Banking and Financial Law

1. Banking and Financial Law Lecture at University of Padua 28th November 2011

2. Lecturer Pierre de Gioia-Carabellese Heriot-Watt University (Edinburgh) http://www.sml.hw.ac.uk/staff-directory/pierre-de-gioia-carabellese.htm p.de_gioia-carabellese@hw.ac.uk

3. Before the Lecture..... Some marketing.... We are British!

4. 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)

5. 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

6. The lecture The concept of bank at common law in the UK

7. Contents The concept of bank in the UK common law and elsewhere Leading cases Some statutory provisions Conclusions

8. 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

9. 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

10. 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

11. 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

12. 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”

13. 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

14. Banking Business: First Principle 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)

15. Banking Business: First Principle 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

16. 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. [..]”

17. 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

18. 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”

19. 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)

20. 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?

21. 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

22. Banking Transactions and Banking Business 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.”

23. Banking Transactions and Banking Business 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. “

24. 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

25. Banking Transactions and Banking Business (cntd) 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

26. Banking Transactions and Banking Business (cntd) 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;

27. Banking Transactions and Banking Business (cntd) 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)

28. Banking Transactions and Banking Business (cntd) 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

29. Banking Transactions and Banking Business (cntd) United Dominions Trust v Kirkwood [1966] 2 QB 431 (cntd) Assenting averments: Diplock LJ Dissenting averments: Harman LJ

30. Banking Transactions and Banking Business (cntd) 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

31. Banking Transactions and Banking Business (cntd) 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

32. Banking Transactions and Banking Business (cntd) 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.

33. Banking Transactions and Banking Business (cntd) 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

34. 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

35. Legal Consequences of the Definition of Bank at Common Law 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.”

36. Legal Consequences of the Definition of Bank at Common Law Exclusively banks may avail themselves of some rights, privileges and defences E.g. The “Kirkwood” case

37. Legal Consequences of the Definition of Bank at Common Law Certain defences in the matter of instruments are allowed exclusively to “banks”: Bill of Exchange Act 1882; Cheques Act 1957

38. Legal Consequences of the Definition of Bank at Common Law 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

39. Legal Consequences of the Definition of Bank at Common Law 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

40. 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

41. 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

42. 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 .....

43. The Right to Invest in Protected or Supervised Transactions 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)

44. The Right to Invest in Protected or Supervised Transactions 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

45. 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

46. 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

47. 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

48. 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

49. 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

50. Primary Sources Pieces of legislation cited, mainly FSMA 2000 Authorities cited