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Banking

Comparative Study of Banking Laws in Australia, Canada and U.K.

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Consolidation has been recognized progress in the banking industries of many jurisdictions in recent decades. In many emerging markets banks M&A has been driven by government policy initiatives for restructuring. Frequently such initiatives have followed a financial crisis and have become directed towards stabilizing the banking system and the economy[1].

The banking business is distinct from other kinds of businesses requires extensive regulation. There has been a degree of harmony about the need for comprehensive regulatory controls governing operations of financial institutions and financial markets generally[2]. In all jurisdictions the main objective of bank regulation is to maintain financial stability, reducing bank failures and protection of consumers. In those line main elements of the bank regulatory system include the restriction on the kind of businesses in which banks are allowed to engage, licensing of banks, provisions relating to the protection of depositors interest and restrictions on the control of banking business.

The business of banking is loaded with danger, arising mainly from the volatility in the world economy and from the human error of mis-judgment[3]. Banks operate largely by investing funds deposited with them by the public. Thus the collapse of banks has a disastrous effect on the position of its customers or business enterprises and it can induce financial panic. In order to prevent such disastrous effects on the public and on the economy almost all jurisdictions have enacted laws that would regulate the banking business.

The European Central Bank (ECB) expressed the view that one of the root causes of the global financial crisis was that supervision and regulation of banking and financial markets are loosely coordinated[4]. Most jurisdictions have special regulations for banking companies; however, there is no difference in the law governing mergers of banking companies[5]. Yet, some countries have laid down separate procedures for bank merger.

Control of Banking in the United Kingdom:

The supervision of banking in the United Kingdom was in the hands of Bank of England until 1998. The Bank of England Act, 1964 authorised the incorporation of the bank by means of public subscription[6]. Originally, the object of the bank was to raise the money required for the war with Louis XIV[7]. It was prohibited from engaging in the general trade. The Bank of England Act, 1696 granted monopoly as regards the carrying on of full-fledged banking business by the corporation. The bank of England’s three main functions- those of an issuing bank, of a central bank, and of a settlement bank became well established in the 19th century. The first attempt to give the bank a substantial monopoly of issuing banknotes was made in the bank notes Act, 1826, under which other banks were precluded from issuing notes for less than $5[8] . The bank‘s supervisory function – its role as a central bank developed at a later date. Bank‘s indirect control of the banking system was based on its ability to influence interest rates by applying them to the accounts maintained with it. The emergence of the powerful joint-stock banks during the last two decades of the 19th century prevented the bank of England from effectively exercising Defacto control it had been able to impose on the banking network earlier[9]. The maintenance of substantial margins with the bank of England began between 1913 and 1914. In terms of structure, the bank remained largely unchanged until 1946 when it was nationalized by the government. In the year 1946, the bank of England‘s stock was transferred from the then owners to the treasury solicitor. Bank of England is now a government institution but operates independently of the government. Then came the Bank of England Act, 1946 which gave the general powers to make requests or recommendations to banks and if authorized by the treasury, to issue directions. The Banking Acts of 1979 and 1987 imposed on the bank not only the power but also the duty to supervise the banks authorized by it to carry on a deposit-taking business in the United Kingdom. The Banking Act, 1979 and 1987 was the first Act to deal comprehensively with the licensing of institutions entitled to accept deposit from the public. It was superseded by the Banking Act of 1987. The Banking Act,1979 divided the deposit-taking institutions into four groups (a) Bank of England ( b) Recognized banks ( c) licensed institutions described as ̳licensed deposit takers‘ and ( d) institutions listed in schedule 1 to the Act such as building Societies and the central banks of EC member countries, which were entitled to accept the deposit from the public without securing a license or authorization. With the collapse of Johnson Matthey Bank, the question of bank supervision was reviewed by a committee set up by the chancellor of the exchequer in December 1984 and chaired by the governed of the Bank of England. In the UK, the Bank of England Act 1998 transferred the Bank of England’s former banking supervision functions to the Financial Services Authority (FSA). Prior to the enactment of it, the legal pedigree for powers of the Bank to conduct financial services supervision rested not only in provisions of the Banking Act 1987, but also in section 101(4) of the Building Societies Act 1986, and in provisions of the Banking Coordination (Second Council Directive) Regulations 1992. Under these laws, the core purposes and strategy of the Bank of England included monetary stability, monetary analysis, monetary operations, banking activities, financial stability, supervision, and surveillance. Though FSA has acquired the powers to supervise banks, listed money market institutions, and related clearing houses as the single financial services regulator[10], it could not withstand the financial crisis between 2008-09. Parliament of UK enacted Financial Services Act, 2012[11] and Financial Services( Banking) Reforms Act,2013 with the objective of strengthening Financial supervision in the UK. Financial Services Act, 2012 established two new statutory bodies replacing the Financial Services Authority (FSA). They are the Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA). These two authorities work under the guidance of the Bank of England. The literature on FSMA reveals that market failure led to the need for recognizing an authority to regulate Financial Services in the UK. The main objects of the FSMA are to ensure market confidence, financial stability, and public awareness, protection of consumers and reduction of financial crimes. Part VII of FSMA, 2000 deals with the law and procedure governing the transfer of Banking Business.

Financial Service Regulation Reforms in the UK- An Overview

The UK financial Service Industry constitutes a significant component of its economy. It is composed of three main sectors; Banking, Insurance and investment business. The regulatory framework for UK financial services, which had developed over the course of the 20th century, was complex and fragmented[12]. There were multiple regulators, often more than one for each of the three sectors of the industry. The governing legislation and regulatory requirements were embodied in multifarious statutes, delegated instruments, codes and rule books. The Bank of England, the UK’s Central bank was stripped of its role as a banking regulator by the Bank of England Act, 1998 and was formalised under the Financial Services and Markets Act 2000(FSMA). However, the financial Crisis of 2008 and 2009 had an adverse impact on the UK‘s economy. In order to ensure that the financial service sector manages and control the risks more effectively, United Kingdom enacted The Financial Service Act, 2012[13] (hereinafter FSA) which came into force on 1 April 2013. This Act has not repealed the Financial Services and Markets Act,2000( hereinafter FSMA,2000). But has brought certain changes to the regulations governing banking and financial sector under the FSMA, 2000. Originally, FSMA, 2000 recognized a tripartite[14] system that governed the banking and financial sector. During the financial crisis, the Financial Service Authority (FSA) proved to be inefficient and therefore have been abolished. The principal change introduced by FSA 2012 was to establish the Financial Conduct Authority( FCA)[15] and Prudential Regulatory Authority (PRA) as the statutory successor of the FSA and to give each new regulator separate but partially overlapping statutory functions and objectives under FSMA,2000[16].

FSA, 2012 brought certain changes which are essential for the better regulation of the financial service sector in general and banks in more specific.

The move to a new twin peaks model of regulation comes with implementing laws that require both regulators to consult each other on a number of issues, including applications to be made by UK regulated firms.[17] Both PRA and FCA take a more judgement based and interventionist approach to regulation. Each regulator expects to challenge senior management business decisions that conflict with regulatory objectives, although they acknowledge that their own decisions may be proven wrong in time. In the short UK regulators will aim to prevent what they see as the flawed decision making that led to the financial crisis.

Regulation of Bank Mergers in Australia: 

Australia has a complex array of laws that govern and influence the conduct of banking practice, including remarkably significant barriers to entry limit the number of banks able to be established within Australia and in turn limits the competitive forces that might otherwise exist as between an increased number of banks offering services[18].

Australian Bank merger Policy: Globalization and the entry of new players have caused many existing participants in the Australian financial services industry to adopt new strategies to gain a competitive advantage[19]. These systems incorporate moves to give new sorts of money related items just as moving operations to and going into collusion with, innovation specialist co-ops. Till as of late a limited methodology was trailed by the Australian Government towards bank mergers. It precluded mergers among Australia’s four biggest banks, for example, Public Australia Bank Ltd, Common Wealth Bank of Australia, Westpac Banking Corporation and New Zealand Banking and the AMP and National Mutual Holdings Ltd. The Government’s thinking was that it accepted that there was inadequate rivalry in the Australian money related territory. Everything considered it is steady of underwriting the obtainment of Australian bank by a distant bank. Australia’s enormous four banks rule the Australian Banking part holding 73% of the public budgetary market. These huge banks are a delayed consequence of a movement of bank mergers throughout ongoing years, in any case, there are stresses that any more conspicuous gathering of the portion, especially on account of acquisitions of second-level banks by any of the colossal four, will result with less buyer choice, diminished contention and occupation mishaps. Since late 1990’s Australia’s monetary system has worked by the ― Four Pillar Policy‖ the inspiration driving the identical is that there should be no under four critical banks to keep up appropriate degrees of competition in the money related division.

Canadian Regulatory Background

Bank authoritative authority has lived generally with government authority since the British North American Act of 1867, under which Canada got self-governance. Brought together authoritative authority furthermore came to be facilitated by the intermingling of banking assets. Starting with a surge of hardening of banking assets. Starting with a surge of mixes in the last part of the 1800s, the Canadian money related system has been administered by a few tremendous extensively extended banks.

From a critical high of 51 banks in 1874, endorsed bank numbers declined to 35 of each 1900 and to 11 out of 1925, generally through bank mergers. By 1966, the 5 greatest Canadian banks held 90% of family unit bank assets. Centralization of banking assets has been associated with banking-zone strength. In particular, during the 1920s and 1930s, when bank frustration rates were high in the U.S., Canada experienced only one, to be explicit Home Bank in 1923.

Regulatory and authoritative bank powers stay with the working environment of the Superintendent of Financial Institutions, which lived with both the Department of Insurance and the Inspector General of Banks. Bank oversight appraisals were established in 1924 after dissatisfaction of the Home Bank. In any case, by 1980 there were only seven screens, and all things considered, rule and the executives in Canada has been less genuine than in the U.S.

Formal public bank guarantees began with the creation of the Bank of Canada in 1935. Regardless, before 1935 some public bank organizations existed. For example, the organization gave liquidity during the furore of 1907, notwithstanding the way that appropriate powers to do so were not surrendered until the 1914 Finance Act gave the Finance Ministry formal bank after all different alternatives have run out powers. Interbank crediting and clearinghouse organizations were similarly ordinarily given among contracted banks.

Game plans of public store assurance occurred with the 1967 adjustments to the Canadian Banking Act which made the Canadian Deposit Insurance Corporation. Canadian store security order was considering the mistake of a couple of trust associations. Nevertheless, certain store insurance and an excessively tremendous to-step by step procedure were set up in Canada on any occasion as exactly on schedule as the 1930s. beck hart reports that compelled mergers served to secure the budgetary system against completely bank dissatisfactions, achieving essentially a 100% store guarantee. The Canadian government also gave “liberal” liquidity help to banks during the mid-1930s.

Banking in Canada ended up being continuously genuine by the 1980s. The 1980 Bank Act refreshes allowed trust associations admittance to enrollment workplaces and allowed outside bank segment on the grounds that. Regardless, the 5 greatest Canadian banks continued holding over 84% of family banking assets.

Endnotes

[1] John Goddard, Philip Molyneux and TimZohu, ̳Bank Mergers and Acquisitions in Emrging Markets: Evidence from Asia and Latin America‘ Available at http://ssrn.com/abstract=2006372 .

[2] Harry McVea, „Financial Services Regulation under the Financial Services Authority: A Reassertion of the Market Failure Thesis?‟ 64 Cambridge Law Journal (2005).

[3] E.P.Ellinger, Eva Lomnicka and Richard Hooley,‘ Elinger‟s Modern Banking Law‘ 4th Edn,(2009) Oxford University Press P.27

[4] Arlen Duke, ̳Competition policy and the banking sector: the need for greater international co-operation‘583 European Competition Law Review 2013

[5] In UK, Part VII of the FSMA regulates the acquisition of the undertaking of banking companies. Court sanctions such schemes. For the purpose of the merger of other companies the provisions of Companies Act, 2006 is applicable. Court has the power to sanction the scheme.

[6] E.P.Ellinger, Eva Lomnicka and Richard Hooley, ―Elinger‘s Modern Banking Law‖, 4th Edn, (2009) Oxford University Press P.29.

[7] It also had to transact its business under the style of the governor and company of the Bank of England. The bank was invested with a legal personality and it was a joint stock company. It was authorized to deal in the bill of exchange. It was allowed to deal in gold coins, bullion and silver.

[8] Frederick Huth Jackson, ̳The Bank of England‘, 59 The Journal of the Royal Society of Arts (1911)

[9] E.P.Ellinger, Eva Lomnicka and Richard Hooley , ―Ellinger‘s Modern Banking Law‖4th Edn,(2009) Oxford University Press p.31

[10] Carlos Conceio , ̳ The FSA‘s A approach to taking action against market approach‘ 2007 Company Lawyer 45 ,28(3).

[11] Main features of FSA,2012 and Financial Services (Banking )Reforms Act,2013 is discussed in detail under 6.1A in Chapter VI of this study.

[12] Gerard Mc Meel, ̳ International issues in the Regulation of Financial advice: A United Kingdom perspective- The retail distribution review and the ban on commission payments to Financial intermediaries‘ 87 St. John‘s Law Review 595(2013)

[13] Introductory note to the Act states that It is an ―An Act to amend the Bank of England Act 1998, the Financial Services and Markets Act 2000 and the Banking Act 2009; to make other provision about financial services and markets; to make provision about the exercise of certain statutory functions relating to building societies, friendly societies and other mutual societies; to amend section 785 of the Companies Act 2006; to make provision enabling the Director of Savings to provide services to other public bodies; and for connected purposes‖ .

[14] Treasury, Bank of England and Financial Service authority (FSA).

[15] The objective of the FCA is to ensure that business across the financial services industry and markets is conducted in a manner that furthers the interests of market participants and consumers.

[16] Ali Malek QC & John Odgers QC , ̳Paget‘s Law of Banking‘ 14th Edn. Lexis Nexis (2015)P.4.

[17] Mark Mandaby, ̳Twin peaks regime- the journey so far‘. www.clydeco.com/insight/updates/…/twin-peaks-regime- the-journey-so-

[18] ―Inquiry into aspects bank mergers‖ Committee Report submitted by Senate Standing committee on Economics,Australia.www.aph.gov.au/senate/committee/economics_ctte/bank_mergers_08/submissions/sublist.htm.

[19] Michael Falk, ―Australia: Banking Regulation- Code of Banking Practice‖ 2002 Journal of International Banking Law 

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Jasbeer Singh

Student, Symbiosis Law School, NOIDA

Jasbeer is a smart writer who is always up to labour upon his skill and ready to grasp every opportunity. He has worked under many advocates and gained practical knowledge. For any clarifications, feedback, and advice, you can reach him at jasbeersinghnanda@gmail.com

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