Law of Financial Institutions and Services - Literature review Example

Student’s name Course code+name Professor’s name University name Date of submission Law of Financial Institutions and Services Australia has sophisticated but stable banking and non-banking financial institutions which have been providing a full range of banking and financial services and products. The histories of these institutions are healthy and so are the services offered. Banking market of the Australia is controlled by four major banking financial institutions and a range of non-banking ones that offer business of banking. Business of banking within the context of these institutions can only be understood with regard to code of banking practices which legally enforce discrete set of rules and principles enshrined into the contract of operations between customers and banking and non-banking financial institutions. It is these code of banking practices and other relevant Acts that help in defining the traditional meaning of the business of banking. Business of banking can well be understood by first establishing the essence of a bank and non-bank. According to Weaver and Craigie (2009), traditional underpinnings of a bank follow statute and case laws. In so saying, it means a body or a person allowed or authorized to handle on or recognized as carrying in the business of banking1. Other traditional definitions of banking borrow from Banking Act 1959. This is where non-banking financial institutions become incorporated in the definition as s 5 of the Act tends to be inclusive of them. The term inclusive has been used as APRA recognizes building societies, credit unions and even specialist credit card institutions when defining a bank (Melecky and Anca, 2012). The essence of this definition therefore means that traditional meaning of the business of banking can best be understood by adopting the framework of Melecky and Anca (2012). According to this framework, traditional meaning of the business of banking is the process whereby banking and non-banking financial institutions deal in the provisions of credit, business loans, savings and monitoring or checking accounts for companies. Other schools of thoughts such as Carmichael et al., (2002) believe that understanding traditional business of banking needs one to first, conceptualise aspects of commercial banking and the Banking Act of 1933 which is also known as Glass-Steagall Act 1933. To this regard, traditional business of banking is retail banking, investment banking, accepting deposits from households, and provision of loans and issuance of share capital. This definition however, does not consider operations of banking financial institutions in accordance with the repealed Glass-Steagall Act 1933 in 1999. Section 8 of the Banking Act 1959---also traditional in its definition, legally provides the understanding of business of banking in Australia. According to this section, banking and non-banking financial institutions are not allowed to carry any other banking business within Australia unless such institutions meet certain conditions.2 In as much, the operations or undertakings of the above roles or duties require that the baking and non-banking financial institutions in Australia operate under given statutory or regulatory regimes. According to Australian Securities Exchange (2012), Australian banking market has been dominated by four major banks when measured by their market capitalization. These are: Commonwealth Bank of Australia (CBA), New Zealand Banking Group Limited (ANZ), Westpac Banking Corporation (Westpac) and National Australia Bank Limited (NAB). Basically, these are the banking financial institutions that the essay will use as case studies to show the statutory regimes they operate under. Starting with Commonwealth Bank of Australia, this is one of the leading providers of comprehensive financial services such as premium banking, retail banking as well as business banking. Latest statistics by Australian Securities Exchange (2012) indicates that the Bank forms part of the largest listed institutions on the Australian Securities Exchange (ASE) as well as in the Morgan Stanley Capital Global Index. The main objective of the Bank is to have Total Shareholder Return in the top quartile of Australian listed peers over every rolling five-year period. Just like Commonwealth Bank of Australia, Australia and New Zealand Banking Group Limited gives clients multifaceted banking and financial services and products especially to corporate, retail and institutional customers within Australia and other parts of the world like New Zealand and Asia Pacific regions. On the other hand, Westpac Banking Corporation (WBC) provides different financial assistance. Being one of the oldest financial and banking groups within Australia, WBC has been leading in conservatively management of risks across its areas of operations especially the near-death experience of the early 1990s (Bryan and Marianne, 2001). Lastly is the National Australian Bank Limited (NAB) which has been providing business banking as well as wholesale and institutional banking services to customers. This bank has been regarded as the largest business bank and one which is well-positioned in terms of financial, investment and risk management assistance.3 The four banking financial institutions work under three specific statutory/ regulatory regimes. That is, the overall regulation of the banking and finance system has been divided between Australian Securities and Investments Commission (ASIC), Reserve Bank of Australia (RBA) and APRA. Under these regimes, Reserve Bank of Australia ensures monetary and banking policy and the stability of the Australian economy. RBA includes within its structures, Payments System Board which ensures that these banks abide by payments system policies. On the other hand, APRA maintains prudential regulation of a wide range of these banks including insurance companies, credit unions, superannuation of funds and other banks not mentioned.4 The main aim of APRA, within the realm of banking financial institutions in Australia is to ensure sound practices and financial stability. Australian Securities and Investments Commission ensure that the banking institutions highlighted protect consumers in their business of banking operations. Another role entrusted with ASIC is to balance market integrity. In so doing, the commission has the responsibility of reviewing and monitoring financial industry codes of practices. Such include electronic funds transfer, code of conduct as well as enforcing laws related to companies, licensing and behaviors of corporations.5 In other researches such as Čihák et al. (2008), Australian Competition and Consumer Commission (ACCC) is argued to be also a regulator for the banking institutions as they have the role to protect competition though the banks getting command from ACCC also depend on the regulations from ASIC to do consumer protection. Conceptualizing the responsibilities of these regime vis-à-vis banking institutions, ASIC’s role which are enshrined within Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) helps. Under this Act, the banks mentioned are regulated on how to conduct their business of banking on unconscionable conduct and consumer protection. This also brings the aspect of regulating financial services and markets (elaborated under Financial Services Reform).6 This section regulates banks on licensing and disclosures. Related with this is the credit regulation which requires banks to abide by Consumer Credit Code. According to Section 8(2) of APPRA, the body is needed to balance efficiency, objectives of financial safety and competition among banks so as to promote financial system stability. According to Australian Government Guarantee Website (2012), ASIC has mandate under the Corporations Act 2001 (Cth) to take a given regulatory actions on banks intended to reduce systematic risk in clearing settlement systems. Banks are also regulated to owe a duty of care as well as a fiduciary duty. The above regulatory bodies ensure banks exercise reasonable care when carrying banking businesses. Australian Government Guarantee Website (2012) adds that such a duty, in some cases, encompass a duty to question valid mandate such as cheque validly drawn and signed by authorized signatory. On the same note, in the normal course, the banks are needed by the above regulatory bodies to prefer its own interests to those of the customer, unlike a professional or a trustee adviser like a lawyer, and they do not need to have a duty to provide advice.7 While banking financial institutions in Australia do business of banking under elaborated regulatory mechanisms so is true with non-bank financial institutions. Within the context of Australia, Australian Government Paper (2012) defines a non-bank financial institution as the one that does not possess a full banking license therefore have no obligation of accepting deposits from members of public. Instead, these institutions can facilitate financial services like individual and collective investment, financial consulting, risk pooling, check cashing, money transmission, and brokering. From the definition, good examples of non-bank financial institutions in Australia include insurance companies, contractual savings institutions, and broker-dealer institutions. Though they too have speciliased descriptions, Melecky and Anca (2012) add that these institutions provide services that are sometimes considered as not suited to banks thus posing competitions to banks. Having multifaceted approach in financial management and or systems, these institutions too have the ability to transform savings of an economy into capital investment especially when there is a chance that primary form of intermediation might fail (World Bank, 2012). In as much, non-bank financial institutions have the chance of exacerbating the fragility of the financial system thus a need for elaborate regulatory or statutory regime under which they can operate their business. To begin with, it is important to note, as argued by Reserve Bank of Australia and Australian Prudential Regulation Authority (2012) that Australian Prudential Regulation Authority Act 1998 (Cth) is allowed to supervise and license operations of non-banking institutions within Australia. ASIC has responsibility for monitoring and promoting market integrity and consumer protection, and for licensing, in relation to financial products and services. The sole responsibility of APRA is the prudential supervision of the non-banking institutions. That is, they have powers to establish and enforce a given prudential standards that will enable it execute its prudential supervision roles over institutions such as insurance companies and even superannuation funds.8 In addition, APPRA has statistical regulatory role over these institutions. That is, non-banking institutions have the duty of providing financial data in regular reports to APPRA with regard to Financial Sector (Collection of Data) Act 2001 (Cth)9. Another regulatory body that monitors operations of non-banking institutions is the Australian Securities and Investments Commission. That is, they monitor and promote market integrity as well as protecting consumers from unfair practices especially with regard to financial services and products. As Weaver and Craigie (2009) put it, “non-banking institutions in Australia need strong regulatory regimes so as to come up with even stronger consumer protection and corporations laws that necessitate investments” (p.35). Actually, ASIC ensures that there is reduction of unfair practices and fraud in financial products and financial markets so that consumers cannot only work with them confidently but also enable markets and companies perform effectively. References Australian Government Guarantee Website (2012). About the Scheme’, Accessed 6 November2013 at www.guaranteescheme.gov.au/ Australian Government Paper (2012). Australian Government Guarantee Scheme for Large Deposits and Wholesale Funding Rules’, Schedule 3, Accessed 6 November2013 at www.guaranteescheme.gov.au/rules/pdf/scheme-rules-20042011.pdf Australian Securities Exchange (2012). Financial Sector Profile. Accessed 6 November2013 at www.asx.com.au/documents/research/financial_sector_factsheet.pdf Bryan, F., and Marianne, G. (2001). A History of Last Resort Lending and Other Support for Stability Department Reserve Bank of Australia. Carmichael, S. Jeffrey, M. and Michael, P., (2002). The Development and Regulation of Non- bank Financial Institutions. World Bank, Washington, DC Čihák, P., Martin, H. and Richard P., (2008). “Integrated Financial Supervision: Which Model?” North American Journal of Economics and Finance 19: 135–52. Melecky, M., and Anca, P., (2012). Institutional Structures of Financial Sector Supervision, Their Drivers, and Emerging Benchmark Models. MPRA Paper 37059, University of Munich, Germany. Reserve Bank of Australia and Australian Prudential Regulation Authority (2012). Macroprudential Analysis and Policy in the Australian Financial Stability Accessed 6 November2013 at www.rba.gov.au/fin-stability/resources/2012-09-map-aus- fsf/pdf/2012-09-map-aus-fsf.pdf Weaver, A. and Craigie P., (2009). The Law Relating to Banker & Customer in Australia, 3rd ed. Thompson Lawbook Co, looseleaf World Bank. (2012). Global Financial Development Report 2013: Rethinking the Role of the State in Finance.  Read More