Now that the revision of ISBP 821 is underway, the perennial question is again being raised: do we have a business case to revise UCP 600?
Also published at https://www.doccredit.world/revising-ucp-600-weighing-the-issues-merits-and-challenges/?ref=documentary-credit-world-newsletter
It is perhaps timely to re-visit the issue and consider whether the environment for revision has changed. Should the ICC contemplate a revision of UCP 600 once the ISBP exercise is completed?
Key Issues
Current status and stability:
UCP 600 has been widely adopted and has provided constancy in international trade finance. It is generally considered effective and deep-rooted, which reduces any immediate need for revision.
Digitalisation and electronic records:
The introduction of electronic rules (eUCP) has been a significant development, allowing for the handling of documentary credits in a digital environment. This supplement to UCP 600 addresses the need for digitalisation without requiring a full revision of UCP 600.
Standby letters of credit and other specific needs:
UCP 600 is primarily focused on documentary credits and, while it can be applied to standby letters of credit to some extent, it does not fully address the specific needs of this instrument. The International Standby Practices (ISP98) are often preferred for standbys due to more comprehensive and relevant content.
Potential for updates:
There are arguments for updating UCP 600 to reflect current market practices and technological advancements. However, any revision would need to balance the benefits of change against the potential disruption to established practices and the costs associated with implementing new rules.
Missing rules
Certain gaps in UCP 600 can be identified:
Generic issues
Other questions
Alternatives to revision
Instead of a full revision, the ICC could just continue to issue supplementary rules and guidelines to address emerging issues without altering the core framework of UCP 600. As current examples, these include eUCP updates, ISBP revision, Technical Advisory Briefings, and Guidance Papers.
Challenges
Discrepant presentations:
Historical data shows that a significant percentage of documents under documentary credits are rejected on first presentation due to discrepancies. Updates would need to focus on reducing discrepancies by providing clearer guidelines and standards for document preparation.
Stability and widespread adoption:
UCP 600 has been widely adopted and is considered stable, which reduces the immediate need for revision. The ICC has, thus far, decided not to undertake a revision at this stage, emphasising that existing problems lie more with the application and practice of the rules rather than the rules themselves.
Complexity of revision:
Any revision would need to address a multitude of comments and feedback from various stakeholders. For instance, during the last revision process, around 5,000 comments were received, making it challenging to incorporate all feedback.
Practice vs. Rules:
The ICC Banking Commission has opined that most problems arise from poor drafting of credits, lack of understanding of documentary credit workflows, and lack of attention to detail, rather than defects in the rules themselves. Therefore, revising the rules might not address the root causes of these issues.
Technological advancements:
While there is a need to keep pace with technological developments, the ICC has opted for supplementary rules like the eUCP to address digitalisation without revising UCP 600. This approach allows for updates to be made without disrupting the core framework.
Harmonisation and standardisation:
Revisions would need to ensure that the rules remain harmonised and consistent across different jurisdictions and practices. This is crucial for maintaining the integrity and effectiveness of the UCP. A revised UCP 600 would aim to further harmonise practices across different jurisdictions, ensuring that all financial institutions apply the same procedures. This uniformity would reduce confusion and errors, making the process more efficient.
Costs and disruption:
Implementing new rules would involve significant costs and could disrupt established practices, which might outweigh the benefits of revision. The ICC has, to date, chosen to focus on improving guidance and training rather than revising the rules.
Market and operational considerations:
The documentary credit market share is decreasing, and some argue that the rules need to be revised to reflect current trade practices. However, the ICC maintains that the rules facilitate trade and do not hinder it, suggesting that work should focus on streamlining practices rather than changing the rules.
Benefits of revision
Without knowing the full scope, most of these can only be considered as speculative.
Increased efficiency and reduced costs:
Clearer and more precise rules might reduce the time and effort required for document examination, leading to faster completion of international trade transactions. This efficiency gain may lower operational costs for banks and other financial institutions.
Reduced discrepancies:
Improved guidance and clearer rules might decrease the high discrepancy rates for initial presentation under documentary credits, which currently lead to delays and additional costs. Discrepancies result in a high rejection rate of documents under documentary credits. Clearer rules might minimise this issue, speeding up the process and reducing the need for re-presentations.
Enhanced operational efficiency:
Updated rules could further harmonise credit practices, reducing any complexity and variability that can lead to errors and additional costs. This harmonisation would facilitate smoother transactions and reduce the need for costly legal interventions.
Digitalisation benefits:
Incorporating electronic presentation rules more seamlessly into the main UCP could accelerate the digitisation of trade finance. This would not only reduce the physical handling costs but also speed up the processing time, leading to faster payment cycles and reduced costs associated with manual processing.
Conclusion
In summary, while there are valid arguments for updating UCP 600, the current consensus is that the challenges associated with revising the rules, including the need for stability, addressing practice issues rather than rule defects, and the costs of implementation, outweigh the immediate benefits of revision.
Instead, it makes sense to continue focusing on supplementary rules and improving practices to keep pace with technological advancements and market needs.