banking and financial law

Banking and Financial Law

Lecture at University of Padua

28th November 2011

Lecturer

Pierre de Gioia-Carabellese

Heriot-Watt University (Edinburgh)

http://www.sml.hw.ac.uk/staff-directory/pierre-de-gioia-carabellese.htm

[email protected]



Before the Lecture.....

Some marketing....

We are British!

Before the Lecture..... (cntd)•Heriot-Watt University

–8th Ancient most academic institution in the UK

•In Edinburgh (but also a campus in Dubai)•School of Management and Languages (part of the Edinburgh Business School)

Before the Lecture..... (cntd)•Pierre de Gioia-Carabellese

–Lecturer in Business Law (including banking and financial law) –British Academic –Solicitor and Notary Public in Edinburgh–Avvocato–Ph.D. In banking and Financial Law–LL.M. In European and International Trade Law

The lecture

The concept of bank at common law in the UK

Contents

The concept of bank in the UK common law and elsewhere

Leading cases

Some statutory provisions

Conclusions

Statute

• No licence is required for an entity to engage in banking business

• Only mandatory restriction in the UK is that an entity must be authorised before accepting deposits from the public

• Financial Services and Markets Act 2000

What is a Bank in the United Kingdom at Common Law?• Common law approach and statutory

suggestions• Bills of Exchange Act 1882• Sect. 2• The “banker”• A body of persons, whether

incorporated or not, who carry on the business of banking

What is a Bank in the United Kingdom at Common Law?• The definition in itself is not the most

comprehensive • However, over the past century it has been

helpful to the courts to come up with a concept of bank

• Why?• A court, in order to establish whether an

institution is a bank, has got to refer to its business

The Three Cardinal Principles for the Banking Business

• The meaning of banking business can change from time to time

• The definition of “banking business” is different across the common law jurisdictions

• The common opinion of the public is a relevant factor

Banking Business: First Principle (cntd)

• The business of the bank can change from time to time

• Banbury v Bank of Montreal [1918] AC 626• The Privy Council held that the giving of

advice on investments did not constitute “banking business”;

• However, “Banbury” overruled by “Woods”

Banking Business: First Principle

• Woods v Martins Bank Ltd [1959] 1 QB 55• In this specific case, it was held that the

giving of advice on financial matters constituted “banking business”

• Among the other things, the bank held itself out as advising customers on their investments


• Woods v Martins Bank Ltd [1959] 1 QB 55• Narrative

• Mr Woods invested £ 14,800 in a company upon advice of its bank manager;

• The company, basically unsound, was a client of the bank;

• Mr Woods also guaranteed the overdraft of the company with a personal surety of £ 1,000 (the manager ensured the guarantor that the guarantee would never been called upon)


• Woods v Martins Bank Ltd [1959] 1 QB 55• The plaintiff sued the bank for negligence• The limit of the banking business is a

matter of fact;• It was within the scope of the bank’s

business to advise on this matter;• The manager ought to inform the

client of a conflict of interests

Banking Business: First Principle (cntd)

• Woods v Martins Bank Ltd [1959] 1 QB 55• The dictum of Salmon J

• “The limits of a banker’s business cannot be laid down as a matter of law. The nature of such a business in each case be a matter of fact and, accordingly, cannot be treated as if it were a matter of pure law. [..]”

Banking Business: Second Principle

•The characterisation of an institution as a bank may be as such in one jurisdiction, but not necessarily in a different one

• E.g. In Ireland, an institution is a bank if it merely accepts money on deposit from the public for the purposes of relending, even if it does not open current accounts operable by cheque• Davies v Kennedy (1869) IR 3 Eq. 668

Banking Business: Second Principle

•In Britain, different approach•Landmark court decision

– United Dominions Trust Ltd v Kirkwood [1966] 2 QB 431• The opening of bank accounts to the

benefit of the public as necessary for an institution to be characterised as “bank”

Banking Business: Third Principle

•The public opinion about that institution•The consideration of the public as that institution being a bank

• Stafford v Henry (1850) 12 Ir. Eq. 400;• Re Shields’ Estate [1901] 1 Ir.R 173,179;• Re Birkbeck Permanent Benefit Building

Society [1912] 2 Ch. 183,208 (CA)• United Dominions Trust v Kirkwood

[1966] 2 QB 431 (see later)

Banking Business and Banking Transactions

•The concept of banking business changes (see above);•However, as at today, what kind of transactions count towards its definition of the banking business?

Banking Transactions and Banking Business

•Outside the UK, usually and traditionally, the banking business is merely the acceptance of money on deposit from the public and the relending or reinvesting to make a profit


•In Ireland• Re Shields’ Estate [1901] 1 Ir.R

173,179 • FitzGibbon LJ: “The business of

banking, from the banker’s point of view, is to traffic with the money of others for the purpose of making profit.”


•In Australia • Commissioners of the State Savings Bank of

Victoria v Permewan Wright & Co. Ltd (1914) 19 CLR 457• Isaacs J

• “The collection of money by receiving deposits upon loan, repayable when and as expressly or impliedly agreed upon, and the utilization of money so collected by lending it again in such sums as are required. “

Banking Transactions and Banking Business (cntd)

• British approach– The acceptance of money on deposit from the

public – and its relending - is a necessary condition;

– However, it is not enough for a business to be deemed as a “banking business”

– As an institution, in order to qualify as bank, must open on behalf of customers current accounts operable by cheque and in which customers may pay cheques


• United Dominions Trust v Kirkwood [1966] 2 QB 431– An entity in order to qualify as a “bank” has got to

open, on behalf of its customers, current accounts operable by cheques and into which customers can pay cheques

– The narrative of the case


• United Dominions Trust v Kirkwood [1966] 2 QB 431– United Dominions Trust (UDT) a finance company;– They raised an action against a borrower;– The defendant objected that the loan was not recoverable

as it was illegal (UDT did not have the license as a moneylender – Moneylenders Act 1900);

– On their turn, UDT claimed that they were exempt from registration as they carried out bone fide banking business (Sect. 6(d)); In relations to this, they were regarded in the city as a bank and had also some privileges such as a

clearing number;


• United Dominions Trust v Kirkwood [1966] 2 QB 431 (cntd)– It was established - and corroborated by the evidence - that

the company received money from the public repaid on maturity but not on demand;

– The finance company never collected cheques payable to its customers;

– Hence, this was not a banking business strictly speaking;– However, United Dominions Trust was entitled to sue as

they were regarded by the City to be a bank (third pillar of the definition of banking business)


• United Dominions Trust v Kirkwood [1966] 2 QB 431 (cntd)– Lord Denning

• Three features for a bank– Acceptance of money by way of deposits;– To honour cheques drawn on them by their customer

when presented for the payment;– To keep bank account on their books for money to

be credited or debited• If the last missing, the wide reputation of the institution

as a bank enough


• United Dominions Trust v Kirkwood [1966] 2 QB 431 (cntd)– Assenting averments: Diplock LJ– Dissenting averments: Harman LJ


• Further court decisions in the wake of “Kirkwood”

• Re Roe’s Legal Charge [1982] 2 Lloyd’s Rep. 370 (CA)– This court decision better explains the concept of

banking business for the purposes of the Moneylenders Act 1900

– Particularly the concept of opening of bank accounts in the name of the customers and the payment of checks on their behalf


• Re Roe’s Legal Charge [1982] 2 Lloyd’s Rep. 370 (CA)– Narrative

• In 1974, a company advanced to a client £ 11,000 in order to enable him to purchase a leasehold property;

• The loan was secured by a legal charge;• The client defaulted; • In 1980, the company demanded payment and raised an action;• The defendant objected that the plaintiff did not have action, as it

was an unregistered moneylender;• On first instance, the company was right; • The client’s appeal was rejected


• Re Roe’s Legal Charge [1982] 2 Lloyd’s Rep. 370 (CA) (cntd)– The finance company had opened current accounts for some

customers, collected cheques on their behalf and provided other banking services (e.g. travellers’ cheques);

– However, the company’s entire banking services were offered via an agency bank;

– The number of deposit and saving accounts was very limited (less than 200) and just approximately 50 cheques were cleared via the institution;

– About 75% of the deposits were held by the same shareholders of the institution;

– The company did not solicit deposit among the public.


• Re Roe’s Legal Charge [1982] 2 Lloyd’s Rep. 370 (CA) (cntd)– Conclusions

• Lawton LJ deemed this none the less a banking business

– Immaterial that the number of items cleared via the company was limited

– Immaterial the fact that the company’s banking business could be considered negligible in size in comparison to a normal bank

Legal Consequences of the Definition of Bank at Common Law

• Applicability of certain duties vis-à-vis the customers exclusively to those institutions which are banks at common law– For instance duty of confidentiality

• Parry Jones v Law Society [1969] 1 Ch. 1,9


• Diplock LJ’s dictum• The duty of secrecy “exists not only between

solicitors and client, but, for example, between banker and customer [..]. Such a duty of confidence is subject to [..] the duty of any party to that contract to comply with the law of the land. If it is the duty of such a party to a contract [..] to disclose in defined circumstances confidential information, then he must do so, and any express contract to the contrary would be illegal and void.”


• Exclusively banks may avail themselves of some rights, privileges and defences

• E.g. The “Kirkwood” case


• Certain defences in the matter of instruments are allowed exclusively to “banks”:– Bill of Exchange Act 1882;– Cheques Act 1957


• Certain defences in the matter of instruments are allowed exclusively to “banks” (cntd)

• Sect. 80 – BEA (with reference to cheques)– In cheques the paying bank must verify the

genuineness of the indorsement;– However, where the cheque has been paid in

accordance with the tenor of its crossing in good faith, the bank enjoys the same position as if the cheque had been paid to the true owner;

– Therefore defence of the payment in good faith


• Certain defences in the matter of instruments are allowed exclusively to “banks” (cntd)– This defence is allowed exclusively to

“banks” according to the common law definition;

– The defence relates not to all the instruments but exclusively to “cheques”, instruments payable on demand and drawn on a bank

Privileges or Rights conferred on Banks under “Statute”

• The right to receive deposits from protected customers;

• The Right to Invest in Protected or Supervised Transactions

The Right to receive Deposits from Protected Customers

• E.g. Solicitors Act 1974– The Council of the Law Society empowered to

require solicitors to deposit client’s funds with “banks”

– This definition is based on statute– Particularly the FSMA 2000

• Bank of England• Banks authorised to accept deposits (Part IV)• EEA firms authorised to accept deposits under

the FSMA 2000

The Right to Invest in Protected or Supervised Transactions

• Banks (and exclusively banks) are empowered to lend money to certain groups of individuals

• Rationale behind it: to protect these categories

• Examples .....


• Examples (cntd)• Agricultural Credit Act 1928

– Farmers are not allowed to grant mortgages or charges over farming assets;

– However, mortgages and charges may be given to “banks” (and exclusively to banks)


• Examples (cntd)• Housing Act 1985

– The Secretary of State entitled to advance money to “recognised lending institutions” to enable them to grant loans to first home purchasers

– Eligible categories: institutions authorised to accept deposits under Part IV of the FSMA 2000 or EEA firms authorised under FSMA 2000 to accept deposits

Is the Term “Bank” as a Protected Brand in the UK?

• In some countries, the terms “bank” is a protected one

• In the UK, originally, Sect. 67 of the Banking Act 1987 prescribed that “authorised institutions” could use the name of bank

• Authorised institutions were UK-incorporated companies with a share-capital of £ 5 million or a UK partnership with the same capital

Is the Term “Bank” a Protected Brand in the UK (cntd)?

• The FSMA 2000 does not mention any more this provision• However, at Sect. 24 of the FSMA there is a specific provision

aimed at tackling any form of misrepresentation • More specifically, it is a criminal offense in Britain for an entity

which is not an “authorised” one nor an exempt one to describe itself as an authorised one or an exempt in connection with the activities under the FSMA 2000

• Probably, through a broad interpretation of Section 24 we can come to the conclusion that Sect. 24 fits also the term “bank”, as an authorised institution

Conclusions

• A definition of bank existing under the UK statute for limited purposes;

• However, entities accepting deposits from the public must be authorised;

• At common law (“Kirkwood”) – and in the UK, an entity shall be a “bank” if it accepted money from the public by way of deposits and, in addition to this, it opened on behalf of customers current accounts operable by cheque and in which customers may pay cheques

Conclusions

• Criticism among the scholars (Ellinger’s Modern Banking Law)– Cheques are nowadays used less and less– Money is transferred via electronic means– As a result the definition in “Kirkwood” should

become more consistent with the modern reality of the banking business

– Therefore less connected with the mechanism of the way money is paid in and out of bank accounts

Conclusions

•Criticism of Scholars echoed by rulings in non-UK common law (Canada)

• Canadian Western Bank v Alberta [2007] 2 SCR 3 (Supreme Court of Canada)

• “The securing of loans by appropriate collateral” but also “the lending of money, the taking of deposits, the extension of credit in the form of granting loans, as well as collection of money” may be deemed as part of the typical banking transactions

Primary Sources

• Pieces of legislation cited, mainly FSMA 2000• Authorities cited

Secondary Sources

• EP Ellinger, E Lomnicka & CVM Hare, Ellinger’s Modern Banking Law (Oxford University Press, Oxford 2011)

• R Cranston, Principles of Banking Law (Oxford University Press, Oxford 2002)

• Westlaw (UK) – legal database no. 1 in retrieving court decisions in common law

banking and financial law

Documents

business law

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investmentsbanking business

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banks business

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banking businessamong