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Financial Difficulty

What is good industry practice?

Our approach to financial services providers’ (FSPs’) obligations under the Code of Banking Practice (CBP) and the National Credit Code (NCC) (formally the Uniform Consumer Credit Code) has been discussed in Bulletins 46, 53 and 60.  In Circular 2,April 2010, we covered our approach to disputes involving small businesses in financial difficulty, not regulated by the NCC, the CBP or the Mutuals Code of Banking Practice (MBCP). 

In Circular 3, we reiterated that we consider non-CBP subscribers also have obligations to customers in financial difficulty due to their own internal hardship policies and good industry practice. We also confirmed that the CBP and the MBCP reflect good industry practice, and a prudent FSP would conduct itself in the manner contemplated by those codes regardless as to whether it subscribes or not.

Banking Specialist’s survey

To verify the CBP and the MBCP reflected FSPs’ general definition of  good practice, our Banking Specialist conducted a survey toselected members who offer non-regulated credit facilities. The purpose was to ascertain if they had a policy that dealt with customers in financial difficulty and whether treatment of hardship cases is different for regulated and non-regulated loans.

Of the fourteen members surveyed,ten members provided substantive responses.  All ten respondents advised they have a hardship policy.  Most respondents have the same policies for loans regulated by the NCC and for unregulated loans.  Those who do not have a formal policy in place have a practice of working with clients on a case by case basis with a view to assessing and formulating suitable arrangements.

Banking Specialist’s conclusions

The Banking Specialist concluded all respondents have either a formal policy or an accepted practice whereby the majority of their clients will be treated substantially the same, whether or not the loan is regulated by the NCC.  The respondents are not signatories to the CBP or the MBCP but their responses and policy documents indicate that they have similar approaches to that of CBP signatories.  The respondents’ information led him to conclude that industry practice in hardship situations is for the FSP to work with their clients along similar lines to the requirements of clause 25.2 of the CBP.

Our approach to financial difficulty disputes going forward

As members are aware, when deciding a dispute and whether a remedy should be provided, FOS will form an opinion about what is fair in all the circumstances, having regard to: 

  1. Legal principles;
  2. Applicable industry codes or guidance as to practice;
  3. Good industry practice; and
  4. Previous relevant decisions of FOS or a predecessor scheme. 

In light of the results of the Banking Specialist’s survey, when forming an opinion about a financial difficulty dispute involving a non-regulated facility, even though the FSP may not be a subscriber to the CBP or the MBCP, we will have regard to the CBP and MBCP standards as they represent good industry practice.