Banking Law Brief PDF

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Banking Law and Regulation Notes from Second Year, 2020/21...

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Banking Law & Regulation 2020/21 Salisbury, Ryan

20 Banking law & regulation

Ryan Sa LW2BA 1

2020/2

Banking Law & Regulation 2020/21 Salisbury, Ryan

TABLE OF CONTENTS 1

BANKS, BANKING BUSINESS, AND THE FINANCIAL SYSTEM............................................................4 1.1 1.2 1.3

2

BANKS AND CUSTOMER RELATIONSHIP..........................................................................................8 2.1 2.2 2.3

3

WHO IS A CUSTOMER?......................................................................................................................9 JUDICIAL ATTEMPTS TO IDENTIFY A CUSTOMER.....................................................................................10 DETERMINING WHO IS A CUSTOMER...................................................................................................11

DUTIES ARISING FROM THE BANK AND CUSTOMER RELATIONSHIP..........13 3.1 3.2 3.3 3.4 3.5 3.6 3.7

4

WHAT IS MONEY?............................................................................................................................4 WHAT IS A BANK?............................................................................................................................6 THE ROLE OF THE BANK OF ENGLAND..................................................................................................7

DUTY OF CONFIDENTIALITY...............................................................................................................13 BANKS DUTY TO CONFORM TO THE CUSTOMER’S MANDATE...................................................................16 BANKS DUTY NOT TO EXCEED THE CUSTOMER’S MANDATE.....................................................................16 THE BANKS DUTY TO MAKE A PAYMENT.............................................................................................17 THE BANK’S DUTY TO OBEY THE CUSTOMERS’ COUNTERMAND...............................................................18 WRONGFUL DISHONOUR OF PAYMENT................................................................................................18 BANK’S DUTY TO RENDER AN ACCOUNT...............................................................................................19

GLOBAL FINANCIAL CRISIS: INTRODUCTION.........................................................19 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11

WHAT ARE BANKS FOR?...................................................................................................................19 WHY ARE BANKS SO RISKY?..............................................................................................................20 TAXONOMY OF RISK........................................................................................................................20 INTERNATIONAL BACKGROUND: THE BCBS..........................................................................................20 WHAT WAS THE GLOBAL FINANCIAL CRISIS?........................................................................................21 PRINCIPAL CHANGES TO BE ADDRESSED..............................................................................................21 FINANCIAL LIBERALISATION...............................................................................................................22 PRUDENTIAL AND CONDUCT OF BUSINESS RULES..................................................................................22 ESSENTIAL FEATURES OF PRUDENTIAL REGULATION...............................................................................22 CAUSES OF THE GFC.......................................................................................................................22 TURNER: ACTIONS REQUIRED...........................................................................................................22

5 GLOBAL FINANCIAL CRISIS: CHANGES TO UK BANKING LAW & REGULATION..................................................................................................................................23 5.1 5.2 5.3 5.4 6

CORPORATE GOVERNANCE IN BANKS.......................................................................26 6.1

2

INTERNATIONAL FINANCIAL ARCHITECTURE AND STANDARD SETTING.........................................................23 BASEL REPORTS..............................................................................................................................23 UK MOVE TO “TWIN PEAKS” DUAL REGULATORY ARCHITECTURE...............................................................25 ENHANCED BANKING SUPERVISION.....................................................................................................25

THE UK CORPORATE GOVERNANCE CODE............................................................................................26

6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10

UK BANK SUPERVISION AND REGULATION.............................................................36

7

7.1 7.2 7.3 7.4 7.5 7.6

WHY ARE BANK FAILURES FEARED?....................................................................................................36 BANK REGULATION V BANK SUPERVISION............................................................................................36 THE LEGAL FRAMEWORK..................................................................................................................36 BANK REGULATORS IN THE UK..........................................................................................................37 TWIN PEAKS APPROACH TO BANK REGULATION....................................................................................38 HOW DOES A BANK GET A LICENCE IN THE UK?....................................................................................39

CREDIT FACILITIES.........................................................................................................................40

8

8.1 8.2 8.3 9

BANK FACILITIES.............................................................................................................................40 OVERDRAFTS.................................................................................................................................41 LOANS..........................................................................................................................................41

PLASTIC MONEY, DEBIT CARDS AND CREDIT CARDS......................................................................44 9.1 9.2 9.3 9.4 9.5 9.6 9.7

10 10.1 10.2 10.3 10.4 10.5

3

Banking Law & Regulation 2020/21 Salisbury, Ryan FINANCIAL CRISIS............................................................................................................................28 THE RBS REPORT: WHY DID RBS FAIL?................................................................................................29 CORPORATE GOVERNANCE UNDER THE FINANCIAL SERVICES AND MARKETS ACT 2000...............................29 THE VITAL ECONOMIC FUNCTIONS OF BANKS........................................................................................30 INHERENT RISKS OF BANKS................................................................................................................30 WHAT WERE THE FAILINGS IN CORPORATE GOVERNANCE? [ARORA CH.3(2)]..............................................31 WHY IS GOOD GOVERNANCE OF BANKS CRITICAL? [ARORA CH.3(3)]........................................................34 THE WALKER REVIEW: PRAGMATIC OR SUPERFICIAL?.............................................................................34 NEW PRUDENTIAL REGULATION AUTHORITY POWERS ON RENUMERATION...................................................35

WHAT IS PLASTIC MONEY?..............................................................................................................44 DEBIT CARDS.................................................................................................................................45 CREDIT CARDS AND CHARGE CARDS...................................................................................................49 CASH CARDS..................................................................................................................................50 DIGITAL MONEY.............................................................................................................................51 CONSUMER CREDIT ACT 1974: IMPORTANT PROVISIONS.......................................................................52 THE PAYMENT SERVICES REGULATIONS 2009......................................................................................54 MONEY LAUNDERING...............................................................................................................56 THE INTERNATIONAL RESPONSE..........................................................................................................56 CONTROL OF MONEY LAUNDERING AND THE FINANCING OF TERRORISM....................................................57 ‘TIPPING OFF’.................................................................................................................................61 ROLE OF THE FCA............................................................................................................................62 PROBLEMS POSED TO BANKS.............................................................................................................62

Banking Law & Regulation 2020/21 Salisbury, Ryan

1 BANKS, BANKING BUSINESS, 1.1WHAT  



 



IS

AND THE

FINANCIAL SYSTEM

MONEY?

‘An instrument, something of value, which can be used to purchase something else of value’. Moss v Hancock [1899] 2 QB III o ‘That which passes freely from hand to hand throughout the community in final discharge of debts and full payment for commodities’ Reference RE Alberta Statutes [1938] SCR 100 o ‘Any medium which, by practice, fulfils the function of money which everyone will accept in payment of a debt is money.” Money allows handler to manage and organise affairs in the best suitable way and enhance negotiating power. Number of key functions for money: o 1) As a unit of account: Only fulfilled if money is given in a uniform value throughout the area concerned o 2) A medium of exchange: If the system of trade and commerce is to be based on a medium of exchange then the law must support this position and allow for the discharge of monetary debts by payment in that medium o 3) A standard of measuring deferred payment: allows for payment to be expressed with certainty regardless of when payment falls due to the contract. Economic view that money has three features: medium of exchange, unit of account, and store of value.

Legal Nature of Money  

 

Can only exist as some form of chattel (physical form) Rights of ownership and transfer: o Bank notes also constitute a chose in action: may be enforced in action rather than taking possession. Under s.82 of the Bills of Exchange Act 1882, bank notes are promissory notes -BoE notes only constitute money because it constitutes a promise to buy. To control inflation, the note issue of the BoE was linked to the gold reserve – since gold standard removed only part of the note issue is backed by gold coin and bullion.

Concept of Fiat Money and Legal Tender 

4

Legal tender is money which, if tendered by a debit in payment of his debt, must not be refused by the Creditor (Nussbuam 1937).

Banking Law & Regulation 2020/21 Salisbury, Ryan





Unlawful for a creditor to refuse payment in £ sterling unless it is specifically agreed between the parties that payment will be in a foreign currency or the creditor is willing to agree to a variation. Fiat money is currency that has value because the Gov’t has recognised it as legal tender for the purposes of paying taxes and discharging other legally enforceable debts. o Represents a right to claim payment against other forms of valuable commodities.

Banking System: Structure & Classification

Classification of Financial Institutions  





5

Businesses classified in several different ways including according to the type of commodity produced, the turnover of the business, and the number of employees. 1959 Radcliffe Committee concluded although the various markets for credit in an economic sense succeed in functioning as a single unified market there were nevertheless many differences in the activities of financial institutions. Classification proposed by Revell categorised banks as: o Deposit Banks o Secondary Banks o Retail secondary banks o Retail secondary banks = no longer relevant The Wilson Committee devised three types of financial intermediaries: o (1) Deposit-taking institutions:

Banking Law & Regulation 2020/21 Salisbury, Ryan

Accept deposits that constitute the liquid and nominal capital of the institution  Deposits then used to make more loans, extend credit, and provide other financial facilities and in turn make profit for the business. o (2) Investing Institutions:  Specialise in collecting funds from individuals, mostly on a longer-term basis and investing the pooled funds on long-term securities or in property o (3) 

1.2WHAT 

  



IS A BANK?

S.2 Bills of Exchange Act 1882 o ‘’The term banker includes a body of person whether incorporated or not who carry on the business of banking.’’ Foley v Hill (1848) HLC 28, 9 ER 1002 o Banker and Customer have a relationship of Debtor and Creditor Joachimson v Swiss Bank [1921] 3 KB 110 o Banker borrows money and undertakes to repay them. Three core principles that provide some guidance of ‘business of banking’ in common law: o 1) Context – the meaning of the term can change o 2) Jurisdiction – different authorities give different meanings to the term o 3) Reputation – Do other people consider this institution as a ‘bank’ in the literal term. United Dominion Trust v Kirkwood (1966) 2 QB 431 o A ‘banker’:  Accepts money from, and collects cheques for customers and place them to their credit  Honours cheques or orders drawn by them by their customers and debit their customers accordingly  Keeps current accounts, of something of that nature, in their books in which the credits and debits are entered.

Types of Bank 

6

Clearing Bank o Traditional Retail Banks e.g. Royal Bank of Scotland o Role is primarily of financial intermediation; they channel funds from those who need them.

Banking Law & Regulation 2020/21 Salisbury, Ryan





o The transmission of payments is facilitated by the participation of these banks in the daily clearing o Growth & Expansion since 1960s Foreign Banks o GTB Banks o Bank of China o Bank of America Investment Banks o Main functions were to: raise capital and M&A transactions for corporate clients and raising capital for Governments o The buying and selling of securities or other financial instruments o Engage in risky activities which have high returns o Deal with capital or deal with mergers and acquisitions for big corporation

1.3THE ROLE 





OF THE

BANK

OF

Monetary Policy o Since 1997, a core function of the Bank of England has been to pursue monetary policy and maintain financial stability o Monetary Policy Committee responsible for setting interest rates while the Gov’t sets its inflation targets for each 12-month period. o Directed at achieving the safeguarding the value of sterling and to provide a framework for non-inflammatory economic growth. Financial Stability o Maintaining an efficient flow of funds within the economy and confidence in the financial sector through financial intermediaries. o After 2008 financial crisis, the Bank of England launched several initiatives to restore confidence including a special liquidity scheme under which it provided loans to ailing banks e.g. Halifax. Bank of England as a Lender of last Resort o Henry Thornton & Walter Bagehot both justified the need for a lender of last resort for a few reasons.  To protect the money in stock  To support the whole financial system not just individual financial institutions  To pronounce its policy in advice of crises to remove uncertainty  The Bank will divide the rate of interest payable on the borrow funds and generally makes these ‘penal’ & defines the classes of bills that are except for rediscount.

The Clearing System & When is Payment Made? 7

ENGLAND

Banking Law & Regulation 2020/21 Salisbury, Ryan

   1. 2. 3. 4.



Payment = transfer from debtor to creditor to discharge legally enforceable debts. Payment systems therefore allow money to fulfil its function in society as an accepted means of exchange of purchasing power. Goode; 4 key components of a national payment system An interbank communications network for online electronic transmission of large volume payment orders and associated messages A clearing house for the physical exchange of paper-based payment orders and the netting of matured payment obligations An automated clearing house for the batch processing of large-volume offline (mainly low value) payment orders, stored on magnetic tape or computer disk The involvement of the central bank as the vehicle for the settlement dealings between participants in the clearing by means of transfers in the books of the central banks, where all settlement banks hold on account Each payment system will therefore reflect a compromise between the needs and demands of the users and the system providers within which the level of security and risks play a significant part.

Directive on Settlement Finality in Payment  





Implemented in UK by the Financial Market and Insolvency Regulations 1999 Directive = 2 Main Aims o (1) To reduce systemic risk in payment systems which operate on the basis of payment netting o (2) To minimise the disruption caused by insolvency proceedings against a participant in a payment or securities settlement system To constitute a ‘system’ within the directive, three conditions must be satisfied. o (1) System must consist of a formal arrangement between three or more participants with common rules and standardised arrangements for the execution of the transfer orders between participants o (2) System must be governed by the law of a member state o (3) System must be designated as such and notified to the EU Commission by the member state whose law is applicable. Transfer Order = An instruction to carry out a transfer of money or of securities

2 BANKS 

8

AND

CUSTOMER RELATIONSHIP

3 prosaic legal consequences: o 1) Where a bank collects, in good faith & without negligence, a cheque for its ‘customer’, it is entitled to a statutory defence against the ‘true’ owner. o 2) A bank owes a duty to honour its customers cheques and other payment instructions

Banking Law & Regulation 2020/21 Salisbury, Ryan

o 3) The bank owes certain incidental duties to its customers, such as a duty of care, duty of confidentiality, and sometimes fiduciary duties like those of a trustee.

2.1WHO 

 



  



  9

IS A

CUSTOMER?

The issue of defining who is a ‘customer’ is important for several reasons: o 1) Application of contractual principles and statutory obligations (regulating the scope of the bank customer rel...