Banking Law and Reasons for RBA Investigation - Assignment Example

Banking Law Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Name Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Lecture Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx 9th May 2012 Question 1 A Reasons for RBA investigation The major reason behind the RBA investigation on the banks funding costs is to determine whether lenders ought to raise the interest rates outside the official RBA pegging rates. In respect to this the RBA have commenced investigations on the accurate cost that ought to be charged on the funding cost. Thus the investigations are aimed at offering the accurate cost of funds and operations for banks. In doing so the bank has held interviews with various senior executives of significant banks prior to the release of the report related to the funding cost which is due in March1. The investigations are a response to the way certain banks had changed their rates independently without the consolation of the reserve bank the banks were claiming the changes in the rates due to the higher funding costs. The RBA is charged with the overall oversight of the stability of the commonwealth of Australia. Bank and interest rates play a major part in financing of business transactions and thus if they remain high they push the cost of financing business in Australia. Consequently, the cost of commodities goes up (inflation rate). The RBA suspects banks are keeping the rates up while the RBA rate used to peg interest rates remains low. The claim of deliberately keeping interests rate high is supported by Société Générale a French bank that alleges that the high interest rates is a plot by Australian banks to maintain super profits. The RBA also initiated the investigation in order to provide a non-biased assessment of why banks refuse to lower interest rates while the RBA had maintained a stable rate in the months preceding the decision. Banks had been under a lot of pressure from the public and politicians that they have been making high profits by taking advantage of customers by keeping their rates high. Banks in their defense against these accusations cite reasons such as cost of business being high and further claim high they had been absorbing the extra costs for months, before making the decision to hike rates. Findings of the report The report found out that the cost of funds has been on the increase in almost all parts of Australia in over six months. Most of the sources of the banking costs have also gone up; such sources include aspects such as short term funding, long term funding and the domestic deposits. Also by the use of available data from the reserve bank and also from the Australian prudential regulation it is evident that most funding cost has increased over time2. The reserve bank also found out that most sources of foreign borrowing are competitive and costly for most Australian Banks. Thus the banks also need to have a justification to increase their rates as they have to pass the higher costs of borrowing to consumers. Implication on the banks in Australia The report will have a number of implications to the banks operating in Australia. First, The Australian banking industry may decide to increase interest rates as the findings of the RBA support the claim their business costs have been increasing since the beginning of the year. Secondly, Australia banks will be more cautious while making upward adjustments of interest rates as the RBA has shown it can follow-up banks to pass on the benefits of lower interest rates to consumers. Finally, the findings of the RBA will change the perception of Australia banks as organization that do not care about the wellbeing of customers. This is particularly the case with the major banks that can expect more business from the improved image Question 1 B Financial services in Australia are regulated by three complementing bodies: the Australia Prudential Regulation Authority (APRA), the Reserve Bank of Australia (RBA) and the Australian Securities and Investments Commission (ASIC). The RBA is the general authority charged with overseeing a stable financial and monetary system. The RBA was created by the Reserve Bank Act 1959 (Cth)3. On the other side the APRA is responsible for the management of activities of ADIs aimed at ensuring that banks run smoothly and they are not in the danger of becoming bankrupt. ASIC is aimed at ensuring financial services maintain their integrity and do not exploit consumers. The commission makes sure the company law is followed, licenses organizations and regulates how they conduct their businesses. The mission statement of the RBA clearly states that the bank should make policies that ensure the best standard of life for Australian citizens. All the activities and policies of the bank are aimed at making sure: the local currency remains stable, unemployment rates stays low, the Australian people prosper and their wellbeing is the best4. APRA is concerned with issues of stability of the Banking system while the RBA is mainly concerned with the overall stability and prosperity of the Australian economy. Interest rate regulation fall under the jurisdiction of the RBA as its is them who set the pegging rate and thus are responsible for ensuring banks pass on the benefits of lower rates to the Australian Citizenry5. By keeping interest rates high, Banks lead to increased levels of unemployment and the cost of doing business. These impacts of high interest rates directly affect the aspects of the economy (Inflation, employment, the wellbeing and prosperity of the Australian people) that fall under the mandate of the RBA. Interest rates do not fall under the mandate of APRA as it can only come in to investigate matters of financial stability of the banking organization. If interest rates are maintained at the current high rate it would mean banks are more stable financially as their profits increase6. Thus the Banking staff comments are incorrect as interest rates fall under the jurisdiction of the RBA and not the APRA. Secondly, the RBA is an independent Authority and would not participate in politically motivated Bank bashing, but in contrast it comes into the issue to find out the facts regarding the levels of interest rates. Question 2 (b) Legal Obligation of Banks under Australian Law Under the Australian law the relationship between a bank and a customer is of contractual obligation and the duties of the bank may vary according to the contract made. However this relationship on the part of the bank is not fiduciary meaning the bank is not under any obligation to protect the interest of the client except on those obligations placed upon it by the contract or by statutory obligation. Australian banks have an implied duty of care while advising customers on investment decisions the best method of investment but this duty does not extend beyond the initial investment decision; the bank cannot be involved in the review of the investment. Banks have a various obligations under Australian including the following: Duty of confidentiality, duty of licensing, duty of privacy, duty of consumer protection, duty of dependable operations in the long term. These duties are found in Australian legislation and case laws. Duty of Confidentiality Australian banking organizations have a duty of strictly keeping the information of client’s confidential. This obligation requires banks not to divulge the information provided to them by customers about transactions and balances7. This obligation was set out in the tournier English case. This duty however may not apply to the following conditions: where the consent of the client has been given, is a requirement under another law, if public duty requires it to be disclosed or disclosure is in the interest of the bank. In Amanda and John’s case North Pacific have not broken the duty of secrecy as they have not divulged the information of their accounts to any secondary parties. Licensing Obligations North pacific bank must make sure that there are licensed under Australian law. The Bank must hold an Australian Credit License relevant to the business activities it engages in. North Pacific’s compliance with the National Credit Code (‘NCC’) is assumed in the case of I.T Consulting Pty Ltd. In the case, North Pacific compliance with the NCC is supposed to ensure consumers of its credit services are protected from exploitation8. Under the NCC North pacific can be found liable in several instances if it fails to comply with NCC regulations. Duty of Privacy North pacific has a duty of privacy under the National Privacy Principle which regulates how personal information is collected, used and disclosed. The Privacy Act 1998 (Cth) part 3A means the credit history of Amanda and John is restricted for usage in determining future credit offers. North pacific in this case has not breached the Duty of privacy as the information provided to them by the two individuals has not been used for reference in making loaning decisions. Furthermore IT consulting pty is a new company and it would not have any existing credit histories9. Duty of Disclosure North Pacific has a duty under the Anti-Money Laundering and Counter Terrorism Financing Act (Cth) to ensure they report any suspicious activities that may involve transfer of illegally acquired monies10. The Act requires the bank reporting such activities to comply with AML Act regulations by authentication of Customer’s identity, detailing particular types of transactions and doubtful dealings, and maintenance of accurate customer records. From the Information provided Amanda and John personal accounts and their company ITC do not seem to have any issues that may link their accounts to money laundering. Therefore, North Atlantic has not reported to authorities such suspicious activities because they are not found in their bank dealings with Amanda and John. As regard the AML Act no instance of its Violation is found in the case study. Duty to Protect Consumers Under the Australian Securities and Investment Commission Act 2001 (Cth) gives banks an obligation to protect consumers when they are making dealings with them. Under the Australian Securities and Investments Commission Act 2001 Section 12CA obliges banks should not act in an unconscionable way as provided for by Australian law definition11. Section 12CB restricts banks from engaging in unconscionable content in all circumstances in their dealings with customers. In the case of John and Amanda North Pacific breaks this section 12CB of the ASIC Act by not availing information that may reduce their exposure to unconscionable conduct. The Australian Consumer Law Act 2010 was breached by Westpac in this instance as they did not provide the Clients (John and Amanda) with the details of the contract even when requested by the clients on several occasions. The contract in this case would be declared void under the consumer law as it places North Pacific in a position that they can take undue advantage of the two individuals and the company as per regards the contract. Capital Obligation of Australian Banks Banks in Australia are under statutory obligation to maintain a minimum amount of capital that ensures they do not go under while holding customers deposits. A bank in Australia is required to have a capital to total risk weighted- assets ratio exceeding the prudential capital ratio (PCR). The Australian Prudential Regulation Authority Act 1998 sets standards referred to as the Australian Prudential Regulation Authority Standards (APS) to regulate the operations of banks. The standards regarding Banks capital are from APS 110 to APS 117 under this standards a bank is supposed: a) Have at least the minimum amount of specific types of capital and capital ratios, b) Have instituted and maintained procedures to supervise capital and capital ratios amounts and report to APRA any changes to capital that may affect the banks stability, c) have a procedure for calculating and applying the risk weight of each risk the bank exposes itself to, d) banks separate their various operations into different departments and calculate and apply risk capital obligations to each department separately, e) the procedures to handle, calculate and scrutinize capital levels12. North Pacific compliance with APRA capital standards are not optional and thus for North Pacific to have started operating in Australia compliance to the standards is must. Thus, in this instance North Pacific has complied with the APS 110 to 117. Statutory Obligation as Regards Bank Management The Australian Corporations Act obligates an Australian ADI to be overseen by not less than three directors, two of whom must be permanent residents in Australia. Other administrative organs of Australian banks are under no statutory obligation in regards aspects of number of administrators13. Question 2 (b) Comments regard Protection of Customer Deposits by Australian Laws The comment “I’m glad we do not need to be concerned about our savings as we can always trust our bank. Now that we’re customers, the bank is our trustee in relation to the money we own in our accounts”. This comment is true to some extent but arguments about whether a bank owes a fiduciary duty to its clients may contradict this statement. A trustee is defined as a person whom a person’s wealth is entrusted upon and he takes care of it with the interest of entrusting parties being the main priority of the contract between the two parties. A bank has no obligation to protect the interests of the party making the deposits and thus cannot be regarded as a trustee. However, the fact that the bank is entrusted with the safekeeping of the customer deposits may make the bank a trustee. Under Australia’s Banking act, Banks are obligated to keep a customer’s deposit as a debt to the customer14. Under the act the Bank does not owe a customer a debt until the customer demands to have his money back. The comment; ‘I’m not sure about that, but I did hear the Australian Government does guarantee money held in deposit accounts’ is true. The Australian government since 2008 adopted a guarantee scheme to protect customer funds held by ADI meant to make sure the financial system in the country would remain stable15. The scheme initially freely covered deposits of up to 1 million u$D but in 2011 it was reduced to 250,000 u$D, however higher amounts would only be covered at a charge16. At least with the accounts we and ITC have, we’ll all enjoy rights under Industry Codes and legislation, though I’m not sure what they’re about. This comment is not true as the industry codes and legislation do not guarantee that a customer’s deposits are safe. The contract between the client and the banker including the terms of services, the banks ethics in its operation are the main aspects a client is supposed to look at while choosing a bank he/she can trust for safekeeping of his assets. Industry codes are also optional for banks and thus cannot be relied upon as a source of comfort regarding the safety of money in a bank account. The contract also leaves the two individuals and ITC open to exploitation by the bank as they do not know the terms of their dealings with North Pacific17. Bibliography ADI Authorization Guidelines, April 2008, Paragraphs 15 and 16 Anti-Money Laundering Act 2008 APRA Act, Section 12(1) APRA Act, Section 3(2) APRA: ADI Authorisation Guidelines; Paragraph 35. Australian Government 2011, Australian Government Deposit Guarantee Scheme, Viewed 9 may 2012, http://www.guaranteescheme.gov.au/ Australian Prudential Regulation Authority Act 1998 Australian Prudential Regulation Authority Amendment Bill 2003 (Cth) Banking Act Commonwealth of Australia 2010, A guide to the unfair contract terms law, Viewed 9 May 2012, Corporations Act, Section 911A(1). Howard, H 2012,Case law and index; a complete series of condensed reports, federal, state, and English, including Canadian, Australian, New Zealand and Hawaiian reports. Vol. I. Banks and banking,Nabu Press, Sydney Myers, M.G. 1961, "The Control of Consumer Credit in Australia". Journal of Finance Volume 16, no 3, pp.409–422 Privacy Act 1988 (Cth) RBA 2012, Our Role,Viewed 9th May 2012, Reserve Bank Act 1959 (Cth), Sections 8 and 26. Staff reporter 2012, ‘50 reasons the RBA rate cut must be passedby:’ Herald Sun Viewed 9 May 2012 < http://www.heraldsun.com.au/news/more-news/reasons-the-rba-rate-cut-must-be-passed/story-fn7x8me2-1226344226033> The Financial Claims Scheme (ADIs) Levy Act 2008 (Cth) The Guarantee Scheme for Large Deposits and Wholesale Funding Appropriation Act 2008 Tournier v. National Provincial and Union Bank of England Ltd [1924] 1 KB 461; [1923] All ER Rep 550 Tyree, AL 2002 Banking Law in Australia, 4th edn, Butterworth, Sydney, Weaver, PM 1994, Banking and lending practice (Studies in Australian banking & finance), Law Book Co, Sydney Weerasooria WS 2000. Banking Law and the Financial System in Australia, 5th edn Butterworths, Sydney. Zappone C 2012, ‘RBA goes into bat for big banks – again’, Sydney Morning Herald, viewed 9 May 2012, http://www.smh.com.au/business/rba-goes-into-bat-for-big-banks--again-20120315-1v6bq.html#ixzz1uPSUNUSR Read More