Law Financial Institutions and Securities - Essay Example

Law, Financial Institutions and Securities 1) The area of banking regulation shows us that legislation is not the only way to regulate an industry. By referring to alternative forms of regulation, discuss the strengths and weakness of these forms of regulation. Regulation is applied on banks in order to maintain a healthy market and to ensure that consumers remain satisfied with the services they receive form financial institutions. The alternative forms of regulation are common law, industry code and legislation. Common law ensures the customer’s confidentiality is protected and only revealed at his consent. Industry code; that is, Banking Code of Practice allows the bank to handle situations not covered by the law and take a step ahead to provide rights and obligations to the customer. The disadvantage if this is that the consumer’s rights may not be protected fully. 2) Freedom of contract applies in the B2B (business to business) context. However, for B2C (business to consumer) transactions, Parliaments have been active in legislating protection for consumers. By referring to consumer protection legislation, how are consumers defined and what are the goals of such legislation? The goals of such legislation are to protect the consumer against unconscionable conduct. The B2C states that any value must be of private and domestic nature and that a person should not engage in trade or commerce that is unconscionable conduct. Consumers are defined as buyers who pay for goods and services purchased. The other goal is to make sure providers of services and goods understand legal requirements needed in the provision of customer care. 3) Compare and contrast the roles of any two regulators of the Australian banking sector APRA is responsible for life insurers, prudential regulation of banks, general insurers, building societies, friendly societies, credit unions and superannuation (ABS, 2009). Moreover, the function of APRA is to strengthen the financial standing of a bank while ACCC aims to weaken the power of a bank in the market. The responsibility of APRA is to make sure that the health of financial institutions is to the benefit of investors. On the contrary, the mandate of ACCC is to make sure that markets have stability by taking lawful actions against companies that injure consumers’ interests. 4) Compare and contrast the roles of APRA and ASIC in relation to regulation of the banking sector. A foreign bank is required by APRA to register with ASIC as conducting business in the country (Laker, 2004). The ASIC plays the role of regulating market conduct especially when it comes to dealing with consumers. Hence, ASIC and not APRA deals with complaints about the way banks sell their products. In addition to that, ASIC gives banks the go-ahead to offer services and financial products to consumers with the condition that they adequately disclose their financial status to consumers. On the other hand, APRA ensures that banks that are prudentially regulated maintain a minimum level of financial stability and soundness in order to avoid collapse. On the contrary, ASIC roots out illegal or detrimental activities acting against market forces. 5) There are constitutional limits placed on the Australian government’s ability to regulate banking in Australia. Discuss. According to section 51 (xiii) of the Commonwealth Constitution, the parliament has the power to make laws for the order, peace and good government. This refers to banking and the issue of paper money. 6) In Australia, a bank’s dealings with private or personal information relating to any of its customers is extensively regulated by bank secrecy laws. Discuss Section 22 of Code of Banking Practice reiterates Tournier Duty and Privacy Act 1988. This section of the code holds that the bank has the obligation to maintain confidentiality to its customers. The duty extends to information about account transactions and customer contract. By law, the bank may disclose information where disclosure is under compulsion, when the bank has the duty to the public to disclose, and where the information is disclosed at the customer’s consent. 7) When they are in dispute with their bank, certain customers may refer the matter to an independent dispute resolution service. i) Explain who may be eligible for the service, and in what circumstances the service may or may not be available to the customer. According to the Banking and Financial Services Ombudsman (BFSO), consumers with disputes, small businesses and member financial service providers are eligible for the service. The services are available to customers if they had contacted their financial services provider and their issue was not resolved. The BFSO then registers the dispute and contacts the financial service provider. The BFSO does not provide financial or legal advice. 8) The offering of financial products by Australian Financial Institutions to a retail customer is regulated in Australia. Discuss The FSR regulates financial services consisting of activities relating to financial products. These are facilities through which the customer makes financial investments, manages financial risks and makes non-cash payments. These are regulated in order to maintain a healthy market. 9) A debenture usually gives the lender some security over the borrower’s assets, and this may take various forms. Discuss, referring to examples. A debenture refers to an unsecured debt backed by the company only and not by any collateral. The holders of debentures are considered creditors in case bankruptcy occurs even though there are no pledges of assets. They are a powerful tool for raising funds and leave assets free for use in financing in the future. A convertible debenture allows the buyer of the debenture to choose to take stock in the company. Hence, debentures are used by companies into raising capital without using their assets thus leaving their assets free to generate capital. 10) Discuss the legal position and liability of credit card holders where an unauthorized transaction occurs in relation to the card, taking into account the different ways in which credit cards may be used. Liability limits of credit cards are determined by law. Credit cards can be used for online purchases in order to minimize liability of the consumer. This is because in case the card is compromised, it can be cancelled immediately. In case fraudulent charges are made on a consumer’s credit card, it will not have an effect on the financial standing of the consumer. 11) Discuss the nature and scope of alternative dispute resolution available to eligible customers (stating who they are) under the Code of Banking Practice. The Code Compliance Monitoring Committee monitors compliance and has the power to name a bank found guilty of a breach of the code. Part E of the Code of Banking process addresses resolution of internal and external disputes and the availability of information concerning the processes of resolving disputes. Eligible customers may be owners of small businesses having loans, customers applying for home and personal loans and debit- card holders. 12) The objectives and coverage of the Code of Banking Practice and the EFT Code of Conduct have much in common, but they also possess important differences. Discuss The code of banking practice stipulates the key obligations and commitments of the banking industry and customers for small business on standards of practice, principle of conduct and disclosure for banking services. It acts as an example of self-regulation by the industry in meeting the interests of the customers. The code forms a binding agreement between the customer and the bank. It also provides obligations and rights which may not have been otherwise provided by law. The Electronic Funds Transfer (EFT) code of conduct is applicable when transferring money electronically.The EFT code protects the consumers when they use electronic funds transfers. 13) Adrianne, who lives in Melbourne, had seen a camera for sale on an internet site operated by a vendor in Malaysia. Unwilling to provide her credit card details, she considers other means of paying for the camera, which costs US$500. a) Advise her about using a negotiable instrument to effect this payment, indicating how it will be drawn up and who would be the parties to the instrument Adrianne can use a bank draft to deposit the money for the camera to the bank account of the vendor who will then withdraw it. The parties involved are Adrianne, the vendor in Malaysia who is the third party and the bank. b.) Contrast the instrument you identified in (1) above, with a cheque, highlighting two points of difference between the two. A cheque orders written by a consumer orders their bank to pay a person in the same country. A draft is not payable on demand while a cheque is payable on demand. 14. Outline the operation of a Bill and identify its parties and describe how it would differ from a cheque A bill is an order that is unconditional and is issued by a business or person. It directs a recipient to pay an amount of money to a third party at a specified date in the future. It is put in writing, signed and dated. A cheque orders money to be paid and its parties are the maker with a demand account and a payee. 15. In contrast to a cheque, the characteristics of Bills of Exchange, as a type of negotiable instrument, makes it ideal for credit arrangements, as well as for international trade. Discuss Bills of exchange are instruments that are put in writing. They have to be signed by the drawer or maker since an unsigned document will not be considered to be legally valid. They do not have conditions attached to it. The order must be to pay money, and the total pay has got to be specific. In addition, the money has to be payable to a definite person or to the bearer or his order. In contrast to a cheque, Bills of Exchange do not have restrictions thus it is ideal for credit arrangements as well as international trade. 16. a) China and South Sea Bank Ltd v Tan (1989) 3 ALL ER 839 The case of China and South Sea Bank Limited v Tan (1989) 3 ALL ER 839 outlined the rights of creditors and guarantors. had surety that guaranteed the repayment of a loan that a plaintiff bank made to a company. The company decided to default the loan when the company shares were adequate security for the loan, but the bank failed to enforce its security until the shares became worthless. The bank sought the loan repayment under the guarantee given by the surety. In his defence, the surety argued that the bank had the obligation to sell the shares when the proceeds were sufficient to pay the loan. b.) The Uniform Consumer Credit Code The purpose of the Uniform Consumer Credit Code is to protect consumers who obtain credit in order to finance their transactions, govern the credit industry and ensure the provision of adequate credit. It requires creditors to disclose to consumers the terms of credit, regulates some debt collectors and limitations upon the remedies of creditors. Moreover, creditors are warned not to make contracts with consumers who may not be able to meet conditions for repayment. c) Joint account holders Joint account holders for credit cards are responsible for the account balance in the bank account and are liable for any money owed to the bank. Many banks have the right to demand payment from joint account holders for all the money. In addition to that, joint account holders are required to meet the income, and credit requirements in order to be added to the account and they can be denied the account if they do not meet them. d) Garcia v National Australia Bank (1996) 39 NSWLR 577 The case introduced a special rule for wives. It opened a broader category of cases involving a relationship of confidence and trust between the guarantor and borrower. e) The bank nationalization case The case affirmed the decision of the high court of Australia to promote the theory of individual rights so that the freedom of commerce and interstate trade are exercised. f) The jurisdiction of the Uniform Consumer Credit Code (UCCC) The UCCC document ignores the superstitions and taboos which have dictated legal forms of consumer protection. One of the objectives of UCCC is to bring uniformity to legal regulations. It has the intention of changing rules in order to bring lower rates and competitive conditions for borrowers. It also enlarges market for consumer borrowing by providing an avenue for competitive forces to operate freely but with conditions. The UCCC also introduces standardization in an easy and clear way for the consumer to understand. The code states that credit providers such as building societies, banks, credit unions and finance companies must tell the consumer their obligations and rights in a credit arrangement. g) Misleading and deceptive conduct The Trade Practices Act makes a provision that prohibits a corporation from misleading or deceiving the consumer. The conduct of a corporation may affect the beliefs and thoughts of a consumer. For instance, the impression of an advertisement, quotation, promotion, or statement created by a bank or any financial institution may leave a misleading impression in the mind of the consumer concerning the quality, value or price of any goods or services. Such a corporation will have breached the law. h) Foley v Hill (1948) 2 HL Cas 28 The case outlined the situation when money ceases to be the customer’s. The banker is liable to repay the consumer money he holds at the request of the consumer. When the consumer pays money into the account, it no longer belongs to him; it becomes the money of the banker and he can deal it like his own. i) Australian Prudential Regulation Authority (APRA) APRA does not prosecute banks but plays a supervisory role in ensuring that they are in a stable financial health. APRA protects depositors, superannuation fund members and policy holders. The organization has a risk-rating system. It is used for supervising financial institutions such as banks in order to determine whether they are able to honor their financial promises to investors and depositors. It uses the Probability and Impact Rating System (PAIRS) by basing it on the inherent risk of bank, capital support, its controls and management and the impact of failure on the financial system (Udis, 2000). j) The operation of the Part III of the Privacy Act 1988 (Cth) Part III of the Privacy Act sets out what the inferences of privacy are. The act governs how and when personal information can be used by the government agencies and, the information is collected only when relevant to the functions of the agencies. The people in charge of information have the responsibility of ensuring that the information is neither exploited nor lost. Also, the owners of information have the right to be told why their personal information is being acquired and who will have access to the information. k) The scope of the common law principle of confidentiality Confidentiality in banking is justified by considering commercial ethics. A consumer who makes transactions in the bank is entitled to believe that his secrets will be safe with the bank in relation to the law of confidentiality. Banks are compelled to disclose financial dealings of customers as stipulated by the common law principle of confidentiality. Banks have the obligation to maintain confidentiality in order to protect a consumer’s financial rights. l) Third party cheques and bankers’ liability A third party cheque is payable to a consumer by a business or another person. It is paid into a bank and the bank is liable to pay the consumer upon request. m) The foreign currency loan cases Foreign currency loan allow foreign investors to borrow funds in a different currency from the Australian dollar. Offshore lenders are not allowed to lend to residents in Australia hence refinancing is required in this case. When handling foreign currency loans, one is required to be able to meet loan repayments. One also has to verify assets and income and meet additional maximum loan to value ratio restrictions if the borrowing currency and income stream are different. n) Published ‘internet banking’ terms and conditions. An account means any credit card, savings or current account with a bank which is under the name of the consumer or jointly held with another person. Customer number refers to the ten digit number that a bank gives consumers in order to allow them use the internet banking service. Pass number refers to the six digit number given to consumers in order to help the bank authenticate their identity before the use of the internet banking service. Customers are allowed to use Internet banking services for the whole day except in cases whereby maintenance and system updates is taking place. In cases where the consumer wants to terminate the use of the services, he or she is required to inform the bank through writing a secure message within the Internet bank. 17) Discuss the extent to which the information provided by a bank in the form of brochures, correspondence with customers and advertisements is constrained by consumer protection legislation The consumer protection legislation can apprehend banks and other financial institutions if the information in the brochures and advertisements are misleading or deceiving to the consumers. The bank is therefore required to provide relevant information in form of brochures or advertisement that can be of benefit to the consumer. 18) The state Banking case and its sequel were an unfortunate outcome for the government of the day, but a good result for the banking industry. Discuss The state banking case resulted in changes in the banking industry that were an advantage in the banking industry since some of the rules that were constrained in banks were overruled. This created an avenue for banks to explore ways of dealing with consumers in a way that leaves them satisfied and gain more profit margins. 19) The case of China and South Sea Bank Ltd v Tan (1989) 3 ALL ER 839 highlights the limited rights available to sureties and the broader range of rights available to creditors. Discuss The case of China and South Sea Bank Ltd v Tan (1989) 3 ALL ER 839 had surety that guaranteed the repayment of a loan that a plaintiff bank made to a company. The company decided to default the loan when the company shares were adequate security for the loan, but the bank failed to enforce its security until the shares became worthless. The bank sought the loan repayment under the guarantee given by the surety. In his defence, the surety argued that the bank had the obligation to sell the shares when the proceeds were sufficient to pay the loan. 20) Third party cheques (debtor) maybe negotiable but are still problematic for collecting banks. Discuss Third party cheques are negotiable but are problematic for collecting banks because they may have been stolen or may be fraudulent. 21) The decision in Garcia v National Australia Bank (1998) HCA (6/8/98) was good news for wives acting as guarantors but not for any else. Discuss The decision in Garcia v National Australia Bank (1998) HCA (6/8/98) was good news for wives acting as guarantors but not for any else. It determined circumstances where it was not conscionable for a lender to impose transactions against his wife. 22) Sexually transmitted debt and a wife’s liability in relation to bank guarantees. Discuss Individuals who guarantee debts for friends and family may lose more than they bargain for. It is common for parents and spouses to guarantee loans for family members hence the problem is referred to as sexually transmitted debt. In the case where a wife signed a loan under the possible influence of her husband, she qualifies to be a guarantor and is liable for the debt. She thus faces the burden for repaying the loan in case their marriage is broken. 23) The Banking and Financial Services Ombudsman scheme. Discuss The Banking and Financial Services Ombudsman Scheme is a service that offers resolutions for conflicts between financial service providers such as banks and individuals. It is an independent body that is capable of making decisions that are binding on the bank. It has a system for managing cases, which records problems, and other related matters raised by disputants. 24) Common law rights of a guarantor under a guarantee. Discuss Creditors normally demand a standard form of guarantee which consists of a guarantor who waives defenses or rights present in the common law. For instance, a creditor is required by common law to protect the debtor’s security, not alter the terms of the loan, or make changes that would alter the risk taken up by the guarantor. In the case whereby any of this occurs with the knowledge of the guarantor, then the guarantor could be released from the guarantee. Also, in the common law, a guarantor does not have the right to pay a loan before the due date. 25) Australian money laundering legislation. Discuss The Australian money laundering legislation covers the gambling sector, financial sector, businesses and other professionals. The legislation imposes several obligations on reporting entities when a provision of designated services is made available. A person deals with other property or money if they receive, conceal or possess money, export or import into Australia money or engage in transactions of the bank relating to money. The money can then be proceeds or instrument of crime. 26) Negotiable instruments possess certain common features, but given the variety of instruments that exist, they do differ from one another. Discuss this statement by reference to any two instruments. A negotiable instrument is a promissory note, cheque payable either to bearer or to order. In that regard, notes and drafts make up the two categories of the instruments. A draft is an instrument that orders an individual or institution to make payment and an example of this is a cheque. On the other hand, a note is an instrument promising that a payment will be made. An example of a note is a Certificate of Deposit. Notes and drafts are always used in business transactions to finance the movement of goods, distribute and secure loans. When a bill of exchange, cheque or promissory note is transferred to a person with the aim of constituting that person, the holder of the instrument is to be negotiated. 27) Discuss the possible rights a guarantor may exercise after having met a demand from a bank to pay the amount owing by a debtor. When a guarantee is given, the guarantor promises to carry out obligations of the third party in case the debtor fails. If the guarantor pays the creditor, he or she has the right to recover the money from the debtor. The guarantor also has the right to take an assignment of the rights of the creditor against the debtor. 28 a) The Privacy Act 1988 (as amended) applies to certain aspects of a bank’s business The amended Privacy Act covers the disclosure and use, collection, security and quality of personal information. The Act also provides a framework for complaints concerning breach of privacy and the role of the Federal Privacy Commissioner is defined. It applies to nongovernmental sectors earning more than $3 million annually and banks (Sexton, 2006). For instance, through this law, banks are required to respect the entitlement of the consumer to privacy and confidentiality of personal information availed to the bank. b) The Financial Services Reform Act 2001 relates to certain aspects of a bank’s business The Financial Services Reform Act (FSRA) is a reform program that examines the regulatory requirements applicable to the financial services industry. The three features of the legislative and the new regulatory regime are to provide a harmonized approach to licensing of banks including conduct framework and disclosure. The second feature includes a single statutory regime for financial product disclosure (Segal, 2002). Thirdly, it aids in the licensing of financial markets and settlement and clearing activities. c) The Foreign Currency Loan cases of the 1980’s highlight the risks banks may face in providing financial products to their customers The foreign loan currency cases of the 1980’s led borrowers seeking reassurance and clarification to cope with intolerable debts that caused burdens. This period saw disputes between borrowers and lenders and some instances were taken to court. The issues that came up involved uncertainties and technicalities of foreign currency products associated with movement of currencies. d) The scope for obtaining a charge back on a credit card transaction When consumers pay by credit card they have an advantage in the game because they can enlist their issuers to help in resolving issues. A right for dispute may be available if there is support by documentation that the good provided to the consumer is of poor quality. e) The significance of the bank nationalization case for Australian banking law Nationalization has made it possible to the Australian banks to address insolvency. Bank nationalization resulted in the transfer of ownership from the private to the public sector. Nationalization has also solved the asset problem and imposed market discipline on the behavior of banks. f) The significance of Balmoral Supermarkets Ltd v Bank of New Zealand (1974) 2 NZLR 155 in the context of making deposits to a bank account. The case of Balmoral Supermarkets Ltd v Bank of New Zealand (1974) 2 NZLR 155 indicated that a bank becomes the debtor of a customer under certain conditions (Ollek, 2002). When money is deposited in a bank and checked by a teller and a signification of acceptance is made by the bank, then the bank becomes the debtor in respect of the money. g) The significance of clause 16 of the Westpac Guarantee (refer to your printed materials) Clause 16 of the Westpac guarantee guides in the calculation of interest charges on cash advances, purchase fees and purchase fees on interest on purchases. It also deals with the terms and conditions during the calculation of purchase fees and interest-free period. The Australian constitution has placed limits on the Commonwealth government regarding the types of laws it makes in relation to banking in order to facilitate the regulation of the activities of banks. It has also done this while dealing with the interest of the consumers. h) The circumstances in which bank cheques may not be as good as cash Bank cheques may not be as good as cash because they are sometimes given a limited amount of time and bounce leading to cancellations. i) The Commonwealth government is restricted by the Australian constitution in respect of the types of laws it makes in relation to banking The Commonwealth government is restricted by the Australian constitution in respect of the types of laws it makes in relation to banking in order to facilitate regulation. This is also done so that the rights of the consumers can be adhered to by the banks. In addition, the regulation is important in maintaining a healthy market. j) Bank guarantee given by married women in relation to their husbands’ business debts are treated under Australian law as a special category in view of the Garcia case. Following Garcia, creditors can assume that the guarantor’s wife has reposed confidence and trust in her husband and may sometimes result in an incomplete or wrong transaction without damaging faith. The case law since Garcia has given little attention to the conflict of corporate and equitable law doctrines (Littrell, 2003). The Garcia case looks at a transaction made by the wife as a guarantor as a decision carried out by both the wife and the husband in their natural capacities. The case upholds equity by regarding the debtor and the husband as one. 29) The Uniform Consumer Credit Code (UCCC) imposes credit disclosure obligations on certain financiers in relation to some but not all credit contract. According to UCCC, banks are required by the law to disclose information about the credit arrangement in a written contract, including interest rates, written contract, commissions, fees and other information that was often hidden in the past. It aims to prevent credit problems that consumers face and recognizes the importance of protecting consumers when they get into trouble. 30) Financial Services Regulation (FSR) imposes responsibilities on banks in relation to certain customers The FSR imposes a procedure for single authorization for financial exchanges, settlement and clearing facilities. The regulatory framework has an effect on members operating as financial planners providing financial advice and unlicensed members providing traditional accounting services. 32) Under bank guarantee, a surety may enjoy certain rights implied by common law, unless the guarantee states otherwise In common law jurisdictions, a contract of surety is subject to frauds and it is only enforceable if documented and signed by the surety. If the surety is made to pay due to the failure of the principle to do so, the law will provide the surety a right of subrogation which will allow the surety to use his contractual rights to obtain the costs of repayment on behalf of the principal. 33) The Banking and Financial Services Ombudsman scheme benefits many types of customers but limits apply to its jurisdiction The Ombudsman is allowed to make a determination or recommendation of up to $150,000 in order to compensate a consumer with disputes for any financial losses caused by an act of a member or omission. The jurisdictional limit is set increase to $250,000. The consumer protection legislation can apprehend banks and other financial institutions if the information in the brochures and advertisements are misleading or deceiving to the consumers. 34) Bills of exchange possess features that enable them to be used to facilitate commercial credit Bills of exchange can be used to international trade since they lack restrictions. 35) John Ng is a sole trader who imports tools from Taiwan. He employ two staff and operates from leased premises. He has approached his bank, SouthPac Bank Ltd for an overdraft. Discuss the following statements - SouthPac will take account of certain factors in assessing John’s credit application - SouthPac may require some form(s) of security from John - The Uniform Consumer Credit Code will apply to the proposed overdraft. - SouthPac decides to seek a credit report about John. The area of credit reporting is regulated in Australia under legislation in terms of access to, and use of certain information. On receiving the application of credit from John, the bank will consider factors such as the ability of the applicant to repay the credit by assessing his sources of income. The form of security required by the bank is a guarantor. The UCCC will ensure that the creditor discloses all information and terms concerning the credit application such as interest rates, fees, the rights and obligations of the applicant. All this will be provided in a written contract. South Pac is required to maintain confidentiality of John’s information as stipulated in the Privacy Act. References Australian Banking System, (2009). Invest Victoria. Retrieved May 23, 2010, from http://www.investvictoria.com Laker, J. (2004). The Australian Banking System- Building on Strength. Australian Prudential Regulation Security. Letsou, V. (2005). The Political Economy of Consumer Credit Regulation. Emory Law Journal 44 (spring). Littrell, C. (2003). APRA’s Role and Approach to Regulation (under FSR). APRA. Retrieved May 23, 2010, from http://www.apra.gov.au/speeches/03_07.cfm Segal, J. (2002). Financial Services Reform Act 2001- Challenges for ASIC. Sexton, R. (2006). The Remedies of Mortgages: The Mortgagee’s Statutory Power of Sale Udis, E. 2000. The 'New and Improved' Colorado Uniform Consumer Credit Code. Colorado Lawyer, 24, 34-6 . Ollek, S. (2007). Guarantees. E-Law. Retrieved May 23, 2010 from http://www.e-law.bc.ca/art_guarantee.htm Read More