The financial scandals over the past couple of years have cast the banking sector in a negative light. Amidst the debates on complex derivates, collaterised debt obligations and other exotic investment products exists a very clear bottom line — people have been cheated of their money.

At the very heart of the negative image that financial institutions are now saddled with is a basic loss of trust. Customers trust banks with their money, trust investment advisers to put their money in safe places, and trust the government and regulators to provide an additional protective layer to this trust relationship.

Discontentment with banks is nothing new. Issues such as hidden costs and excessive service or penalty charges have always existed.

In Malaysia, the response by Bank Negara Malaysia to these complaints is usually prompted by pressure from the media or consumer rights groups. Bank Negara is not helped by the absence of clear laws. In the UK, the Unfair Contract Terms Act and other consumer-friendly legislation provide the rod with which the Office of Fair Trade has beaten down on banks. 

As a result of the breakdown in trust, regulators have been spurred into action. The much-maligned US Securities and Exchange Commission has been in the spotlight, and the UK Financial Service Authority even proposed an outright ban on complex financial products such as collaterised debt obligations.

To rebuild trust, the suggestion is that banks start from the bottom up — from the most basic products, such as current and savings accounts and credit cards. For starters, banks are being encouraged to simplify their information material and agreements, to redraft complex financial and legal terms into “plain language”. US President Barack Obama says financial agreements, forms and statements “have to be written in plain language and be in plain sight — no more fine print”, and that the basic products be “plain vanilla, easy to understand”.

In 2009, Bank Negara issued its Guidelines on Product Transparency and Disclosure with the intention of improving information disclosure on products and services offered by financial service providers. The implementation of these guidelines is still ongoing, and practical results are expected by late 2010.

The ‘plain language’ concept
The concept of “plain language” drafting is not new. It was introduced in the US as a federal government initiative in the 1970s. It gained international popularity in the past decade as government regulators, professionals such as accountants and lawyers, and private companies started issuing guidelines and openly endorsing the concept. Legal contracts, market reports, shareholders circulars, prospectuses and annual reports were created with this concept in mind.

The common misconception about “plain language” is that it means removing all complex information and technical jargon, and using simple words. This description is off the mark. While there is no agreed definition, the following are some key ideas which make up the “plain language” concept:

• Start with the reader in mind. A credit card application form will need to be simpler than a complex cross-border joint venture agreement. Include only information that is absolutely necessary.

• Sometimes, complex information is required. The “plain language” concept means presenting it in a clear, organised manner, optimising the chance that the reader will understand it.

• Carefully consider the layout and typeface. Small fonts in cramped paragraphs give the impression that the reader’s attention is unwanted. Headings help guide the reader. Use tools that increase clarity such as illustrations, tables and vertical lists.

• There are also technical issues of grammar and style. “Plain language” promotes the use of the active voice, simple verbs, contractions, pronouns, short sentences, transition words and the proximity of subject, verb and object. Avoid abbreviations, jargon, Latin, archaic legal phrases (for example, “howsoinever provided herewith”) double negatives, multi-topic paragraphs and exceptions to exceptions. Use “must” instead of the vague “shall” or “may” when setting out requirements.

The benefits of implementation
The immediate reason why banks are reluctant to switch to plain language documents is simple — cost and time. Amending standard banking documents would require engaging external legal counsel — after all, the documents contain the legal terms, conditions and obligations between the parties — a graphic designer, investor relations expert, and going through the bank’s internal risk management, documentation and audit committees. While customer satisfaction is important, the push factor of a regulator making change compulsory is obviously required. The customer is not the only party that stands to gain; the following are some obvious benefits:

• Customers better understand the product and make informed decisions. Brokers and advisers are better placed to make recommendations.

• Good communication builds customer confidence. The bank’s marketplace reputation will improve.

• Clearer terms and conditions reduce time and cost required for bank staff and lawyers to explain documents to frustrated customers. This simultaneously improves customer and employee satisfaction and the business process. Applications are completed quicker, as consumers make fewer mistakes.

• Compliance is more likely where the contents are understood. A vaguely drafted document may backfire as courts may interpret the clause differently than the bank intended.

•  Important commercial terms are easier to spot. The customer — and the bank — will find it easier to review and avoid oversights or mistakes.

The revision of a bank’s standard documents is obviously a major operation involving the coordinated effort of several parties. However, banks who take a long-term commercial view will appreciate that it is just a matter of time before their documents would have to be revised as many contain stale, pointless legalese and technical jargon. It is worth the effort as updating these documents does not only benefit the customers, but also the bank.

Marcus van Geyzel is a senior associate in the corporate and commercial division at Mah-Kamariyah & Philip Koh, Advocates & Solicitors

This article appeared in Forum page of The Edge Malaysia, Issue 807, May 24-30, 2010