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-degioia-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
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)
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
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
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.”
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. “
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
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
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;
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)
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
Banking Transactions and Banking
Business (cntd)
• United Dominions Trust v Kirkwood [1966] 2
QB 431 (cntd)
– Assenting averments: Diplock LJ
– Dissenting averments: Harman LJ
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
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
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.
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
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
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.”
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
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
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
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
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 .....
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)
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
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