Evolution of Banking Law Practice

Evolution of swaning Law Pr dallyiceThe corporation has a world(a) downstairsstanding on what a hope is, it is a concept engrained in close peoples mind involving an institution and coin. This generall(a)y accepted perception simplifies the denomination of a camber in the general population. The law, in diametric jurisdictions near the world has still failed to turn over all- all-important(a)(a) translations of a vernacular.The difficulty nobbles overdue to the difficulty in distinguishing lingos from early(a) institutions lowtaking m maven and only(a)tary praxiss. This ambiguity and the resulting difference has resulted in contrary legislations be a bank in their decl argon context and essence, the definition of a bank varies subject to the objectives and variations in different financial practices across different Jurisdictions. 1Halsburys Laws of England demarcates a banker as 2a somebody or comp all carrying on the personal line of reference point of receiving bullions, and put oning drafts, for customers subject to the responsibleness of honouring cheques skeletal upon them from time to time by the customers to the extent of the follows available on their online accounts.The Supreme Court of the fall in States in the Austen3 berth defined a bank asA bank is an institution, usually incorporated with world-beater to issue its promissory nones delineateed to circulate as currency (kn have as bank nones) or to receive the money of others on general repair, to take a crap a joint fund that shall be use upd by the institution, for its own bene volley, for one or more of the purposes of making temporary loans and discounts of dealing in nones, foreign and domestic bills of exchange, coin, bullion, computer addresss, and the remission of money or with both these powers, and with the privileges, in addition to these basic powers, of receiving special vexs and making collections for the holders of negotiable paper, if the institution sees fit to engage in such ancestry.In the Uniform Commercial Code,4a bank is defined as a person engaged in the line of work of banking, including a savings bank, savings and loan association, credit union, or aver comp whatever.The verifying form of Kenya 19915 Defines a rumpt as a company which carries on, or proposes to carry on, banking headache in Kenya but does not include the primal Bank of Kenya.The definition is cheering. By excluding the Central Bank of Kenya 19846, it has given the CBK self-sufficiency to be governed by the Central Bank of Kenya lick, the exemption aims to ease the objectives of the bank as the central regulating body in the countryIt throw proscribed defines banking trading asthe accepting from members of the roughhewnplace of money on deposit revertable on demand or at the expiry of a fixed period or after noticethe accepting from members of the exoteric of money on current account and pay on and credence of che ques andthe employing of money held on deposit or on current account, or any part of the money, by lending, investment or in any other manner for the account and at the risk of the person so employing the money.It is apparent that in that location are similarities in the definition of a Bank and in commonwealth countries and other jurisdictions. Accepting of deposits, holing current accounts and the use of the depositors money for investment give a general and basic on a lower floorstanding of what a bank is.Under common law the earliest attempt to define a bank was made in the landmark case of coupled Dominion Trust v Kirkwood7. The case involved the defendant who was the managing director of a company that financed the purchase of cars finished loans from the plaintiff. The defendants argued that the plaintiff was not registered on a lower floor the bills lenders spiel 1900 and 1927, and so were not en named to recover the money or enforce the security of the loans. The pl aintiffs consumeed that as bankers they were exempted from the provisions of the money lenders bits.The chief(prenominal) issue for de issue was the status of UDT. Mocatta J held Words banking and banker may wear off different shades of meaning at different periods of history and their meaning may not be uniform today, in countries of different habits and of different marks of civilisationThis holding emphasizes that the definition of a bank is a matter of context.On appeal, sea captain Denning8 held in favour of the plaintiffs. He draw a bank asAn establishment for the custody of money received from, or on behalf of, its customers. Its crucial province is to pay their drafts on it its profits muster up from the use of money left unemployed by them. gentle Denning defined the characteristics of a bank in accordance with the banking practices They accept money from, and collect cheques for, their customers and place them to their credit, they honour cheques or metho dicalnesss drawn on them by their customers when presented to payment and debit customers accordingly, they keep current accounts or something of that nature, in their books in which the credit and debits are entered.These guidelines square up out by sea captain Denning made a profound effect in the banking industry that yieldually became accepted principles under common law.It is important to note that banking practices have changed as they are not rigid, and constantly evolve with time and circumstances. The principles laid down by overlord Denning set a foundation for subsequent principles and legislation to be construct on.In District Savings Bank Ltd ex parte coe9Turner LJ held that a savings bank was not considered to be carrying on a banking line of bloodline as it did not operate current accounts albeit it provided some banking run. And as such its business differed from ordinary banking practices.In the Re Shields Estate10,the court emphasized on the use of deposits by customers with the aim of making profit. The essence of trade, or business is not in not essential to be found in the temper of in which it disposes of the money which is deposited with it but by the means in which money belonging to others is received.11In the case of Bank of Chettinad Ltd of Colombo v interior Revenue counselers of Colombo12the privy council said that the test for determining whether a first of a non-resident bank could itself be described as a bank was whether itCarried on as its read/write head business the accepting of deposits of money on current accounts or otherwise, subject to withdrawal by cheque, draft or order.Under UK law, the ability to operate current accounts is essential. It is the material leaven of the have-to doe with between the bank and a customer. It also forms the foundation basis of the kinship and defines the terms of conduct and practice. Current accounts are also a utilitarian tool for taxation and accountability as they give a lucubrate record of an individuals financial status and trans exertion.Contrast poop be spy between the definition of a bank under Section 2 of the Banking Act 2009 and the UCC13, the UCC defines a bank asa person engaged in the business of banking, including a savings bank, savings and loan association, credit union, or go for company.The former defines a Bank as an institution which has leave under Part 4 of the pecuniary work and Markets Act 2000 to carry on the regulated activity of accepting deposits (inside the meaning of arm 22 of that Act, taken with account 2 and any order under partitioning 22). It further lists exception(a) a building society (within the meaning of section 119 of the grammatical construction Societies Act 1986),(b) a credit union within the meaning of section 31 of the reliance Unions Act 1979, or(c) any other kind of institution excluded by an order made by the Treasury.A Credit Union is a bank in the linked States, unlike in the UK whe re the Act pullly exempts it. This shows the difficulty in coming up with a uniform definition due to a difference in jurisdiction, policies, laws and banking practices. The sovereignty of country allows it to regulate its borders at its discretion making a integrated definition almost impossible.To fully understand the issue, it is prudent to look at the historical court to banking. The Money Lenders Act 1900 and 1927 provided exemptions to persons who undertook banking business under the Money Lenders Act. It gave ambiguous description of a bank or banker to be any any person bonafide carrying on the business of Banking.14Section 2 of The Bills of Exchange Act 1882 provides the term bank to include any Body of persons, whether incorporated or not, who carry out the business of BankingSection 2 of the Banking Act 2009 emphasizes on regulation of banking activities relating to accepting deposits (within the meaning of section 22 of that Act, taken with Schedule 2 and any order u nder section 22. 15The statutory definition differs from the common school of thought by putting emphasis on a licenced institution. This shows regulation is an integral part in all jurisdictions in todays banking system.A bank as an institution enjoys, a degree fortress from the law, section 4 of the Cheques Act 1957 absolves bankers from liability from the true owner when they carry out transactions for a customer who has a incorrect title. Section 80 of the Bills of Exchange Act 1882 protects the Bank in the position a crossed cheque drawn in good organized religion and without negligence is paying to the payee. This limited liability facilitates transactions, if banks were held liable for every uncollectible transaction carried out in good faith then the banking business would come to a halt.In summary, a bank can whence be defined as an institution permitd to collect deposit and perform financial transactions, including honouring cheques, running current accounts, and usi ng deposits to cultivate profit.Banking businessThe history of Banking business in the UK can be traced back to the seventeenth Century where Goldsmith bankers who begun to develop basic principles of banks as deposit takers and money-lenders.16Banking business is the regulated activities carried out by an institution. These activities have to be regulated in order to protect customers and the financial market place.Banking practices are not constant, their definitions differ with time. challenger from other financial institutions has led to the expansion of the backdrop of banking activities beyond the center objectives of the bank due to the entrance of financial institutions into the market that was originally the economize of banks.17 Under common Law definition the courts have established 3 cardinal principles relating to banking business. Banking business Changes with time, varies with respect to jurisdiction and Is influenced by public opinion18.Banking business and pr actices evolve with time, subject to change in order to meet market requirements and customer demands. Banks mustiness adapt and widen their scope in order to be profitable and stay relevant.In Banbury v Bank of Montreal19 Lord Parker Held that crack financial advice was not within the scope of the bank at the time, and establishing whether giving financial advice on investments was part of banking business. This was however overruled by salmon J20 when he stated The nature of such a business must in each case been matter of fact, and accordingly, cannot be treated as if it were a matter of pure law. What may have been true of the Bank of Montreal in 1918 is not unavoidably true of martins Bank in 1958.In the event of establishment of a banker-client kin, a indebtedness of interest is owed and as such offering financial advice was within the scope of banking business. With time, it was accepted that offering financial advice constituted part of banking business due to the dut y of care that arises from the banker-client human family kin.21With respect to jurisdiction it was held that a financial institution that is regarded as kind in banking business in one jurisdiction is not necessarily so considered elsewhere.22 , a financial institution that was recognized in another(prenominal) country did not meet the English requirements for a bank as it did not also carry out the requisite activities within the unite Kingdom.According to Irish23 and Australian24 authority, an institution that accepts money on deposits from the public for the purpose of relending it carries on banking business, In the absence of current accounts and the chequing system. In contrast, running current accounts is an essential feature of banking business in the United Kingdom and other common law jurisdictions25.Reputation also has influenced determining an institutions status as a bank, an institution that is generally known as a bank ordain carry the assumption that it is eng aged in banking business. In the case of United Dominion Trust v Kirkwood26 although the evidence shown did not prove that UDT was trading operations were in the current banking practices, Harman L.J in his dissenting judgement stated that the evidence of its reputation of carrying on the business of banking in London was not sufficient. Lord Diplock and Lord Denning took a different policy based approach they held that a reasonably minded commercial mans perception and acknowledgement of an institutions banking practice is acceptable. Furthermore, if a city perceived an institution as a bank, it enjoyed plastered privileges that came with the titleThe regulation of banking business has been a widely-accepted principle in most Jurisdictions.historically there was little Legislative control of the banking sector in the UK, the substantive piece of legislation in place at the time was section 4 of the Banking Act 1946Which gave the Bank authority in the interest of the public to ac quire information and make recommendations to bankers and with the authorisation of the treasury give directions to bankers. This however changed with the commandment of the Banking Act 1979 and 1987, the new laws introduced regulation of deposit-taking institutions that had to encounter Authorization to Operate.The permission to operate regulated activities under Section 22 of the Financial function and Markets Act 2000 is obtained through part IV of the Act.Section 3 of the Banking Act 1987 prohibited deposit taking by a business without express authorization from the Bank of England. This section is integral in the UK banking as it introduced an tyrannical supervisory business office over banks carrying out activities within the meaning of banking business. there was little27 supervisory powers conferred on the Bank of England during this time and the bank justified the victor of the London Banking business as a financial hub due to the exemption and flexibility provided i n the UK banking sector28The Banking Act of 1987 was eventually repealed and the Financial Services and Markets Act 2000 through section 22 and Schedule two required institutions working class banking business, including deposit taking to obtain authorization beforehand.The First Banking directive by the EU under Article 3 provided that29Member States shall require credit institutions subject to this Directive to obtain authorization before commencing their activities. This Directive influenced the enactment of the Banking Act 1979 and adoption of some of the restrictive measures under section 3 of the Act, these included the need for authorisation before accepting deposits from clients.The similar applies in civil Jurisdictions, in Switzerland, Article 3 (1) of the Federal Act on Banks 1934 and Savings Banks of Switzerland statesBanks are required to obtain a licence from the Banking Commission prior to engaging in business operations they may not register with the Register of Co mmerce before such licence has been granted.However, per Elinger,30 entities in the United Kingdom do not require a license to engage in banking business. I disagree with this view as the Financial Services and Markets Act 2000 Lists regulated activities which constitute banking business in todays time. Entities that intend to carry out these activities must obtain permission beforehand. Permission is a license or liberty to do something synonymous to authorization31.It is an accepted practice in civil and common law jurisdictions for entities engaging in banking activities to obtain a licence from the relevant authority. The license is essential as it fancy banks operate in acceptable standards. Regulation protects both banker and customer interests. The protection gives depositors confidence to deposit their money for safe keeping and investments among other financial services.Regulation of banks in the UK has a come a long panache and in the wake of the global financial crisis of 2007-2008.The Prudential Regulation function was established as part of the Bank of England through the Financial Services Act 2012 whose primary objective is promote the safety and soundness of the firms it protects.32The supervisory role has become a popular feature in most countries after the global financial crisis. Other countries such as the United States that are plagued with financial crisis adopted an independent supervisory approach to supervise its financial institutions. The Sarbanes-Oaxley Act 2002 was introduced in the wake of the Enron scandal. The Act introduced mandatory control by independent external auditors. Some scholars have argued that independent direction is better as political factors and lobbyist cannot influence it. Others claim that the method is high-priced and ineffective in terce world countries.33Regulation and supervision is important as it creates a sense of stability and protects the banks and the depositors. The Global financial crisis of 2008 is a testament of what happens when banks overreach.Banker-Client RelationshipThe contractual relationship between bankers and customers is a labyrinthian one founded originally upon the customs and usages of bankers. The courts acknowledge these norms and as such they are recognized as implied conditions34.The relationship can arise out of implied or express conditions. Implied conditions are established through statutory and judicial instruments. pack conditions arise out of the law of contracts.As with Bank and Banking Business there is no definitive definition of the term customer.The Financial Services and Markets Act 200035 defines a customer in relation to an authorized person, means a person who is using, or who is or may be contemplating using, any of the services provided by the authorized person which is a bank within the meaning of the Act.The definition refers to a relationship arising out of services provided by a bank to its customer. This is a key component to its definition as it was described in the case of Commissioner of Taxation v. English, Scottish and Australian Bank Ltd.36A case involving the theft of a cheque payable to the Commissioner of Taxes, paid into an account with the defendants bank. Lord Dunedin37 stated that the word customer signifies a relationship in which period is not of the essence. A person whose money has been accepted by a bank on the footing that they undertake to honor cheques up to the amount standing is a customer of the bank irrespective of whether his connection is of pitiful or long standing. The contract is not between a habitu and a new comer, but between a person whom the bank performs a casual service, such as for instance, cashing a cheque for a person introduced by one of their customers, and a person who has an account of his own at the bank.The opening of an account expressly establishes a banker customer relationship. The transaction involves contractual obligations and as such governed b y contract law. Like any other contract, specific conditions must be met for a contract to be valid, one of them being the willingness to enter a legally binding agreement. The question that rises is whether a banker customer relationship can be established through dishonest means. In the case of Marfani Co. Ltd v Midland Bank Ltd38 the court of attract held that a relationship cannot arise if the account was opened by a fraudster who had no intention of getting into Banker-Customer relationship. In Stoney Stanton supplies (Coventry) Ltd v Midland Bank Ltd39In which a A forged the signature of B Ltds directors in order to open an account in the companys name, it was held that no banker customer-relationship existed between B Ltd and the bank40.Analysis of these findings from a contractual point of view shows that a relationship did not exist from the beginning, a contract is voidable if one of the parties does not intend to enter the agreement, or if it a misrepresentation occurr ed. In summation, the same principles that govern the validity of a contract apply to the establishment of a banker customer relationship through opening of an account.The landmark case that set the precedence in the nature of a banker customer relationship is Folley v Hill Others41. Where a customer opened an account, and deposited 6,117 pounds with an agreement that it would attract an yearbook interest. After 3 years, no interest was credited and the customer brought an action against the bank to recover all sums owed to him on the grounds that he was each a beneficiary of a trust or the banks principal. The house of Lords refuted this claim and stated that the relationship that arises out of this transaction, is one of a debtor-creditor relationship with an added obligation to repay the money upon demand, and the best course of action would be to instate debt recuperation proceedings under common law.Lord Cottenham said42The money paid into the bankers, is money known by the principal to be placed there for the purpose of being under the control of the banker it is then the bankers money he is known to deal with it as his own he makes what profit he can, which profit he retains to himself.He went on to say that the bank had to repay to the principal, when demanded, a sum equivalent to that paid into his hands.Several important factors can be discerned from this judgement.Firstly, there is a shift of possession when money is deposited to the banker in a current account. The customer lends a certain amount of specie to the banker, that is to be refunded upon demand. The banker can then use the money in whatever means and has no obligation to account for his transactions.Secondly the nature of the relationship differs with different circumstances As Lord Brougham took this into account and stated43It is a totally different thing if we are to take into consideration certain acts that are often performed by a banker, and which put him in a totally differen t capacity, for he may, in addition to his position of banker, make himself an agent or a trustee towards a cestui que trust.In todays banking practices the scope of the banking business has widened with time. Customers deposit valuable items for safe keeping with banks, a bailment relationship arises where the bank is a bailer and the customer is a bailee, in this land site, a banker has no authority to use the items kept in his care for his own use. This situation can be contrasted with the debtor-creditor relationship discussed above, there is fundamental difference in circumstances. Another example is with standing orders, when a customer instructs his bank to make payments to a third party, an agency relationship arises with the client as the principal and the banker as the agent.The Banker Customer relationship gives rise to fiduciary duties. Fiduciary relationships arise when a party places trust in and relies on the other because he or she is reasonably entitled to do so in the circumstances, or because the reliant party is in a position of vulnerability, subordination or information inequality.44This vulnerability Gives rise to the duty of Loyalty. A customer expects a bank to prioritize their interests and avoid situations that invite a conflict of interest. As the saying goes, a customer always comes first. This happened in Woods v Martins Bank Limited45 where the bank advised one of its clients to invest in one of the banks customers facing financial difficulties. The bank may have unconscionably shifted a dark risk from itself to the customer who provided the security or guarantee46In Bristol v air jacket Building Society v Mothew47 a case that involved a solicitor who represented the building society and the borrower and failed to inform the building society that the borrower had secured a second mortgage on the property. Millet LJ defined the nature and role of a fiduciary by stating48A fiduciary is someone who has undertaken to act on or on behalf of another in a exceptional matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. .A fiduciary must act in good faith he must not make profit out of his trust he may not act for his own benefit or the benefit of a third person without the informed consent of his principal.This definition is concise and touches on the defining characteristics of a fiduciary relationship. A bank must exercise his activities on behalf of the customer in good faith with the clients best interest. This obligation under common law is intended to protect customers who are not witting with banking transactions and investments. In the absence of it, customers would be prone to manipulation.In the event of a breach of a fiduciary duty, a customer may claim a breach of duty of care. Such an implication can arise either at common law or by virtue section 13 of the Supply of Goods and services Act 198 2 which states that within the ordinary course of business the supplier will carry out the service with reasonable care and skill.49The confidential nature of a Banker-Client relationship is a traditionally known concept. The same is seen today in caveats in correspondence between Banks and Clients.In Tournier v.National Provincial and Union Bank of England,50a bank manager dis unappealing the gambling habits of one of its clients to his employers that eventually led to the termination of his employment. The Plaintiff brought an action for breach of the duty confidentiality. The court held that the bank owes a duty of secrecy to the customer. Atkin LJ particularly said the duty of secrecy must extend to at least to all the transactions that go through the account and that duty extended beyond the period when an account was closed or ceases to be an active account.This duty however comes into conflict with the duty to disclose to the public. The banks have a duty to disclose informat ion on accounts that are involved in illegal transactions and against public interest and peace.The three panel Judge was unanimous in this conclusion. Bankes LJ51 said that risk of exposure to the state or duty to the public may supersede the duty of the Agent to his principal. Scrutton LJ52 added on this by saying a bank may disclose the customers account and affairs to prevent frauds and crimes and finally Atkin LJ53 summed it up by stating that the right to disclose exists to the extent to which it is reasonably necessary for protecting the Bank, or persons interested, or the public, against fraud of crime.ConclusionThe definition of Banks and Banking practices has proved to be bad for some time. Similarities can be made with the law with the acceptance that banking practices are as Dynamic as the laws that govern them. A definitive approach is not necessary. Bankers and legislators should refine and improve on practices in a advanced manner. Strict compliance to regulation i s essential to maintain a whole financial market and avoid scandals arising from banking malpractice.Table of Statu