Part 6 Chapter 3

Banking Regulation

Contents
1â	Introduction	462
2â	European banking regulation	462
3â The Financial Services Authority		466
4â Financial Services Compensation Scheme		473
5â	Financial Ombudsman Scheme	473
6â Financial Services and Markets Tribunal		473
7â The Bank of England		474
8â	Bank insolvency	475
9â	Illicit finance	477
10â	Conclusion	492
11â	Recommended reading	493

1â Introduction

The purpose of this chapter is to provide an overview of the United Kingdom’s financial regulation provisions. The chapter begins by briefly highlighting the influence of legislative provisions on the United Kingdom’s financial regulation system. This includes a discussion of the various Banking Directives,1 the Basel Accord and the Basel Committee on Banking Supervision. The next part of the chapter concentrates on the current system of regulation imposed by the Financial Services Authority through its Handbook and the provisions of the Financial Services and Markets Act 2000. The chapter then turns its attention to financial crime and identifies the relevant statutory provisions dealing with money laundering, insider dealing, market abuse, terrorist financing and fraud.

2â European banking regulation

Like many aspects of law, banking regulation laws and policy have been heavily influenced by the European Union. This influence and levels of international

1 Set out in section 2 below.

463	2â European banking regulation

co-operation will continue to grow as the global economy attempts to recover from the 2007 crash. One of the most important legislative instruments is the Second Consolidated Banking Directive.2 The aim of the Directive is to ‘harmonise banking laws across the EU and to provide a “single licence” for banks to be passported from their home State across the EU’.3 This has been described as a mutual recognition system so that ‘freedom of establishment and freedom to provide services is applied in the banking context, so that credit institutions established and authorised in one Member State are generally permitted to operate in other Member States without the need for re-authorisation’.4 The Directive also seeks to ‘ensure competition between banks and safeguard depositors’.5 However, the Directive does not apply in assessing the financial soundness or solvency of a credit institution.6 The European Union has implemented several statutory measures aimed at regulating banking activities. These include, for example, the Prospectus Directive 2003/71/EC, the Recast Banking Consolidation Directive 2006/48/EC, the Markets in Financial Instruments Directive 2004/39/EC, the Recast Capital Adequacy Directive 2006/49/EC, the Financial Conglomerates Directive 2002/87/EC, UCITS Directives 2009/­ 65/EC, the Deposit Guarantee Schemes Directive 94/19/EC, the Investor Comp ensation Scheme Directive 97/9/EC, the Market Abuse Directive 2003/6/EC and the Transparency Directive 2004/109/EC. It is important to note that the European Union’s approach toward banking regulation has been heavily influenced by the Basel Committee on Banking Supervision and Basel III, which is an international regulatory framework for banks that seeks to improve the levels of ‘regulation, supervision and risk management of the banking sector’.7 Basel III has three objectives:

(1)to improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source;

(2)to improve risk management and governance; and

(3)to strengthen banks’ transparency and disclosures.8

These objectives target two specific issues:

(a)bank-level, or microprudential, regulation, which will help raise the resi lience of individual banking institutions to periods of stress; and

(b)macroprudential regulation of system-wide risks that can build up across the banking sector as well as the procyclical amplification of these risks over time.9

22006/48/EC (14 June, 2006).

3A. Hudson, The Law of Finance (Sweet and Maxwell, London, 2009) 165.

4R. Bollen, ‘European regulation of payment services: the story so far’ (2007) 22(9) Journal of

International Banking Law and Regulation 451, 457.

5 See Hudson, above n. 3, at 165.â 6â Ibid.

7Bank of International Settlements, ‘International regulatory framework for banks (Basel III)’, available at www.bis.org/bcbs/basel3.htm.

8Ibid.â 9â Ibid.

464 Banking regulation

The next part of the chapter identifies the relevant international institutions that perform very important roles in the regulation of banking activities. Many of these institutions have no formal law-making powers, although some produce ‘best practice ‘or ‘guidance’ notes. Nonetheless, they all play a very important role and have direct influence over the United Kingdom’s banking regulation laws.

(a)â International Monetary Fund

The International Monetary Fund (IMF) consists of 187 countries. It seeks to develop international co-operation to maintain financial stability, to encourage and assist international trade, to encourage high levels of employment, advance sustainable economic progress and reduce global poverty. The principal objective of the IMF is to ‘ensure stability in the international system’, and this is achieved in three ways:

(1) keeping track of the global economy and the economies of member countries;

(2) lending to countries with balance of payments difficulties; and

(3) giving practical help to members.

Furthermore, the IMF manages the international monetary system and monitors the financial and economic policies of its 187 members. Importantly, it monitors the economic performance on a national, regional and global level and it provides members with financial policy advice. The IMF provides low and middle income countries with education and training facilities to devise and implement suitable financial policies. The IMF also provides loans to countries which are unable to repay their international financial commitments and cannot secure funding from other sources.

(b)â World Bank

The World Bank, like the IMF, is a very important financial resource for developing countries that consists of 187 members. Its mission is to reduce poverty, to encourage people to become self-sufficient through a series of partnerships between the private and public sector. Unlike the IMF, the World Bank is not a lending institution and it is made up of two development organisations, the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). These are supported by the International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA) and the International Centre for the Settlement of Investment Disputes (ICSID).

(c)â Bank of International Settlements

The role of the Bank of International Settlements (BIS) is to support central banks to maintain monetary and financial stability, to encourage international

465	2â European banking regulation

co-operation and to act as a bank for central banks. The BIS seeks to achieve these objectives by:

(a)promoting discussion and facilitating collaboration among central banks;

(b)supporting dialogue with other authorities that are responsible for promoting financial stability;

(c)conducting research on policy issues confronting central banks and financial supervisory authorities;

(d)acting as a prime counterparty for central banks in their financial transactions; and

(e)serving as an agent or trustee in connection with international financial operations.

(d)â Basel Banking Supervision Committee

The Basel Committee on Banking Supervision acts as a medium for recurring co-operation on banking supervisory matters. The Committee’s objective is to improve awareness and knowledge of important banking supervisory matters and to enhance the levels of banking supervision. This is partly achieved by promoting best practices, and by exchanging information on national, regional and international supervisory matters. Importantly, the Committee issues best practice notes and guidelines, which have become known as the Core Principles for Effective Banking Supervision; and the Concordat on Cross-border Banking Supervision. The work of the Basel Banking Supervision Committee is divided into four sub-committees:

(1)the Standards Implementation Group;

(2)the Policy Development Group;

(3)the Accounting Task Force; and

(4)the Basel Consultative Group.

(e)â International Organisation of Securities Commission

The International Organisation of Securities Commission (IOSC) consists of a number of different agencies that seek to expand and put into practice international standards of regulation and enforcement in order to protect investors. Specifically, the IOSC seeks to promote and maintain investor protection and confidence in the securities market. This is achieved through the exchange of information and increased levels of co-operation in enforcement actions against illegal activities.

(f)â Financial Stability Forum

The Financial Stability Forum (FSF) has been established to co-ordinate at the international level the work of national financial authorities and international standard-setting bodies and to develop and promote the implementation of