The future of UCP: what’s next?
Just returned from the Technical Meeting in the ICC Banking Commission in Tbilisi.
There are a number of things to report from the meeting, and I will do that in the coming weeks. However, during the meeting I was part of a discussion streaming from the agenda item “Documentary Credit Practices: Controversy & Guidance”. This agenda item is supposed to be a returning agenda point. The topic for the discussion (that is also the topic for this blog post) is “The future of UCP: what’s next?”
Obviously the premise for the discussion was not a UCP 600 revision, but rather to look at how to solve some of the current issues related to the handling of LCs under UCP 600. I want to share my thoughts around the topic, as delivered at the meeting as a spontaneous monologue:
About rules and Practice
I love being part of the LC world. One reason for that is that it is filled with people with good intentions. More than once I have been part of an ICC drafting or revision group, and have felt the good intentions in the room. All the people in the room surely wanted the best for the LC product – and for the LC community. In the meetings there were solved issues and closed gaps. However, many of the “gaps closing” activities have actually created other gaps. UCP 600 articles have been “explained” in many ISBP 745 paragraphs, and many ISBP 745 paragraphs have been clarified in ICC Opinions – or even DOCDEX Decisions. There are even ICC Opinions changing the practice described in previous ICC Opinions. No matter how you twist and turn it, the rules and practice surrounding the LC is very complex.
About the LC
In many ways the LC is a simple instrument: It calls for some documents – and once those are presented – and comply with the terms and conditions of the LC – the issuing bank is obligated to honour. However, many of the LCs I see is far from simple. There are often clauses that are hard to understand – and a “best guess” approach must be assumed. But even for the ones where the language in the LC is relative clear they are simply too long. As an example, just take a look at the following requirement, when I have seen often in LCs:
“Full set Clean Shipped on Board Ocean Bill of lading”
Let’s drill it down:
1: There is no need to say “Full set” because when a bill of lading is called for it is a UCP 600 requirement, that the “full set” is presented (UCP 600 article 20(a)(iv))
2: There is no need to say; “Clean” because when a bill of lading is called for it is a UCP 600 requirement, that it is “clean” (UCP 600 article 27)
3: There is no need to say, “Shipped on Board” because when a bill of lading is called for it is a UCP 600 requirement, that it shows that “the goods have been shipped on board a named vessel at the port of loading stated in the credit” (UCP 600 article 20(a)(ii))
4: There is no need to use the word “Ocean” because it offers no extra value / information to the LC officer when examining the document. A “bill of lading” subject to the UCP 600 covers per definition a port-to-port shipment.
5: The words “Bill of Lading” are the words needed to point the LC officer to the UCP 600 transport article to be used for the examination of the presented bill of lading (i.e. article 20).
So just like Groucho and Chico Marx in Night at the Opera I will remove the parts that are not needed:
“Full set Clean Shipped on Board Ocean Bill of lading”
In other words: All you need to say is “Bill of lading”! Using only 3 words instead of 10.
As far as I can see, there is no doubt than many LCs are too long (too many unnecessary words are used) – and often contains clauses that are ambiguous. This makes them unnecessary complex.
About the documents
The document presented under an LC will determine if the confirming / issuing bank is obligated to honour to negotiate – i.e. pay the beneficiary. Many of the documents I see contain unnecessary information. Some a lot. Often a presentation contains a huge stack of paper – sometime even a full box of paper.
Bear in mind, that when examining the documents, the LC Officer must compare (all) the data between the LC and the documents – as well as between the documents – and determine if there is a “conflict”. The more information in the documents; the higher the risk that there will be conflicting data.
As far as I can see, many presentations under LC contain data not called for by the LC. This makes them unnecessary complex.
The problem outlined
As has been shown above, each of the 3 main elements (Rules & practices, the LC and the documents) in an LC is often unnecessary complex.
The result of this is the Chaos Theory in motion. I.e. with only a small change, the end result becomes unpredictable.
And that is a problem: What all the parties to an LC want – especially the beneficiary – is predictability! For example the beneficiary wants predictability that once the LC is received – money will also be received – at the agreed time.
More often than not, this is not what the beneficiary receives.
Seeking the solution
Identifying the problems related to LCs and UCP 600 is relatively easy.
Solving them .. that is another story.
My approach is to follow the lead of Senior Technical Advisor to the ICC Banking Commission Dave Meynell. Recently he has been the main drafter of 2 ICC guidance documents.
One related to strict compliance (https://iccwbo.org/publication/icc-banking-commission-executive-committee-issues-paper_notes-on-the-principle-of-strict-compliance/)
The other is the “Guidance Paper on use of Drafts under Documentary Credits” which currently is out there in draft form.
For both it applies that, if the guidance is followed, complexity to the LC process is reduced. E.g. if Drafts/Bills of exchange are only called for in LCs when actually needed, there is one less “document” that could potentially trigger a discrepancy (which means increased costs, delayed payment – and in the worst case scenario “no payment”).
In general it seems that:
1: Banks need guidance on how to reduce complexity in the LCs they issue, and
2: Banks need guidance on how to guide their customers better on how to make the documents, so that only the data required by the UCP 600 and the LC is in the documents.
It is a long road – but better to start it sooner than later.
Not mentioning the R-word
As indicated in the beginning, the purpose was not to discuss a UCP 600 revision at this point in time. However, I (like many others) have given it a great deal of thought as to the core problem of too many discrepancies – and too many refusals (which is a key problem in the LC process, because it is the direct result of an over-complex process).
On night I woke up in my sleep – all covered in sweat … because I realised that a main trigger for the problem is in fact my favourite UCP 600 article. Namely article 14(d) – which reads:
“Data in a document, when read in context with the credit, the document itself and international standard banking practice, need not be identical to, but must not conflict with, data in that document, any other stipulated document or the credit.”
This article offers the principle for examining the data in the LC and in the documents. As is clear from the wording of the article, this is not limited to data required by the LC – but ALL of the data in the LC and ALL of the data in the presented documents. Given the complexity (as described above), this article makes it really hard to make a complying presentation. And perhaps worse, it creates a grey zone – where there is room for interpretation, confusion and discussion….
No doubt, at one point there will be a need to re-think this approach. When that happens, inspiration should be sought in ISP98. The equivalent rule in the ISP98 is 4.03 (Examination for Inconsistency)
“An issuer or nominated person is required to examine documents for inconsistency with each other only to the extent provided in the standby.”
Knowing full well that commercial LCs are by nature different from standby LCs, the same rule cannot be directly applied to a future version of UCP 600. However, there surely is a need to rethink the principle of examining the documents presented under an LC.
What to do meanwhile?
The solutions mentioned above are not quick or easy. Changing bad practice through guidance takes time. Likewise, a revision of the UCP 600 is not on the table yet.
So what to do now?
1: Training! There are much good (e)training out there, for example from Coastline Solutions, tradefinance.training and eBSI Export Academy.
2: Make sure that the LC staff is updated on current practice (e.g. the bi-yearly publication of the new ICC Opinions.
3: Check out sources on the internet – and do that with a critical mind. Getting answers from e.g. LinkedIn discussion forums may be easy and convenient – but there is no guarantee that the answer is “correct”.
4: Check out the lcviews premium where reviews of all relevant ICC Opinions are linked to the UCP 600 articles. This allows for an overview off the applicable rules and practice on a particular topic. For more information: http://www.lcviews.com/index.php?page_id=194
5: Take care of each other and the LC instrument ….
Kind regards
Kim