Interested parties included the consumer body Which? and the Consumer Credit Counselling Service; the Treasury and Department of Trade and Industry; the Financial Ombudsman Service (FOS); the banks themselves; and even members of the public who take an interest in the way banks run their affairs.

While elements of the banking industry - mortgages, for example - are regulated by the Financial Services Authority, there is much that is covered instead under the Banking Code. It applies to current accounts, savings and deposit accounts, cash individual savings accounts, basic bank accounts for low-income earners, and debit and credit cards.

It includes the following pledge to consumers from the industry: "We will act fairly and reasonably in all our dealings with you by meeting all the commitments and standards in [the code]." This might come as a surprise to any regular reader of this section, in which punitive action by the regulator is frequently reported (see News, page 18).

Under the code, banks that behave badly can be publicly named and shamed by the Banking Code Standards Board. However, parts of the code remain contentious. For example, say the Bank of England raised its base rate by a quarter point but your own bank reacted by putting up the interest on your variable-rate savings account by just 0.2 percentage points. Under the current rules, the bank is not obliged to contact you about this.

The FOS sounds off about this in its submission for the review. Pointing out that in 2005 banks had indicated they hoped to tighten their "notification" rules, it writes: "We have [since] been disappointed to note that no real progress has been made."

One particular concern is found across a number of review submissions: the need for tougher rules to test the creditworthiness of individuals before banks lend to them. The existing code tells consumers: "Before we lend any money or increase our overdraft, or other borrowing, we will assess whether we feel you will be able to repay it."

The FOS points out that other codes - from the Finance and Leasing Association (FLA), for example - are far more stringent. The FLA code says: "We must make sure that all loan applications go through a sound and proper credit assessment."

Given the record billion-pound debt write-offs made by banks last year, the current rule "appears very light indeed", the FOS says.

Mr Young will publish his suggestions for revisions at the end of May, reporting to the three sponsors of the code: the payments body Apacs, the British Bankers' Association and the Building Societies Association.

They must publish their responses, but they don't have to agree with Mr Young's recommendations and can make their own amendments instead. The revised code must be implemented by March 2008.

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