Banking & Finance Law. LAWS410 Exam summary notes

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1 Banking & Finance Law LAWS410 Exam summary notes

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3 BANKING & FINANCE LAW LAWS410 The Australian Banking System The Wallis Report Regulatory bodies. 1 Reserve Bank. 1 ASIC.. 2 APRA 2 Types of banks Trading banks and savings banks Building societies and credit unions.. 2 Mutual banks. 3 State banks. 3 AML/CTF Legislation... 3 Reprting entity obligations.. 3 The Proceeds of Crime Act The Criminal Code Act Retention fo documents 5 Banking & Contract Law.. 6 What is a contract?.. 6 Offer and acceptance.. 6 Parol evidence rule... 6 Business efficiency exception Express and implied terms.. 7 Warranty or condition?.. 7 Exclusion and exemtption clauses.. 7 Signing is binding Vitiating factors 7 Fraudulent misrepresentation 7 Negligent misrepresentation.. 8 Misleading or deceptive conduct. 8 Duress.. 8 Undue influence 9 Unconscionable conduct 9 Regulation Background to modern regulation.. 10 The Banking Act Overview Entry limitations.. 10 Limitations on shareholdings Protection of depositors.. 11 Payment system regulation. 11 Prudential supervision.. 11 The Basel Accord

4 Capital adequacy Discount for credit risks Operational risk.. 12 Liquidity Large exposure Association with non-banks 13 Other prudential regulation 13 Lending policies.. 13 Banker and Customer Relationship. 14 Traditional relationship Debtor-creditor.. 14 Additional contactual incidents 14 Who is a customer? Terminating the relationship.. 16 Failure of the bank.. 16 Altering the relationship. 17 New implied terms.. 17 Unilateral alteration 17 Written agreements 17 EFT accounts. 18 Consumer accounts. 18 Bringing a claim Time limitations (Limitation Acts) 18 Account in credit 18 Term loans. 18 Unsecured overdraft.. 19 Secured overdraft. 19 Special customers. 19 Dormant accounts 20 The business of banking definition. 20 The Banking Act 1959 definition. 20 Judicial definition.. 21 Duties of the banker. 21 The duty of secrecy. 21 Duties when giving bankers references.. 22 Duty to question a valid mandate. 22 Duties of the customer 23 The Macmillan duty 23 The Greenwood duty. 24 Possible other duties. 24 Forms of Business Sole Trader Partnership

5 Joint and several liability and the ordinary course of business test. 26 Joint ventures. 26 Franchise 26 Trusts 26 Company 27 Cheques Cheques and the Bills of Exchange Act.. 28 Cheque requirements.. 28 The payee.. 28 The drawee.. 28 An order. 28 Unconditional. 28 Conditional delivery 29 Addressed to financial institution. 29 Sum to be paid 29 On demand 29 Date 29 Order and bearer cheques. 29 The drawer s signature 30 Crossing of a cheque. 30 Bank cheques. 31 Dihonour of bank cheques. 31 Payment by cheque 31 Dishonouring a cheque. 31 The duty to pay cheques. 32 Funds available 32 Legal impediment.. 32 Cheque properly presented for payment. 33 How the duty is to be discharged.. 33 Wrongfully dishonouring a cheque. 33 Damages.. 33 Defamation. 34 Defence of qualified privilege 34 Wrongful payment of a cheque. 34 Paying the wrong amount.. 34 Paying the wrong person. 34 Fictious person 35 Defences of the paying bank 35 Common law defences.. 35 Statutory defences 36 Collecting cheques 36 3

6 Actions for misappropriated cheques 36 The action in conversion 37 The action for money had and received. 37 The action for breach of contract 38 Action in negligence. 38 Defences of the holder of a misappropriated cheque 38 Defences of the collecting bank of a misappropriated cheque.. 38 Common law defences.. 38 Statutory defences 39 Bills of Exchange.. 41 Cheques Act and Bills of Exchange Act 41 The concept of negotiation. 41 Formal requirements 41 Unconditional order.. 41 Sum certain.. 41 Time payable Promissory notes. 42 Bearer and order bills 42 Transfer/negotiation 42 Holder.. 42 Consideration. 42 The method of negotiation 43 Becoming a holder in due course. 43 Deriving title from a holder in due course. 43 Requisites of valid acceptance 44 Requisites of valid indorsements. 44 Transfer of order bill without indorsement. 44 Transferor by delivery.. 44 Overdue and/or dishonoured bills. 45 Principles of liability 45 No liability without signature 45 Person signing as an agent. 45 No liability without presentment for payment. 45 Inchoate bills. 45 No liability without delivery 46 The chain of liabilities 46 Documentary Credit.. 47 CIF contracts. 47 Documentary credits. 47 Other unilateral promises 48 Relevant terminology The International Chamber of Commerce standard terms 48 4

7 When does the UCP apply? 48 Basic principles.. 49 The autonomy principle 49 Exceptions to the autonomy principle The doctrine of strict compliance.. 50 Electronic Banking.. 51 What is electronic banking? 51 Electronic signatures 51 Electronic payments International payments. 51 Legal relationships Completion of payment Damages Domestic payments.. 52 Bulk payments 52 Individual payments.. 53 Computer money Credit cards Legal payments Criminal liability Clearing and settlements Clearing system Settlement Payment under a mistake Defences Mistaken payment of cheques Consumer Protection Consumer protection initiatives 56 Unfair contract terms. 56 Responsible lending requirements Consumer warranties. 56 The Code of Banking Practice.. 57 When does the Code apply?.. 57 Disclosure under the Code General principles of conduct 58 Guarantees. 58 Closing the account.. 59 Dispute resolution under the Code 59 The epayments Code. 59 Definitions

8 Application of the epayments Code. 60 Disclosure requirements.. 60 Changing terms and conditions 60 Paper records 60 Liability for unauthorised transactions 61 Mistaken payments.. 61 The Financial Ombudsman Service. 62 Limits on power. 62 Procedure.. 62 Access to and disclosure of information.. 63 Remedies. 63 Lending Types of lending. 64 Secured/unsecured Overdrafts Term loans Commercial/financial bills Standby credits and performance bonds Letters of comfort Types of borrowers. 66 Minors.. 66 Business borrowers-unincorporated Companies Consumers Guarantees Nature of a guarantee. 68 Requirements of a guarantee 68 Guarantee under the NCC 68 Guarantor s right against the other parties 68 Debtor. 68 Co-guarantors 68 Rights to securities. 68 Avoidance 69 Misrepresentation and non-disclosure 69 Undue influence and unconscionable conduct. 69 The creditor-principal debtor contract 70 The creditor-guarantor contract. 71 6

9 THE AUSTRALIAN BANKING SYSTEM BANKING & FINANCE LAW The Wallis Report The Financial System Inquiry (the Wallis Inquiry) was established in 1996 to review the regulation of the Australian financial system and to make recommendations for its improvement. The Wallis Inquiry delivered its final report in early April of The report contained 115 recommendations. The Inquiry recommended a single licensing regime for all deposit-taking institutions. This recommendation has been implemented by amendments to the Banking Act The Inquiry also recommended reallocating regulation of banking according to the role and function of the institution. Recommendations included: The Corporations and Financial Services Commission would be responsible for establishing and enforcing rules o 1 f conduct and disclosure - in the event, this role was given to the Australian Securities and Investments Commission (ASIC); The Reserve Bank of Australia (the Reserve Bank) was to be responsible for monetary policy, the setting of interest rates and 'systemic stability'; APRA was given responsibility for prudential regulation of the financial sector, A role previously performed by the Reserve Bank; The Payments System Board (PSB) was created as a second board of the Reserve Bank with responsibility for the payments system, ensuring system stability, access to, and control of, the payments system. Regulatory bodies Reserve Bank The country s central bank. Created by statute Reserve Bank Act 1959 (Cth). Section 26 of the Reserve Bank Act 1959 establishes the Reserve Bank as the central bank of Australia and - subject to the Act and to the Banking Act 1959 the Reserve Bank is prohibited from carrying on any business otherwise than as a central bank. The Reserve Bank was also responsible for prudential supervision until 1998, when the function was transferred to APRA. The Financial Sector Reform (Amendments and Transitional Provisions) Act 1998 (Cth) inserted s 8A, which establishes two governing boards: the Reserve Bank Board, responsible for the Reserve Bank's policy on all matters other than the payments system policy; and the Payments System Board, responsible for the Bank's payments system policy. In the event that the two boards have conflicting policies, s 1OC of the Financial Sector Reform (Amendments and Transitional Provisions) Act 1998 provides a method to resolve the differences - namely: the Reserve Bank Board prevails; and the Payments System Board's policy has effect as if it were modified to remove the inconsistency. The Reserve Bank Board Section 10(2) some limits on the way that the Reserve Bank Board is to exercise this power. It must ensure, within the limits of its powers, that the monetary and banking policy of the Reserve Bank is directed to the greatest advantage of the people of Australia. In addition, its powers should be exercised in such manner as, in the opinion of the Board, will best contribute to: the stability of the currency of Australia; 1 1

10 the maintenance of full employment; and the economic prosperity and welfare of the people of Australia. The Payment Systems Board The Bank's payments system policy is determined by the Reserve Bank Act 1959, s 10B(1), and the Board has the power to take whatever action is necessary to ensure that the bank gives effect to the policy. The Payments System Board is constrained by s 10B(3)(a) to ensure that its policies is directed to the greatest advantage of the people of Australia. The Board is directed bys 10B(3)(b) of the Reserve Bank Act 1959 to exercise these powers in a way that will best contribute to: controlling risk in the financial system; promoting the efficiency of the payments system; and promoting competition in the market for payment services, consistent with the overall stability of the financial system. Australian Securities and Investment Commission (ASIC) ASIC was established as part of the Wallis Committee recommendations. Its continuing existence is by virtue o f s 8 o f the Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act). As part of its consumer protection role, ASIC administers the unconscionable conduct and consumer protection provisions of Div 2 of the Australian Securities and Investment Commission Act ASIC also publishes regulatory guides and information sheets on how to approach issues or policies. ASIC may issue infringement notices under the Corporations Act 2001 (Cth), or it may seek 'enforceable undertakings' under the ASIC Act.These may be done where ASIC determines that there is a breach of the law. An enforceable undertaking is a promise to ASIC, in writing, that the person or entity giving the undertaking will do or refrain from doing something Australian Prudential regulation Authority (APRA) The Wallis Committee recommended the establishment of a single prudential regulator for all institutions involved in deposit taking, insurance or superannuation. APRA was established for that purpose by the Australian Prudential Regulation Authority Act 1998 (Cth). APRA is funded by levies imposed on the financial services sector that it regulates. APRA issues Australian Prudential Standards, which regulate a range of activities undertaken by financial institutions. An Australian Prudential Standard has the force of law: Banking Act 1959, s 11AF. Types of banks Trading banks and savings banks The Banking (Savings Banks) Regulations 1960 (Cth) appear to remain in force. These regulations require a savings bank to hold a certain percentage of all deposits in prescribed investments and limit the types of deposits that the bank may accept. Building societies and credit unions Credit unions are cooperative societies where each member has a say in the running of the union. Credit unions loan money to members and accept deposits. 2

11 From 1 July 1999, building societies, credit unions and certain other financial institutions were deemed to be registered under the Commonwealth companies legislation. They were then regulated by APRA as ADIs, and by ASIC with respect to corporate regulation. Mutual banks In 2010, the Federal Government announced that it would permit certain building societies and credit unions to become 'banks'. These mutual banks are owned by the account holders and are often referred to as 'customer-owned banks'. Each member has one vote, irrespective of their account balance or the number of accounts held. State banks S 51 (xiii) Constitution: Commonwealth can make laws on banking, other than state banking, also State banking extending beyond the limits of the State concerned, the incorporation of banks and the issue of paper money. Melbourne Corp v The Commonwealth (1947) 74 CLR 31: The High Court has held that 'State banking' means the business of banking engaged in by a state as a banker. It does not include business between a state as a customer and a bank. AML/CTF Legislation Money laundering: launderer converts money obtained from illicit activities into funds which appear to come from legitimate business activities. Australia supported the formation of the Financial Action Task Force (FATF) - an initiative of the Organisation for Economic Co-operation and Development (OECD). The national and international approach to the money laundering/terrorist financing problem is a two stage procedure: detection through reporting obligations; and deterrence through the confiscation of funds. In Australia, the first of these is implemented in the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (s 3 objective of Act is to fulfil international obligations). The second policy is implemented through the Commonwealth and state proceeds of crime legislation. Reporting entity obligations A reporting entity is a financial institution or other person who provides a 'designated service'. For banking law, the provision of an account, allowing a person to be a signatory, allowing a transaction to be conducted on an account and a whole host of other services offered by traditional banks are designated services: s 6. A 'signatory' is a person - or one of the persons - on whose instructions (whether required to be in writing or not and whether required to be signed or not) the account provider conducts transactions in relation to the account: s 5. Act imposes certain obligations on reporting entities: A reporting entity must carry out an identification procedure this procedure must generally be carried out before applying a designated service, but in some circumstances may be delayed; certain transactions must be reported, including 'suspicious' transactions; and each reporting entity must prepare and comply with an anti-money laundering and counterterrorism financing program. Financing program 3

12 Reporting entities must have and comply with an anti-money laundering and counter-terrorism financing program. The program consists of two parts: Part A must identify, mitigate and manage the risk that the provision of its designated services to its customers may facilitate money laundering or terrorism financing; and Part B must set out customer identification procedures. These obligations are set out in Pt 7 of the Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1). Identification Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. l) sets out the details of identification. Section 32 AML/CTF requires the reporting entity (with some exceptions) to apply an 'applicable' customer identification procedure before providing the designated service. In the case of an individual customer, this means that the reporting entity must use systems and controls that are designed to ensure that the reporting entity is reasonably certain that the customer is the individual that he or she claims to be. In the case of a company customer, the identification procedure must ensure that the company exists, and, in certain cases, must include the names and addresses of beneficial owners. The reporting entity must employ procedures and systems which enable it to know some details of its customer's affairs. This is broadly known as the 'know your customer' (KYC) requirement, an ongoing requirement e.g for an individual know their income, assets available etc This obligation to update customer information is a new and potentially onerous obligation on financial institutions. Section 36 AML/CTF requires an reporting entity to 'monitor' its customers with a view to identifying, mitigating and managing the money laundering/terrorist financing risk. Reporting Reports are given to the Australian Transaction Reports and Analysis Centre (AUSTRAC). S 41 AML Suspicious defined: Defined in a way that means the customer s identity of the customer is to be revealed. There are 4 main obligations when reporting: a reporting entity must report 'suspicious' matters; 'threshold' transactions must be reported (threshold is $10,000); any person who sends or receives an international funds transfer instruction must report it to AUSTRAC; and a reporting entity may be required to give compliance reports. The Proceeds of Crime Act 1987 The 'proceeds of crime' consist of any money or other property that is derived or realised, directly or indirectly, by any person from the commission of an offence that may be dealt with as an indictable offence: Criminal Code Act 1995 (Cth), s 400.1(1). 'Money' and 'property' include references to financial instruments, cards and other objects that represent money or can be exchanged for money - whether or not they have intrinsic value: Criminal Code Act 1995, s 400.1(2). Studman v Commomvealth Director of Public Prosecutions [2007] NSWCA 28: The appellant had opened a bank account in a false name, contrary to the Financial Transaction Reports Act He argued that the account should not be confiscated, since the funds deposited were legitimate. The NSW Court of Appeal held that the 'property' in question was the chose in action, which was acquired 4

13 by the deposit of funds. Since the chose in action was acquired by a criminal act, the funds were the proper subject of confiscation. The Criminal Code Act 1995 For ADIs, a person 'deals' in money or property if he or she engages in a banking transaction relating to the money or property: Criminal Code Act 1995, ss 400.2(1) (a)(iii) and 400.2(2)(a)(iii). The 'constitutional' part of 'dealing' for the purposes of s 400.2(1) is that the money or other property in question must be the proceeds of crime or could become an instrument of crime: Criminal Code Act 1995, s 400.2(1)(b). Section 400.2(2) of the Criminal Code Act 1995 uses a 'shopping list' approach. If a person does any of the things mentioned in subs (a), then the additional requirement is that the person does them: in the course of, or for the purposes of, importation of goods into Australia; or in the course of, or for the purposes of, exportation of goods from Australia; or by means of a communication using a postal, telegraphic or telephonic service within the meaning of para 51 (v) of the Constitution; or in the course of banking (other than state banking that does not extend beyond the limits of the state concerned). An 'instrument of crime' is any money or property which is used in the commission of an offence - or used to facilitate the commission o fan offence - provided that the offence may be dealt with as an indictable one: Criminal Code Act 1995, s 400.1(1). The 'basic' offences are described by s of the Criminal Code Act s 400.8(1): where a person deals with the money or property and the money or property is, and the person believes it to be, proceeds of crime; or the person intends the money or property to become an instrument of crime. S 400.8(2): where a person deals with money or property which is either the proceeds of crime, or there is a risk that it will become an instrument of crime. The offence is committed if the person is reckless as to either fact. S 400.8(3): The third basic offence is committed if the person is merely negligent as to either fact. Section of the Criminal Code Act 1995 describes the offence of possession of property reasonably suspected to be proceeds of crime (must be in relation to a commonwealth offence). The elements of the offence are that the person deals with money or property by receiving, possessing, concealing, disposing, importing or exporting it - provided that it is reasonable to suspect that the money or property is the proceeds of crime. S 400.9(2) of the Criminal Code Act 1995 enumerates circumstances in which it may be assumed that the money or property is the proceeds of crime. These include: the conduct involves structured transactions ('smurfing') designed to avoid the reporting requirements of the Financial Transaction Reports Act 1988; the conduct involves using accounts in false names; the value of the property is grossly out of proportion to the defendant's income or expenditure. Retention of documents A financial institution must retain certain documents for a period of seven years. Certain documents not related to the operation of the account must be retained in the original: Financial Transaction Reports Act 1988, s 40F. The Financial Transaction Reports Act 1988 provides an exception for documents relating to a single account transaction where the amount does not exceed $200: Financial Transaction Reports Act 1988, s 40H(2)(a). 5

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