Article

by Radek Dobáš

The implementation of UCP 600 represents a challenge for banks worldwide. Although they bring about major improvements, UCP 600 still raise a number of question marks. How have some of the banks in central and eastern Europe, ranging from the Czech Republic through Austria and the Balkans to Ukraine, coped with this challenge during the early days of UCP 600?

To get a sense of how banks in the region are reacting to the new L/C rules, I sent out a questionnaire comprising 20 questions to eight major Czech banks and to 15 banks in the region. All of the Czech banks and 12 of the 15 foreign banks responded. The responses include views of banks from the Czech Republic, Slovakia, Austria, Hungary, Serbia, Croatia, Romania and Ukraine. In this article, I will summarize the results.

Of the 20 banks included in the survey, nine have a participant in the ICC Banking Commission and therefore had the opportunity of direct involvement in the UCP revision process. Five banks participated indirectly through their parent banks.

One of their first considerations was the translation of the new rules. All countries participating in the survey claimed to have a translation of UCP 600 into their national languages or indicated they would be translating them. Five banks were involved in the process of translation, four of which were from Czech Republic. Croatia is also preparing a translation of the revised ISBP, the old version of ISBP having been translated into the Croatian and Serbian languages. None of the other countries involved, however, indicated they would be translating the revised ISBP in the near future.

Preparations

The next step for these banks is "getting prepared". The survey focused on the L/C application forms and how banks were preparing their clients for the new rules. Sixteen banks had revised their L/C applications, but four had not, in part because their applications refer to the "UCP latest version" or use similar language. With three exceptions, all of the banks were actively helping their clients to understand UCP 600. Nine banks (of which six are Czech banks) provide clients with free UCP 600 publications; seven stated they had held UCP 600 seminars for clients or sponsored clients' participation in the seminars. Twelve banks provided face-to-face training to their clients, while others had sent out some information to them. Many banks do a combination of more of the above.

As a result, banks claim that most of the clients have some knowledge of UCP 600's existence (only one bank responded that its clients "do not have a clue"). However, only four banks stated that most of their clients welcomed the UCP revision, while 15 said their clients were mostly indifferent or were not providing feedback. Unlike with the UCP, none of the banks addressed indicated they had provided free ISBP publications to their clients. Thirteen banks said their clients were more or less familiar with ISBP, two said they did not inform them about it, and five stated their clients did not care.

Transition stage

What has been the bankers' practical approach to UCP 600 during the transition stage? Out of the banks addressed, four said they still provide clients an option to choose UCP 500 expressly in their L/C applications. Of the 16 remaining, only one bank said it was not ready to issue a UCP 500 L/C if expressly required by the client. While six banks issued at least one UCP 500 L/C in July 2007 (one of them issuing more than 20 per cent of their L/Cs this way), only two indicated they had issued UCP 500 L/Cs after July 2007.

Reactions

Though UCP 600 was adopted unanimously, the same cannot be said of banks' appreciation of the new rules. Only one bank expressed its complete satisfaction with UCP 600, two were indifferent, 15 stated they welcomed the revision with some reservations and two expressed serious reservations. None of the banks, however, said they would strictly recommend to their clients the continued use of UCP 500, and 14 banks wrote that some of their reservations had been eliminated by the new ISBP. Furthermore, only one bank replied "yes" to the question as to whether they had noticed or expected a significant decrease in discrepancy rates as a result of the revision, while 18 answered "no" and one bank was apparently indecisive, as it gave both replies. The answers were almost identical when a similar question was asked with respect to "old" ISBP (UCP 500 version): one bank said it noted a significant decrease in discrepancy rates, 18 replied "no" and one wrote that presentation of documents without discrepancies is impossible regardless of which rules are used.

Issues and question marks

What are the hottest issues and the biggest question marks? Although many export bankers appreciated the wording of sub-article 12(b) authorizing the nominated bank to pre-pay or purchase its deferred payment undertaking or accepted draft, the same rule seemed to worry many bankers on the import side, who feel their applicants may be less protected against possible fraud and tend to suggest that their clients exclude or eliminate sub-article 12(b).

Considerable attention during the revision process was devoted to the "reasonable time" concept in UCP 500 article 13 and how to rephrase this article so there is no more uncertainty as to what it means. The Banking Commission agreed on a "maximum of five banking days". I strongly believed that when agreeing to this wording, bankers expected to have any time between the day zero and day five to check the documents and possibly send out a refusal notice. But now my sense is that more and more reputable bankers and lawyers believe that, in law and practice, the new rule will not automatically allow banks any time up to five banking days, and that checkers will still have to be careful in checking "reasonably quickly".

Sub-article 14(j) brought about a significant change in document checking. I believe that in the past most document checkers examined the beneficiary's and applicant's addresses appearing on documents, especially invoices, for consistency with addresses in the credit. Under UCP 600, these addresses may be different if they fall within the same country. This concept was warmly welcomed by bankers on the export side (easier checking, large companies wishing to receive L/Cs at a place different from the invoicing address), but the situation may be different when viewed from the issuance side, for example, when applicants are private persons (e.g., entrepreneurs), the address may be the only item that legally differentiates them from another private person.

Another sentence in sub-article 14(j) may cause some surprises, for it says when the applicant's address forms part of consignee and/or notify party details, this is an exception to the general rule concerning addresses. This seems logical at first glance, but, surprisingly enough, UCP 600 do not state: "However, if the credit requires that applicant appear as a consignee or notify party ... ", but merely: "However, when the addresses and contact details of the applicant appear as part of the consignee or notify party details ... they must be as stated in the credit." Many bankers now ask whether the exception applies even if the credit is silent on the consignee and/or notify party.

Surprisingly, article 35 (concerning the consequences when documents are lost) has proved disturbing to some banks, although it merely repeats the principle inherent in L/C practice for years.

Exclusions

Banks may be uneasy about some of the UCP 600 articles and may issue credits excluding them. Excluding UCP articles was very rare under UCP 500. Now it seems the fashionable thing to do. For example, some banks say they recommend excluding sub-articles 12(b), 14(l) 28(h) and (i), article 35 or even parts of sub-article 16(c)(iii). No-one can prevent issuing banks from modifying the rules, since all L/Cs, in some way, modify UCP. Difficulties arise, however, where credits merely exclude a rule without providing a replacement. Some of these exclusions do not make much sense in the context of the L/C and the UCP, and can even be ineffective.

Improvements

It is important to remind readers of improvements achieved by the new rules and to mention some of them. The text of the rules has been simplified substantially. Many documentary requirements are now much more logical and correspond to actual practice: for example, dates of shipment on air waybills and road, rail and inland waterway waybills, the requirement for the carrier name on rail waybills, or the principle that the contents of a document, not its name (title), are what matters. UCP now expressly state that one original of a document must always be presented, except where the L/C expressly calls for a copy (some beneficiaries used to claim that where the L/C did not expressly require an original, it was up to them to choose). Rules on handling discrepant documents were also substantially improved to be in line with actual practice. The second beneficiary under a transferred credit may no longer bypass the first beneficiary and present documents directly to the issuing bank.

And finally we should not forget that what may be a major concern for one banker may represent a major improvement for another.

Radek Dobáš is Head of Documentary Payments, Ceská Sporitelna A.S. in the Czech Republic. His e-mail is RDobas@csas.cz