Is there a business case to develop a lite version of UCP 600?
During the Annual ICC Banking Commission Meeting in Beijing there was a panel discussing “practice”. One of the questions asked at this panel was if there is a business case to develop a ‘lite’ version of UCP 600? This will be the topic for this blog post ….
As far as I understand the rationale for the idea is that many LC users find the current UCP 600 too cumbersome and complex. It is (as an example) argued that the concept of “negotiation” is hard to explain to a customer. Likewise, there is the eternal battle to get the presented documents correct – which may not be an easy task.
In my previous blog post (The Scope of ISBP 745) I argued that many banks do not apply the UCP 600 and ISBP 745 correctly; and added that on top of that there is “[a]mbiguous, poor and sloppy drafting of the LC – which opens the examination of the documents to interpretation or pure guess work”.
(http://www.lcviews.com/index.php?page_id=671).
If this is a true representation when it comes to the Trade Finance banks (accepting that there are for sure nuances), then just imagine how this is for the users of the LC; the buyers and the sellers – whose core business is not LCs! The "state of the LC" is evidenced by looking at the estimated global percentage of documents refused on first presentation – which ranges between 60-75%
I am not 100% sure “negotiation” is a huge problem in reality (!!) – but I surely accept that many LC users are not comfortable with using LCs … and the UCP 600.
As argued in the blog post “The Scope of ISBP 745” most of the challenges and problems arising from the LC handling steam from the examination of the documents.
So at least, I would agree that there is a problem triggered by the complexity of UCP 600/ISBP 745 – spiced up with bad practice in the drafting of LCs. The result is a deadly stew.
I doubt however that the solution is for the ICC to draft a new (“lite”) version of the UCP.
First of all, I have never seen a revision from the ICC that actually have reduced complexity - even where that was an aim. For example, the UCP 500 revision started out as a “technical revision” - with the idea that only a few specific issues needed be fixed. However, it turned out to be a huge task. The drafting group received more than 5,000 comments to the released drafts and almost every single word was changed. (Kim Christensen: A happy birthday for UCP 600?; Global Trade Review, Vol 6/Issue 6, August 2008 – or Kim Sindberg: From Beginning to Beginning).
Second, as far as I can see – most of the troublesome issues could potentially be solved via the LC itself. Or the other way around: No need “fixing” the UCP 600 if the banks handling the LCs continue the same bad practice as they do today.
So, what is the solution? Of course, there is not one solution – and for sure no quick fix! To quote “The Scope of ISBP 745”:
“the ICC should re-consider the “distribution strategy” so that the practice reaches the TF Officers that today do not have the proper access. In addition, there should be emphasized focus on guidance and training – easily accessible.”
That for sure is a place to start – and I urge ICC National Committees to add pressure on the ICC to re-launch their “3 phase rocket”, i.e.:
Guidance
More comprehensive and widely circulated training and guidance
Access
Review pricing and digital availability of UCP rules and practices
Marketing
Smart usage of information to achieve greater awareness by practitioners
However, coming back to the opening question; “Is there a business case to develop a lite version of UCP 600”?
As far as I can see (and have argued above), the answer clearly is no! However, since (as also argued above) there is a problem with the current handling of LC (primarily the examination of documents), there may in fact be a need to do something. That “something” could be to develop a “Lite LC”·
Such could potentially reduce the complexity of the individual LC – and still be based on the UCP 600.
This could simply be done in the form of an LC template.
Below is a commented example (merely to identify the elements that should be considered and “de-complexified”):
QUOTE
LITE LC TEMPLATE
SWIFT-MT: 700 NORMAL DM2
ISSUE OF DOCUMENTARY CREDIT
ISSUING BANK:
[NAME OF ISSUING BANK]
SENT TO:
[NAME OF ADVISING, NOMINATED, CONFIRMING BANK]
:40A: FORM OF DOCUMENTARY CREDIT
IRREVOCABLE
:20: DOCUMENTARY CREDIT NUMBER
[LC NUMBER]
:31C: DATE OF ISSUE
YYMMDD
:40: APPLICABLE RULES
UCP LATEST VERSION
:31D: DATE AND PLACE OF EXPIRY
YYMMDD [PLACE / COUNTRY]
:50: APPLICANT
[NAME OF APPLICANT]
:59: BENEFICIARY
[NAME OF BENEFICIARY]
:32B: CURRENCY CODE, AMOUNT
[CURRENCY AND AMOUNT]
:41D: AVAILABLE WITH
[NAME OF NOMINATED BANK]
BY PAYMENT
(The Lite LC must be issued available by “payment” or “by “deferred payment” only)
:44C: LATEST DATE OF SHIPMENT
YYMMDD
:45A: DESCRIPTION OF GOODS
[A SHORT DESCRIPTION OF GOODS and the agreed trade terms]
:46A: DOCUMENTS REQUIRED
+ INVOICE
+ [TRANSPORT DOCUMENT]
+ INSURANCE CERTIFICATE [OPTIONAL]
(The Lite LC must only include invoice, transport document and (in CIP/CIF shipments) an insurance document)
:47A: ADDITIONAL CONDITION
A PRESENTATION UNDER THIS CREDIT MUST CONSIST OF ONE ORIGINAL OF THE STIPULATED DOCUMENTS, AND WILL ONLY BE EXAMINED TO THE EFFECT THAT:
1: THEY ARE PRESENTED WITHIN THE EXPIRY DATE OF THE CREDIT
2: THEY ARE PRESENTED WITHIN THE PRESENTATION PERIOD DEFINED IN UCP 600 SUB-ARTICLE 14(C)
3: THE DRAWING AMOUNT IS WITHIN THAT WHICH IS AVAILABLE UNDER THE CREDIT.
4: THE DESCRIPTION OF GOODS IN THE INVOICE COMPLIES WITH UCP 600 ARTICLE 18(C)
5: THE SHIPMENT DATE AS REFLECTED ON THE BILL OF LADING IS WITHIN THAT STATED IN FIELD 44C
.
UCP 600 SUB-ARTICLE 14(D) DOES NOT APPLY TO THIS CREDIT.
(The above is the tricky part of the Lite LC – and for sure there is room for improvement. However, the goal is to clearly dictate the elements that only can create a discrepancy.)
:71B: CHARGES
[DISTRIBUTION OF CHARGES]
:49: CONFIRMATION INSTRUCTION
[ADD CONFIRMATION INSTRUCTIONS]
:78: INSTRUCTIONS TO THE PAYING/ACCEPTING/NEGOTIATING BANK
UPON RECEIPT OF A COMPLYING PRESENTATION PLEASE REMBURSE YOURSELF ON [REIMBURSING BANK]. THE REIMBURSEMENT IS SUBJECT TO URR 725
Or
UPON RECEIPT OF A COMPLYING PRESENTATION PLEASE DEBET OUR ACCOUNT WITH YOU.
(The Lite LC must make the funds directly available to the nominated bank. The two above clauses are examples that must be redrafted to fit the actual circumstances e.g. taking into account if the LC is available by deferred payment (field 41D)).
UNQUOTE
For sure the above will need more work to be ready to launch. This is however doable. A key task is to identify the buyers, sellers and banks that would want to use it. A tricky part here is the involved cost. For sure, any “LC customer” would expect that for such a “product”, there should be a reduced price (as the document examination would be relatively easy). So, there is a sales and marketing angle to this as well.
However, now the ball has been played. Please feel free to play along…
And please remember to take care of yourselves and the LC.
Kind regards
Kim