The Problem Is Not with the UCP, It’s with the LCs

Simplification: A Recurring Topic

It seems that simplification of the UCP is once again a hot topic.  At the IIBLP’s 2019 Americas Annual Survey conference in March, I was asked to chair a panel with this as one of the discussion topics.  Then, in April, this was on the agenda at the 2019 ICC Banking Commission meeting, in Beijing. I did not attend the Banking Commission meeting, but I understand that the suggestion actually discussed was that a new, simplified set of rules might be created as an alternative to the UCP.  The underlying issue, of course, is that beneficiaries do not want to work with letters of credit that are difficult to comply with—indeed, it is often difficult to understand what a letter of credit is requiring, even for bankers.  And, as is their standard response, the position taken by the members of the Banking Commission is that we don’t need to revise the UCP—we just need to train people better on how to use the UCP.

The Real Issue: Over-Engineered LCs

My own position on this topic is that it’s not the UCP that’s the problem, it’s the letters of credit. Let’s not simplify the rules, let’s simplify the LCs. 

I was never a big fan of Bank Payment Obligations (may they rest in peace), but I am a fan of the approach they took to required documents.  The design of BPOs was to extract a few critical data points from the purchase order/contract of sale between the buyer and seller to form a data set that went into a BPO and then, after shipping the goods, for the seller to submit another data set, containing the same data points but from the shipping documents.  If the two data sets matched, it was considered sufficient evidence that the seller had complied with the purchase order/contract of sale that the buyer, in choosing this structure, pre-authorized the bank issuing the BPO to then pay the amount being demanded.  Effectively, the seller was simply creating a single document (sort of an electronic beneficiary’s statement) that attested that the seller had complied with the purchase order/contract of sale and was entitled to payment of the specified amount.  Meanwhile, neither the beneficiary’s bank submitting the beneficiary’s data set nor the bank issuing the BPO ever saw any paper documents; the beneficiary was to send them directly to the buyer.