Question:

What is the traditional meaning of the business of banking? Briefly describe some of the major Bank and Non-bank financial institutions in Australia today and the

Answer:

Banking Law in Australia

Introduction

The business of banking has traditionally been a key pillar in all national economies. Governments the world over have always held the belief that the business of banking should not be left entirely on the hands of bankers. Within this point of view, various laws have traditionally been put in place for regulating the business. Conversely, banks have traditionally held the view that the government plays a critical role in the banking industry, and they have for this reason been lobbying for special legal provisions to be put in place to oversee proper operations of the banking business.

            For special legal provisions to be put in place, a crucial imperative has been on efforts to define the concept of ‘the business of banking’. The Banking Act 1959, which was rewritten in 1989, contains a definition of ‘banking business’, specifically in section 5. Prior to this rewriting effort, the tradition was for judges to provide this definition in particular cases.

            However, the definition provided in the rewritten act was not agreeable to everyone in Australia. Its inadequacies were reflected in the regulations that authorized ‘additional activities’, which also fall within the ‘banking business’. Moreover, in Section 11 of the Act, the APRA is authorized to highlight certain provisions within the Act that are not applicable to a corporation or individual (Tyree 2011, p. 73).

In Section 7 of the Banking Act 1959, non-corporations are prohibited from undertaking ‘banking business’. The only exception in this case is the situation where a determination by Section 11 points to the contrary. Moreover, Section 8 requires non-ADI (Authorized Deposit Taking Institution) corporations to get special determination before engaging in ‘any banking business’. In all these restrictions, there is growing concern on what ‘any’ means. There is doubt on whether it means ‘any part’ of the banking business or if it has different meanings. The best way to understand this meaning is to explore the various definitions given in judicial and statutory provisions.

Definitions from a judicial perspective

There are many cases in which an effort has been made to define the business of banking. One of these cases is Commissioners of the State Savings Bank of Victoria v. Permewan Wright & Co Ltd (1914) 19 CLR 457 (Tyree 2011, p. 103). In this case, the court had to determine whether the State Savings Bank of Victoria deserved to be protected by Section 88 of the Bill of Exchange Act 1990, after it had collected checks that had been misappropriated. The facts showed that it did not satisfy all the requirements stipulated in Section 88. Nevertheless, the High Court ruled that the bank was entitled to this protection.

In this case, the judge gave a ‘reservoir’ definition, stating that “the business of banking is the collection of money through receipts of deposits on loan, which are repayable as and when impliedly or expressly agreed upon, and the use of this money by lending it once again on the basis of the sums required” (Weerasooria 1976, p. 49). In this definition, the judge did not put in place a requirement for payment facilities or current accounts. More importantly, the bank was not identified as a ‘banker’ owing to the fact that it failed to allow for the drawing of funds through checks or even the collection of checks.

In a different case, Bank of Chettinad v. Commissioner of Income Tax, Colombo [1948] AC 378, the issue of contention was taxation (Tyree 2011, p. 129). In his ruling the judge had to determine whether Ceylon Branch had undertaken a ‘business of banking’. The judge based his argument on consideration on “whether this branch, at the time under review, could be described as a company whose primary business is accepting money deposits on current accounts or other avenues subject to withdrawal through draft, check, or order”. In this definition, an omission was made on the requirement of lending. Moreover, the existence of a third-party facility of payment is contemplated through reference to ‘draft, check, or order.

Definitions from a statutory perspective

The Banking Act 1959 was enacted in order to remove the scenario where courts had been traditionally assigned the role of providing a definition of ‘banking business’. Section 5 of the Act provides a two-prong definition of banking business (Weerasooria 2003, p. 18). First, it is a business that entails banking as provided for in the meaning contained in paragraph 51(xiii) in the constitution. Secondly, it is a business undertaken by a corporation, in which paragraph 51(xx) of the Australian constitution is applicable, and consists of, to varying extents, of both taking money on the party’s deposits and other financial activities as provided for by the regulations for purposes of this very definition.

In the first definition, it is evident that there is an inadequacy because any reference to the mechanisms of payment is omitted. In subsequent efforts to provide regulations on certain financial activities, the omission in the first definition was explicitly recognized. For instance, the Banking Regulations 1966 have a provision that allow the APRA (The Australian Prudential Regulation Authority) to give the determination that certain provisions contained in PPFs (purchase payment facilities) allow to operate as banking businesses (Tomasic 2002, p. 72). Similarly, the concept and definition of PPFs is provided in section 9 of the Payment Systems Act 1998. Moreover, in Regulation 4 of the APRA, it is provided that credit card acquisition and issuance fall into the banking business category as long as the issuer or acquirer participates in credit card scheme that was designated April 11, 2001. The schemes that have this designation include Visa, Bankcard, and MasterCard.

Ambiguity in the concept of ‘any’ banking business

In the 1989 re-written version of the Banking Act 1959, there are prohibitions in Sections 7 and 8, which are against the undertaking of ‘any banking business’. This creates ambiguity, since it is not clear whether the carrying of any deposit-taking business is included even if no loans are made. Worse still, it is not clear whether a business is undertaking ‘any banking business’ if it is providing loans but it is not accepting deposits.

Reference to case law shows that wide interpretation has been slightly supported. A case in point is Re The Bottomgate Industrial Co-operative Society (1891) 65 LT (NS) 712 (Tyree 2011, p. 163). In this case, a core issue was on whether the society was in the business of banking. The judge ruled that it was unnecessary to demonstrate that the Society was involved in undertaking every aspect of the business that some bankers were carrying on. The judge insisted that it was sufficient to show that Bottomgate Industrial Co-operative was carrying on the principle activities of the business of banking, which include receiving money upon deposit, allowing the money to be repaid as the depositor so desires, and paying out interest to depositors on the amount standing on each deposit.

Regulatory framework and statutory regime for Bank and Non-bank financial institutions in Australia today

Both bank and non-bank institutions in Australia operate under the regulatory framework of the Australian Prudential Regulation Authority (ARPA). Some of these banks include AMP Bank Ltd, Bank of Queensland Limited, Defence Bank Limited, Commonwealth Bank of Australia, Macquarie Bank Limited, and Bendigo and Adelaide Bank Limited. Some of the non-bank institutions include credit unions (such as Community Mutual Ltd and AWA Credit Union Limited), Specialist Credit Card Institutions (such as GE Capital Finance Australia), and non-operating holding companies (such as MyState Limited and Macquarie Group Limited). For all these banks, the regulatory framework is based on the presumption that consumers knowingly choose to bear the consequences of various counterparty risks relating to the bank financial institutions of their choice.

Moreover, the prudential framework is based on the recognition that not many consumers will be able to assess as well as monitor the risks that come with dealings with bank financial institutions (Goodhart 1995, p. 549). In the existing safety net, the design does ensure that consumers are not going to lose their money in the event of failure of the prudentially regulated bank financial institution. Additionally, the regulatory framework of the APRA differentiates between deposit-taking, general insurance, life insurance, and superannuation with regard to capital intensity as well as other requirements relating to risk management.

However, the mechanisms put in place for regulating banks by the ARPA do not function in isolation; they constitute a single component of a complex web of interrelated components that form a strong regulatory framework that greatly reduces the likelihood of failure and the negative impact it may bring (Nielsen 1998, p. 257). These components include principle-based, generic requirements for all corporations as well as other rules that apply to commercial endeavors.

An in-depth analysis of the complementary components that make up the regulatory framework is of great important in the present paper. There are four components in this case, namely, market discipline; corporate and market regulation; consumer protection; and prudential framework (Thomson 2001, p. 75). Market discipline forms the foundation of this regulatory framework. The people who typically exercise market discipline include customers, sophisticated investors, counterparties to various financial transactions, as well as shareholders and creditors alike. However, the major problem in the case of both bank and non-bank institutions is that not every customer, particularly in retail contexts, can manage to possess all the skills and information needed to practice market discipline.

Corporate and market regulation is overseen by the Australian Securities and Investments Commission. This commission governs the far-reaching requirements needed whenever companies are being started, run, and ‘wound up’. The requirements in this case include registration, establishment of the institutions’ scope of operation and objectives, solvency resolutions, record-keeping, rules on meetings, protection of the interests of creditors and members, and lodging of annual statements.

In the case of APRA, all bank and non-bank institutions operating under its regulatory regime have to be set up and registered as companies (Delston 1999, p. 7). On other hand, the Australian Stock Exchange also plays a crucial regulatory role by requiring all listed entities to disclose any information which might have an effect on the prices of its securities in efforts to maintain a fully informed market.

In terms of statutory regime, the Corporations Act 2001 requires bank and non-bank institutions to meet additional requirements on disclosure. These requirements have a lot to do with the credit rating process, which brings about further scrutiny upon the operations of these financial institutions. The ongoing monitoring role that financial markets perform brings about heightened scrutiny to the institutions’ financial position.

Conclusion

In summary, the traditional meaning of the business of banking has been an issue of debate for decades. At first, the work of defining the business of banking was left to courts. Later on, with the enactment of the Banking Act 1959 and subsequent rewriting of the Act in 1991, a statutory definition was provided. In the judicial interpretation of the ‘banking business’, the main contentious issue was the clause ‘any banking business’.

In many court cases, the definition has omitted the practice of lending, while in others, the definition provided the requirement of collection of money through receipts of deposits. The ambiguity arises because it is not clear whether the carrying of any deposit-taking business is included even if no loans are made. Worse still, it is not clear whether a business is undertaking ‘any banking business’ if it is providing loans but it is not accepting deposits. Nevertheless, reference to case law shows that wide-reaching interpretation has been slightly supported. This wide-reaching interpretation is also evident in the complex web of interrelated components that form a strong regulatory framework for both bank and non-bank financial institutions.

 

References

Delston, R, 1999, Statutory Protections for Banking Supervisors, Financial Sector Website Paper No. 4.

Goodhart, C, 1995, ‘Should the Functions of Monetary Policy and Banking Supervision Be Separated?’ Oxford Economic Papers, Vol. 47, No. 4, pp. 539-560.

Nielsen, J, 1998, ‘Business banking in Australia: A comparison of expectations’, International Journal of Bank Marketing, Vol. 16, No. 6, pp. 253-263.

Thomson, D, 2001, ‘Banking regulation and market forces in Australia’, International Review of Financial Analysis, Vol. 10, No. 1, pp. 69–86.

Tomasic, R, 2002, Corporations law in Australia, Longman, Sydney.

Tyree, A, 2011, Banking Law in Australia, Butterworths Press, Sydney.

Weerasooria, W, 1976, Banking law and practice in Australia, Heinemann, London.

Weerasooria, W, 2003, Banking law and the financial system in Australia, Pearson Books, Melbourne.

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