More specifically, the amendments introduced by the FSA 2010 can be summarised as follows: 259

(1)The FSA was granted innovative powers to establish rules regarding the payment mechanisms of financial services firms.260

(2)The FSA was directed to create rules relating to recovery and resolution plans.261

(3)The FSA was empowered to make rules prohibiting bank short selling.262

(4)The FSA’s powers of intervention against a financial services firm were increased.263

(5)The FSA was granted additional disciplinary powers.264

(6)The FSA 2010 introduced a new form of consumer redress scheme.265

(7)The FSA was given new powers to force the production of more information by the financial services sector.266

Q5 Why was the Financial Services Authority created in 1997?

5â The Coalition government

The 2010 General Election resulted in the United Kingdom’s first coalition government in nearly a century. Following the poor performance of the FSA during the ‘credit crunch’ it became clear that the Coalition government would instigate an extensive review of the United Kingdom’s banking policies and regulation. The Coalition Agreement stated ‘we will reform the regulatory system to avoid a repeat of the financial crisis. We will bring forward proposals to give the Bank of England control of macro-prudential regulation and oversight of micro-prudential regulation.’267

In June 2010, the Chancellor of the Exchequer, George Osborne, outlined in greater detail the Coalition government’s financial services policy. Of particular relevance to this chapter was the proposal to abolish the FSA and transfer its supervisory powers to the Bank of England;268 create a Financial Policy Committee within the Bank of England; establish a Prudential Regulation Authority that would be responsible for the day-to-day supervision of financial institutions; establish a Consumer Protection Markets Authority that would regulate the conduct of all financial services firms; establish the Economic Crime Agency; create an Independent Commission on Banking; and introduce

259N. Willmott, P. McGowan, M. Ghusn, V. Brocklehurst, R. Aikens, S. Bailey, M. Scodie and J. Palme. ‘Equipping the modern regulator: assessing the new regulatory powers under the Financial Services Act 2010’ (2010) 78 Compliance Officer Bulletin (July/August) 1, 3.

267HM Government, The Coalition: our programme for government (London, 2010) 9.

268See HM Treasury, A New Approach to Financial Regulation: Consultation on Reforming the Consumer Credit Regime (London, 2010).

a specific bank levy.269 In February 2011, the Coalition government published details of Project Merlin, which resulted in the United Kingdom banks agreeing to increase the levels of lending to businesses; that each bank’s senior management salary will be associated with its lending commitments; to pay lower bonuses; to introduce new disclosure arrangements regarding the salaries of a bank’s senior management; and to make a contribution of £1.2 billion to the Business Growth and the Big Society Bank.

In June 2011, the Coalition government published another consultation paper and White Paper that included the draft Financial Services Bill,270 which contains three major proposals:

•a specific statutory objective governing the Prudential Regulation Authority’s responsibilities for the insurance sector;

•an updated and enhanced competition regime under a Financial Conduct Authority; and

•steps to strengthen the handling of cases of widespread consumer detriment, including mis-selling.271

It appears that the policy adopted by the Coalition government is to revert back to regulation by the Bank of England, which is very similar to that adopted by the former Conservative governments, as outlined at the start of this chapter.

Q6 What is the Coalition government’s policy towards banking regulation?

6â Conclusion

As stated above, the main issues highlighted by the government which influenced its decision to create the FSA were ineffective regulation and inadequate investor protection. The FSMA 2000 contained several mechanisms aimed at improving the levels of financial regulation and enhancing the level of protection offered to investors. Sadly, the effectiveness of these measures must be questioned in light of the near collapse of Northern Rock and Equitable Life. Following the Northern Rock crisis, the government decided to introduce the Banking Act 2009, which permits the Bank of England to intervene when a bank is in financial difficulties and creates a ‘financial stability objective’.272 Prior to the creation of the FSA in 1997, the former Conservative government left the regulation of the banking sector in the hands of the Bank of England. This proved to be a very ineffective model, as the performance of the Bank of England was blighted by several high profile financial scandals. The policy

269HM Treasury, Financial services policy agenda, available at www.hm-treasury.gov.uk/fin_ policy_agenda_index.htm.

270HM Treasury, A New Approach to Financial Regulation: the Blueprint for Reform (London, 2011).

271HM Treasury, ‘Government publishes financial regulation White Paper and draft Bill’, 16 June 2011, available at www.hm-treasury.gov.uk/press_59_11.htm.

272FSA 2010, s.1.

7â Recommended reading

Bevers, G. ‘The accountability of the Financial Services Authority under the Financial Services and Markets Act 2000’ (2001) 22(7) Company Lawyer 220

Gower, L. ‘Big bang and city regulation’ (1988) 51(1) Modern Law Review 1

Grey, J. ‘Lessons from BCCI saga for the current accountability debate surrounding Northern Rock?’ (2008) 23(2) Journal of International Banking Law and Regulation 37

HM Government The Coalition: Our Programme for Government (London, 2010)

HM Treasury A New Approach to Financial Regulation: Consultation on Reforming the Consumer Credit Regime (London, 2010)

â A New Approach to Financial Regulation: the Blueprint for Reform (London, 2011) Lomnicka, E. ‘Making the Financial Services Authority accountable’ (2000) Journal of

Business Law 65

Page, A. ‘Self-regulation: the constitutional dimension’ (1986) 49(2) Modern Law Review 141

Tomasic, R. ‘Corporate rescue, governance and risk taking in Northern Rock: Part 2’ (2008) 29(11) Company Lawyer 330

[The question is] notoriously difficult to answer. The question has become much harder to answer in recent years, with the advent of telephone and Internet banking as well as banks in supermarkets. The traditional idea of a bank with many local branches dealing with customers face to face (core retail banking) seems odd and out of date.1

The common law definitions of a bank are varied, summed up in the comments by Salmon J, who in Woods v. Martins Bank Ltd stated ‘what may have been true of the Bank of Montreal in 1918 is not necessarily true of Martins Bank in 1959 … the question “what is a bank” will be answered differently from time to time and place to place’. The nature of banking business at any particular time depends on the surrounding circumstances, and is a matter of fact as well as of law.2 In Bank of Chettinand Ltd of Colombo v. Commissioners of Income Tax, Colombo, the court stated ‘the words “banking” and “banker” may bear different shades of meaning at different periods of history and their meaning may not be uniform today’.3 This was a point recognised by Azzouni who noted that:

Banking has indeed been a developing area in which new changes and developments have been taking place every decade. Legislators have always been required to study the efficiency and capability of the existing laws to solve any ambiguity or difficulty associated with any new change. With regard to Internet banking, although the major problems can be handled either through traditional legislation or through the recent regulations designed for Internet problems in general, there are still some gaps in these legal controls.4

One of the most authoritative definitions of a bank is that adopted in United Dominions Trust Ltd v. Kirkwood.5 Here, Lord Denning MR provided a useful list of features of banking practices:

Bankers accept money from and collect cheques for their customers and place them to their credit; honour cheques or orders drawn on them by their customers when presented for payment and debit their customers accordingly, and keep current accounts in which credits and debits are entered.6

1J. Wadsley and P. Penn, Penn and Shea, The Law relating to Domestic Banking (Sweet and Maxwell, London, 2000) 89.

2[1959] 1 QB 55, 56.

3[1948] AC 378, 383.

4A. Azzouni, ‘Internet banking and the law: a critical examination of the legal controls over Internet banking in the UK and their ability to frame, regulate and secure banking on the Net’ (2003) 18(9) Journal of International Banking Law and Regulation 351, 362.

5[1966] 2 QB 431, CA.

6Ibid. 461. The definition provided by Lord Denning has been cited and used in numerous cases, such as Hafton Properties Ltd v. McHugh (1987) 84 LSG 342. For a more detailed discussion see P. Skitmore, ‘Case comment: Hafton Properties Ltd v McHugh (1987) 84 LSG 342’ (1987) 8(5)

Company Lawyer 231. The definition has also been used by the Inland Revenue, as illustrated in V. Magurie and M. Walton, ‘The ordinary course of banking business and deduction of tax at source’ (1992) 7(1) Journal of International Banking Law 29.

Therefore, ‘a bank must have only two distinctive elements, namely deposit taking and cheque collection’.7 However, Hsiao stated that:

This definition is by no means helpful in answering the question: ‘what is a bank?’ Banks are classified in different ways. Some institutions will fall into the banking category despite not having the two elements stated in the Kirkwood case. By the same token, the building society, which is generally regarded as having a banking status, is excluded by the [Banking Act 2009], and so is the credit union. The bank in the Act is any United Kingdom institution falling under the FSMA 2000 with authorisation or exemption to carry on the regulated activities of accepting deposits. The Act is only applicable to institutions incorporated or formed under the law of the United Kingdom.8

In addition to the common law definitions, there are several statutory definitions that will assist us to answer the question of what is a bank. For example, according to the European Union, a bank can be defined as ‘an undertaking the business of which is to receive deposits or other repayable funds from the public and to grant credits for its own account’.9 Ellinger et al. noted that ‘Parliament has found it necessary to provide a generally applicable functional definition that distinguishes banks from other types of financial institution. Different pieces of legislation do, however, define the term “bank” for their own specific purposes.’10 Thus, the Banking Act 2009 provides that; ‘bank’ ‘means a UK institution which has permission under of the Financial Services and Markets Act 2000 to carry on the regulated activity of accepting deposits (within the meaning of section 22 of that Act, taken with Schedule 2 and any order under section 22)’.11 According to the explanatory notes, ‘this section defines a bank as a UK institution that has a regulatory permission, granted by the FSA under the Financial Services and Markets Act 2000, to accept deposits’. For the purposes of the FSMA 2000, a bank does not include a building society,12 a credit union13 or ‘any other class of institution excluded by an order made by the Treasury’. The Bills of Exchange Act 1882 provides that a ‘banker includes a body of persons whether incorporated or not who carry on the business of banking’.14

Wadsley and Penn stated that ‘many commentators have pointed out that the circularity of these words leaves courts with the same question to answer as they started with’.15

7M. Hsiao, ‘Legitimised interference with private properties: Banking Act 2009’ (2010) 25(5)

Journal of International Banking Law and Regulation, 227, 229–30.

8Ibid. 230.â 9â EU Banking Directive 2006/48/EC, Art. 4.

10E. Ellinger, E. Lomnicka and C. Hare, Ellinger’s Modern Banking Law (Oxford University Press, 2011) 7.

11 Banking Act 2009, s.2.â 12â As defined by the Building Societies Act 1986, s.119.

13As defined by the Credit Unions Act 1979, s.31.

14Bills of Exchange Act 1882, s.2.

15Wadsley and Penn, above n. 1, at 96.