Law of Financial Institutions and Securities - Case Study Example

Law of Financial Institutions and Securities Name A Report Submitted Institution Course Date: Tragic lesson in wages of pride The following essay is an assignment on the topic of Law of Financial Institutions and Securities. The essay is divided into two sections based on the number of questions present in the assignment. The first question is on the article named ‘Tragic lesson in wages of pride’ while the second section is a case study that needs analysis and demonstration of the scenario’s legal rights. The essay will start by giving a brief summary of the whole article by noting the major arguments present in the article. The article titled “Tragic lesson in wages of pride” by Andrew Cornell talks about the complex nature of the banking sector mainly in Australia and also the United States and United Kingdom. The author explains how the banking system has changed with time since its inception in the Middle Ages and the development of the global economies and the effect of the change to both the taxpayers and the banking regulators. In addition, the article reveals how the investment bankers plays a huge role in making the banking sector more complex and out of control that it requires banking regulators to come in and control the situation. Cornell also points out how the taxpayers have been unknowingly backing up residual deposit from very risky market speculation, and business of banking investments. Based on this issue, the article also provides bankers explanations and reasons for doing what they do and the governments say on this issue through Philip Lowe who is the deputy governor of Reserve Bank. Furthermore, the author explains the functions of the banking regulators in Australia and the methods and techniques they use in stabilizing the banking industry, which performs well off compared to other countries all around the world. The other main key point that the author notes in the article is the work done by the Australian Prudential Regulation Authority concerning the costs and benefits of the global banking rules, which are already implemented in Australia. From the article, it is evident that the nature of the banking practices has led to major problems in the global banking sector in general. Cornell says that the sole purpose for the emergence of the banking sector in Italy was taking excess capital from lenders and providing it to a group of borrowers who had investment opportunities, but did not have the funds to use for the investment. In return, the latter, who is borrowing, would pay an interest rate commensurate with the ventured risk. However, this system changed with time as investment bankers hid the risk associated in the ventured investment and passed it to those who did not understand it or were not prepared to take the risk. For example, in the United States conventional banking forced taxpayers to back-up extremely riskier businesses of investment banking together with risky market speculation. This meant that the taxpayers would unknowingly subsidize the cost of the risky investment banking business. To add to the list, banking sector raised the cost of banking services offered to their clients arguing that the cost of regulation was too expensive and that it chocked economic recoveries that needed the bank to finance. This was noted as bad banking by the deputy governor of Reserve Bank named Philip Lowe who argued that banks repeated the mispricing of risks, which took place in great modernization. The deputy governor pointed out that the tax payers through their government preferred to engage on paying more for banking if it reduced the risk of failure than paying less for banking and ending up subsiding the risky investment banking. Due to this nature of banking practice, regulators have been forced to quarantine conventional banking as it leads to a financial crisis, which costs more than a quarter of a country’s gross domestic product. The saaame case witnessed in the United Kingdom when it was facing a financial crisis in the year 2008. Furthermore, the bankers raised the cost of their loan rates above the required pricing, claiming that the providers of debt, who are the depositors and the capital markets, demand more from their investment. This is why Charles Littrell, who is the APRA’s bank enforcer, received complaints from bankers when they set to raise home loan rates by 0.25 percent. According to the bankers, the raise was unrealistic since providers of the bank debt demanded more from the bank. In relevance to this issue, the author who notes was a banker for 20 years argued that the benefits achieved from a stable banking system outweighed its costs incurred inform of credit that is more expensive. This meant that as long as the banking system was stable, greater success would be achieved rather than raising the cost of borrowing. The author advocates the need for greater banking regulation as a means for preventing and controlling financial crisis in a country. According to Cornell, the banking system is spinning out of control and causing financial crisis together with instability in the banking system. Through the calculations done by Bain and Co from UK, taxpayers usually carry the burden of paying £1000 per year per person as the cost of an unstable banking industry. This is a heavy burden for the taxpayers and should be corrected through regulations. In addition, Cornell argues that without firm regulation, and supervision, the risk involved in banking investments is underpriced, the credit for borrowing is set at excessive prices and the innovation undertaken by banks is not good for the society as a whole. To further add to the list, the regulations protect banks, customers and taxpayers through interest rates control as the bank would lend out loans with high interest rates so as to gain more capital and satisfy their lenders. In a report done by Biggar concerning bank regulations, banking regulations originated from microeconomic corners regarding the ability of bank creditors to monitor the risks, which originated from the lending side, and concerns over the stability of the banking system in cases of banking crisis. Furthermore, the banking sector was subjected to a widespread informal regulation due to the statutory and administrative regulatory provisions by the governments. This meant that the governments would use outside formalized legislation together with their discretion so as to influence the banking sector outcomes such as bailing out insolvent banks, deciding on banking mergers and maintaining significant state ownership. The reserve bank of Australia defines Australian Prudential Regulation Authority (APRA) as an integrated regulator that is responsible for deposit taking for institutions such as banks, credit unions and building societies. The authority is in charge of these institutions as well as developing administrative procedures and practices that give effect to its regulatory role. The procedures and practices undertaken by this authority should be in a manner, which balances financial efficiency and safety, competition, competitive neutrality and contestability. The article acknowledges the role played by the Australian bank regulators and the benefit achieved from the regulations. According to the author, the APRA prevented to a great extent, the infection of Australian commercial banks from investment banking innovation and remuneration, which was causing crisis to other north Atlantic countries. The APRA succeeded in doing this by reasonably pricing the risk of investment banking. Through risk pricing in the banking sector, only a few but large diversified banks operate in Australia, which makes the risk for a financial crisis minimum. In addition, it prevents and controls financial crisis in Australia by increasing competition in the banking sector and as a result, lowering the price of risks. The Australian regulator also controls and sets up the maximum rates of borrowing through interest rates control regulations. Through interest rate control technique, the regulators reinforce stability in the banking sector. For example, they aim at stabilizing the banking industry through small increase in the cost of interest rates rather than highly increasing the interest rates and making credit more expensive. Based on the thorough analysis of the article, I totally agree with the author that the nature of the banking sector has led to global financial crisis around the world. As a response to this financial crisis, banking regulations is necessary for every country that wants to prosper. Just as, the author says, without firm regulation and supervision, there would be an ongoing financial and economic crisis resulting from excessive credit costs, undesirable banking innovation and underpriced risks. I also support the authors view for a continued firm banking regulation even if the banking sector is stable and performing well. Question 2 From the case study, of Joyce Lee and the Australian Bank limited (ABL), important issues regarding the banker’s obligation to customers as well as customers rights’ regarding the banking sector presents itself. The case study reveals the importance of customer rights, the banking laws and the contractual obligations of the bank. In Australia, there are three regulatory agencies present for the maintaining and regulation of the financial system. The first main regulatory agency is the Reserve Bank of Australia that is responsible for the monetary and banking policy, as well as, stabilizing the Australian economy. The second agency is the APRA, which as discussed earlier in this paper is responsible for ensuring sound financial institutional practice and financial stability. The third agency is called the Australian Securities and Investment Commission (ASIC), which is responsible for consumer protection and markets integrity. This part of the essay will give focus to the role played by ASIC together with the legal requirements of banks and the stipulated legal rights for customers. Going back to the scenario, Joyce Lee, as a new client and holder of a savings and credit account holder at the Australian Bank Limited, just like any other customer has legal rights, which protect her from. As a consumer, she has the right to be provided with full information disclosure regarding the business or organization that she would be transacting with. In this case, the ABL has the legal obligation of providing full disclosure on information of their banking practices, goods and services offered. According to the Australian consumer law regarding banks, the law prescribes standards, which encourage clean and clear business practices in banks; the law prohibits harmful and illegal practices and provides consumer rights to safe and honest methods of dealing with them. One of the law requirements enjoins banks to disclose information related to the effective and efficient use of their products or services. Although this is the case, it does not mean that banks should disclose information that is detrimental to their organization (Leahy 1997, pg. 58). The main purpose of this requirement is to ensure transparency in dealing with the client. In addition, the law prevents bank institutions from burdening their clients with undisclosed or hidden charges. It hinders businesses from forcing clients to pay for products and services that they did not avail. The law stipulates that any bank, which violates the Australian Customer Service requirements, would face sanctions (Australian Customer Service 2011). From the case study, Jane has the right to demand compensation from the bank due to the financial loss incurred distress and incase of inconveniences caused as a result of the withheld data. According to the situation presented at hand, Joyce has firm grounds to refer this issue to the ACL since the withheld information was a misleading and deceptive conduct by silence. This is evident from the case, which states that ABL did not provide Joyce with the terms relating to their banking services and as a result, she incurred $1000 loss from her savings account. Joyce also has the right to confidentiality, as it is an implied term in contracts between banks and customers. These institutions need to keep their customers’ information and data confidential. The confidentiality not only confines itself to account transactions, but also extends to all information the banks has about the client. According to Tournier’s principle, a banker’s duty of confidentiality is not always absolute. The bank can legally disclose data if compelled to do so by law, if it is the bank’s public duty. However, if the bank’s own interest requires disclosure, and when the customers agree for their information to be revealed to third parties (Muraleedharan 2006, pg 264). In case a bank discloses information under circumstances not discussed above, then it has acted in a wrong way, and as a general rule, it should be held liable. This is because the bank will have breached its contract and its fundamental duty to its customers. In addition to protecting the overall interests and rights of clients, the ACL is a powerful defense mechanism against unscrupulous contracts entered by transacting parties. Through the intervention, of a court, the ACL voids contract that compromises the rights and interests of a person. Consumer Guarantees ensure that clients avail goods and services with high quality. It also gives customers the rights to terminate or end certain services that they find to be ineffective or unfair. Through the laws provided by the ACL, Joyce has the right to finish the contract and her relationship with the bank if she finds the bank’s actions and practices to be unfair. According to the banking code, the bank has the obligation of acting fairly, reasonably and not to mislead their customers under any circumstance. It also requires banks to inform customers about changes in the charges, terms and conditions through sending regular updates and bank statements. In addition, the code obliges banks to deal with problems and customers complaints in an effective and efficient manner. As provided in the ASIC Act, banks should follow all the requirements in the banking code, as it is a contractual law and present in the law of torts. Relating this thought to the case study, ABL broke the contractual rule and its obligation to take care of its consumers. According to the case, ABL stated in its site that, in case of any dispute relating to its products and services, which refer to the respective account, the customer are guaranteed that the dispute would be resolved within five working days. However, when Joyce presented the issue of her debited savings account, the bank took a period of 30 days to do an internal enquiry before informing her that the matter was closed. This is evidently true that, there was a breach of contract on the side of ABL together with the provision of misleading information to its customers. Joyce has the right to sue the bank for any inconvenience caused because of the extended period taken, by the bank, to solve the dispute. In addition, she can also sue the bank for damage done from the misleading information provided by the bank. The ABL contract assured Joyce that if there was any dispute, the bank guaranteed a resolution within a period of 5 days. In contrast to this, the bank did not provide any solution to the dispute at hand, since it closed the matter and refused to take liability for its actions without informing their client, the reasons for the undertaken actions and decisions (Jasper 2007, pg 153). Based on the provisions of consumer protection under the 2004-revised code of banking practices, bank customers have the right of having their disputes or complaints solved by a bank as well as, the right relating to the provision of document by their banks. The dispute resolution framework under an approved ASIC policy requires a dispute resolution system that is independent, fair, accountable, efficient and effective. It is clear that Joyce’s complaints and dispute relating to her account was not solved at all, and the bank closed the matter without any accountability for it actions (Australian Securities and Investments Commission Act 2001). In such a case, Joyce has the right to take the unauthorized debited account case to an external party such as the court or schemes such as the Banking & Financial Services Ombudsman Limited, which deals with disputes regarding banks. Cartwright identifies that the main function of the Financial Ombudsman Service (FOS) scheme is to provide accessible, fair and independent dispute resolution for both customers and the financial service providers such as the banks (1999, pg.45). The services offered by FOS are free to customers and are open to all financial service providers operating in Australia. The FOS has the jurisdiction of solving a dispute regarding any act or omission by the banks in relation to financial services in Australia, as well as disputes that arise from confidentiality and in some cases the issue of individual disputant and privacy. In addition, the FOS has jurisdiction over legal issues arising from banker –customer disputes such as a breach of contract, misleading or deceptive conduct, unconscionable conduct, breach of provisions of the UCCC and breach of the code of banking practice (Mishkin 1998). Before taking a dispute to the third party for resolution, a customer with a compliant must first contact their financial service provider so as to discuss the issue at hand and discuss the possible and quickest way to resolve the issue. If the two parties, the customer and the financial service provider, do not come to an agreement, then the customer should lodge a dispute with the FOS. Since this is the case with Joyce, she should first lodge a dispute with the scheme so as to register the dispute in their system. This is the first step in the process, and it entails contacting the complaint or dispute to the chairperson of the FOS. This is done via filling a straightforward form located on the FOS website. In the form, Joyce should provide detailed information regarding the complaint, its nature and provide the supporting documentation of her claims as well as her contacts. The FOS would then contact the service provider involved and then order them to write a response to the customer in a period of less than 45 days. The acknowledgment of the complaint would be done within 3 days (Financial Services Ombudsman 2012). If Joyce receives a written response from the financial service providers who in this case is ABL, which does not resolve the dispute, she must contact the FOS again with the new information. The FOS will then review the dispute by first considering if it falls under their jurisdiction. After undertaking these steps in the procedure, the rest of the issue is to be handled by the FOS. In case the FOS does not resolve her complaint or dispute to her satisfaction within 45 days, then Joyce should proceed onto the next step. The next step entails referring the matter to the state department that is responsible for consumer complaint or requesting the review of the dispute by the FOS. When settling a dispute, the FOS may adopt the dispute resolution method of negotiation, conciliation or making a decision based on investigations and the provided evidence. Before making a rule, the Ombudsman must take into account the law of the land, regulators rules and regulations, pertaining to the relevant parties involved, and good industry practice, which in most cases mean the trade body standards. For example, in the case of Joyce, the FOS may use the approach of decision making after carrying out an investigation on the financial service provider. Provided that Joyce presents all the necessary evidence relevant to her case, the FOS may order the bank to fully compensate her as it breached its contractual agreement (Financial Services Ombudsman Limited 2008). In conclusion, it is evident that banking law is a diverse and constantly changing field of law. It puts focus on all the activities that have been at the heart of a strong economy since prehistoric times and intersects with the lives of most individuals. Before signing a contract, it is advisable for bank clients to go through the contract with their lawyers, as they would be constructively advised on the way forward. To top it off, every individual who is a customer should know his or her right so as to prevent themselves from exploitations by banks and other businesses. References List Australian Securities and Investments Commission Act 2001. (n.d.). Australian Government common law. Retrieved September 17, 2012, from http://www.comlaw.gov.au/Details/C2012C00105 Banks, ASIC and Banking and Financial Services Ombudsman Ltd. (n.d.). Banking & Financial Services Ombudsman Limited. Retrieved September 14, 2012, from http://www.bfcsa.com.au/index.php/entry/banks-asic-and-banking-and-financial-services- ombudsman-ltd Cartwright, P. (1999). Consumer protection in financial services. The Hague: Kluwer Law International. Events | CSIA. (n.d.). Customer Service Institute of Australia - dedicated to Australian Customer Service Training, Certification and Awards. Retrieved September 14, 2012, from http://www.csia.com.au/?page_id=10 Home Page: Primary. (n.d.). Financial Services Ombudsman. Retrieved September 14, 2012, from http://fos.org.au/centric/home_page.jsp Jasper, M.C. (2007). Consumer rights law (2nd ed.). New York: Oxford University Press. Leahy, G. (1997). Managing banking relationships. Cambridge: Woodhead Pub. With the Association of Corporate Treasurers. Mishkin, F. S. (1998). The economics of money, banking, and financial markets (5th ed.). Reading, Mass.: Addison-Wesley. Muraleedharan, D. (2006). Modern Banking: Theory And Practice. New Haven, Conn.: Kluwer Law International. Your Financial Rights: Complain, get help & compensation... (n.d.). Money Saving Expert: Credit Cards, Shopping, Bank Charges, Cheap Flights and more. Retrieved September 14, 2012, from http://www.moneysavingexpert.com/reclaim/fight-back-fos#account Read More