View source for United Kingdom banking law

{{Use dmy dates|date=April 2022}}
'''United Kingdom banking law''' refers to [[banking law]] in the [[United Kingdom]], to control the activities of [[bank]]s.

==History==
[[File:London MMB »2C0 Royal Exchange.jpg|right|thumb|The [[Bank of England]] acts as the [[UK]]'s central bank, influencing interest rates paid by private banks, to achieve targets in [[inflation]], growth and [[employment]].]]
The [[Bank of England]] was originally established as a corporation with private shareholders under the [[Bank of England Act 1694]],<ref>5 & 6 Will & Mar c 20.</ref> to raise money for war with [[Louis XIV]], [[King of France]]. After the [[South Sea Company]] collapsed in a [[South Sea Bubble|speculative bubble]] in 1720, the [[Bank of England]] became the dominant financial institution, and acted as a banker to the [[UK government]] and other private banks.<ref>EP Ellinger, E Lomnicka and CVM Hare, ''Ellinger’s Modern Banking Law'' (5th edn 2011) ch 2, 30</ref>

The Bank of England could, simply by being the biggest financial institution, influence interest rates that other banks charged to businesses and consumers by altering its interest rate for the banks' bank accounts.<ref>So, if the Bank of England raised its interest rate for [[Barings Bank]]'s account with it, Barings would probably try to raise its interest rates for customers with Barings Bank accounts (unless competition was very tight, in which case its profits would have to be reduced).</ref> The [[Bank of England Act 1716]] widened its borrowing power. The [[Bank Restriction Act 1797]] removed a requirement to convert notes to gold on demand. The [[Bank Charter Act 1844]] gave the bank sole rights to issue notes and coins. It also acted as a lender through the 19th century in emergencies to finance banks facing collapse.<ref>See [[W Bagehot]], ''Lombard Street: A Description of the Money Market'' (1873) discussing [[Overend, Gurney and Co]]</ref> Because of its power, many believed the Bank of England should have more public duties and supervision. The [[Bank of England Act 1946]] nationalised it. Its current constitution, and guarantees of a degree of operational independence from government, is found in the [[Bank of England Act 1998]].

*[[Macmillan Committee]] (1929)

==Central bank==
UK banking has two main parts.<ref>See EP Ellinger, E Lomnicka and CVM Hare, ''Ellinger's Modern Law of Banking'' (2011) chs 1-2 and 5</ref> First, the [[Bank of England]] administers [[monetary policy]], influencing [[interest rates]], [[inflation]] and [[employment]], and it regulates the banking market with [[HM Treasury]], the [[Prudential Regulation Authority (United Kingdom)|Prudential Regulation Authority]] and [[Financial Conduct Authority]]. Second, there are private banks, and some non-shareholder banks (co-operatives, mutual or [[building societies]]), that provide [[credit (finance)|credit]] to consumer and business clients. Borrowing money on credit (and repaying the [[debt]]<ref>[[Debt capital]] finance contrasts with [[equity capital]] finance, where an investor buys shares, invariably with voting rights, in a company. Debt finance usually keeps the borrower in control of their business, subject to any restrictive covenants and the need to repay the debt.</ref> later) is important for people expand a business, invest in a new enterprise, or purchase valuable assets more quickly than by saving. Every day, banks estimate the prospects of a borrower succeeding or failing, and set interest rates for debt repayments according to their predictions of the risk (or average risk of ventures like it). If all banks together lend more money, this means enterprises will do more, potentially employ more people, and if business ventures are productive in the long run, society's prosperity will increase. If banks charge interest that people cannot afford, or if banks lend too much money to ventures that are unproductive, economic growth will slow, stagnate, and sometimes crash. Although UK banks, except the [[Bank of England]], are shareholder or mutually owned, many countries operate public retail banks (for consumers) and public investment banks (for business). The UK used to run [[Girobank]] for consumers, and there have been many proposals for a "[[British Investment Bank]]" (like the [[Nordic Investment Bank]] or [[KfW]] in [[Germany]]) since the [[financial crisis of 2007–2008]], but these proposals have not yet been accepted.

===Central bank governance===
Under the [[Bank of England Act 1998]] section 1, the bank's executive body, the "Court of Directors" is "appointed by [[Majesty|Her Majesty]]", which in effect is the [[prime minister]].<ref>By contrast the US [[Federal Reserve Act of 1913]], 12 USC §241, requires that on advice and consent of the Senate, appointments by the President ‘shall have due regard to a fair representation of the financial, agricultural, industrial and commercial interests, and geographical divisions of the country.’ Under §302, in the Federal Reserve system of constituent banks, three are chosen by and to represent stockholding banks, six others, represent the public and elected to represent stakeholders. In the [[EU]], [[TFEU]] art 283(2), states the [[European Central Bank]]'s Executive Board (a president, vice president and four members) are appointed by the [[European Council]] by [[qualified majority]], after consulting the [[European Parliament]] and the [[Governing Council]] of the [[European Central Bank|ECB]]. The Governing Council is itself the Executive Board plus governors of the national central banks using the [[euro]]. The term is 8 years, non-renewable, and they can only be removed for gross misconduct after review by the [[CJEU]]: ECB Statute [https://www.ecb.europa.eu/ecb/legal/pdf/c_32620121026en_protocol_4.pdf arts 10-11].</ref> This includes the [[Governor of the Bank of England]] (currently [[Andrew Bailey (banker)|Andrew Bailey]]) and up to 14 directors in total (currently there are 12, 9 men and 3 women<ref>See [http://www.bankofengland.co.uk/about/Pages/people/court.aspx 'Court of Directors' on bankofengland.co.uk]</ref>).<ref>[[BEA 1998]] s 1A allows the Treasury to add directors, or reduce the number of directors, after consultation, with some limitations.</ref> The Governor may serve for a maximum of 8 years, deputy governors for a maximum of 10 years,<ref>[[BEA 1998]] Sch 1, paras 1-2</ref> but they may be removed only if they acquire a political position, work for the bank, are absent for over 3 months, become bankrupt, or "is unable or unfit to discharge his functions as a member".<ref>[[BEA 1998]] Sch 1, paras 7-8</ref> This makes removal hard, and potentially a court review. A sub-committee of directors sets pay for all directors,<ref>[[BEA 1998]] Sch 1, paras 14</ref> rather than a non-conflicted body like [[Parliament]].

===Interest rates===
The [[Bank of England]] provides finance and support to, and may influence interest rates of the private banks through monetary policy. Possibly the Bank's most important function is administering [[monetary policy]]. This affects growth and employment. Under [[BEA 1998]] section 11 its objectives are to (a) "maintain price stability, and (b) subject to that, to support the economic policy of Her Majesty’s Government, including its objectives for growth and [[Full employment|employment]]."<ref>In the US, the [[Federal Reserve Act of 1913]], 12 USC §225 states ‘The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of [[maximum employment]], stable prices, and moderate long-term [[interest rates]].’ Under [[TFEU]] art 9, and see also 127 and 119-150 the EU should aim at a "high level of employment". By contrast [[Treaty on European Union|TEU]] art 3(3) says it should be ‘aiming at full employment’. See M Roth, ‘Employment as a Goal of Monetary Policy of the European Central Bank’ (2015) [https://ssrn.com/abstract=2656646 ssrn.com].</ref> Under section 12, the Treasury issues its interpretation of "price stability" and "economic policy" each year, together with an [[inflation]] target. To change inflation, the [[Bank of England]] has three main policy options.<ref>R Cranston, ''Principles of Banking Law'' (2002) 121-122</ref> First, it performs "[[open market operations]]", buying and selling banks' [[bond (finance)|bond]]s at differing rates (i.e. loaning money to banks at higher or lower interest, known "[[discounting]]"), buying back [[government bonds]] ("[[repos]]") or selling them, and giving credit to banks at differing rates.<ref>In the [[EU]], [[TFEU]] art 123 contains a prohibition on the [[European Central Bank]] lending money to governments, but in ''[[Gauweiler v Deutscher Bundestag]]'' (2015) C-62/14 the [[CJEU]] approved the use of [[outright monetary transactions]] to buy Greek government debt on secondary markets (to support the euro) was lawful.</ref> This will affect the interest rate banks charge by influencing the quantity of money in the economy (more spending by the central bank means more money, and so lower interest) but also may not.<ref>Cranston (2002) 121, ‘This will typically, in turn, produce a change in the base rates of the banks.’</ref> Second, the [[Bank of England]] may direct banks to keep different higher or lower reserves proportionate to their lending.<ref>[[BEA 1946]] s 4(3). No order has been issued, but banks generally comply with the Bank of England's suggested reserve ratios. Cranston (2002) 121, ‘The size of the reserves clearly determines the volume of money in circulation and the extent to which a bank can itself extend credit to its customers.’</ref> Third, the Bank of England could direct private banks adopt specific deposit taking or lending policies, in specified volumes or interest rates.<ref>See ''Monetary Control'' (1980) Cmnd 7858.</ref> The Treasury is, however, only meant to give orders to the Bank of England in "extreme economic circumstances".<ref>[[BEA 1998]] s 19</ref> This should ensure that changes to monetary policy are undertaken neutrally, and artificial booms are not manufactured before an election.

===Private bank oversight===
*[[Bank of England Act 1998]]
*''[[Three Rivers DC v Bank of England]]''
*[[Bank of Credit and Commerce International]]

==Private bank governance==
{{see also|UK company law}}
[[File:Cabot Square, Canary Wharf - June 2008.jpg|thumb|right|The largest UK banks are [[HSBC]], [[Barclays]], [[NatWest]] and [[Lloyds Bank]].]]
Outside the central bank, banks are mostly run as profit-making corporations, without meaningful representation for customers. This means, the standard rules in the [[Companies Act 2006]] apply.

===Directors and shareholders===
Directors are usually appointed by existing directors in the [[nomination committee]],<ref>[[Companies (Model Articles) Regulations 2008]], Sch 3, para 20 and [[UK Corporate Governance Code 2016]] section B</ref> unless the members of a company (invariably shareholders) remove them by majority vote.<ref>[[Companies Act 2006]] ss 168-9</ref> Bank directors largely set their own pay, delegating the task to a [[remuneration]] committee of the board.<ref>[[Companies (Model Articles) Regulations 2008]], Sch 3, para 23 and [[UK Corporate Governance Code 2016]] section D</ref> Most shareholders are [[asset managers]], exercising votes with other people's money that comes through pensions, life insurance or mutual funds, who are meant to engage with boards,<ref>[[UK Corporate Governance Code 2016]], section E</ref> but have few explicit channels to represent the ultimate investors.<ref>See E McGaughey, 'Does corporate governance exclude the ultimate investor?' (2016) [https://ssrn.com/abstract=2666955 Journal of Corporate Law Studies]</ref> Asset managers rarely sue for breach of directors' duties (for negligence or conflicts of interest), through derivative claims.<ref>[[Companies Act 2006]] ss 170-77, 260-263</ref>

Concerns about "short-termism" have been written about by the [[Kay Review]] ([https://www.gov.uk/government/publications/kay-review-of-uk-equity-markets-and-long-term-decision-making-implementation-progress-report 2014]) on short and long term thinking in equity markets, and the [[Walker Review]] ([http://webarchive.nationalarchives.gov.uk/20100407211811/http:/www.hm-treasury.gov.uk/d/walker_review_261109.pdf 2009]) on bank governance. These have not yet examined the responsibility of [[institutional investors]], and asset managers who vote with other people's money.

===Employee rights===
Since the [[Credit Institutions Directive 2013]],<ref>2013/36/EU arts 88-96</ref> there are some added governance requirements beyond the general framework: for example, duties of directors must be clearly defined, and there should be a policy on board diversity to ensure gender and ethnic balance. If the UK had employee representation on boards, there would also be a requirement for at least one employee to sit on the remuneration committee, but this step has not yet been taken. The [[Credit Institutions Directive 2013]] ([http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32013L0036 2013/36/EU] article 95 states "If employee representation... is provided for by national law, the remuneration committee shall include one or more employee representatives."

===Licensing and passport===
There is some public oversight through the bank licensing system.<ref>Before [[FSMA 2000]] ss 19-23 and 418-9, the [[Banking Act 1979]] introduced the formal authorisation requirements.</ref> Under the [[Financial Services and Markets Act 2000]] section 19 there is a "general prohibition" on performing a "regulated activity", including accepting deposits from the public, without authority.<ref>See also [[Credit Institutions Directive]] 2013/36/EU arts 8-14</ref> The two main UK regulators are the [[Prudential Regulation Authority (United Kingdom)|Prudential Regulation Authority]] and the [[Financial Conduct Authority]]. Once a bank has received authorisation in the UK, or another member state, it may operate throughout the [[EU]] under the terms of the host state's rules: it has a "[[passport]]" giving it [[freedom of establishment]] in the internal market.

==Customer rights==
[[File:Birmingham Northern Rock bank run 2007.jpg|thumb|right|Government ultimately guarantees the banking system. By 2009, the UK government [[2009 United Kingdom bank rescue package|had been forced to nationalise]] [[Northern Rock]], [[Bradford & Bingley]], the [[Royal Bank of Scotland]] and part of [[HBOS-Lloyds TSB]]. The [[Banking Act 2009]] contains a system to stop systemic crisis from banker insolvency.]]
While banks perform an essential economic function, supported by public institutions, the rights of bank customers have generally been limited to contract.

===Customer accounts===
In general terms and conditions, customers receive very limited protection. The [[Consumer Credit Act 1974]] sections 140A to 140D prohibit unfair credit relationships, including extortionate interest rates. The [[Consumer Rights Act 2015]] sections 62 to 65 prohibit terms that create contrary to good faith, create a significant imbalance, but the courts have not yet used these rules in a meaningful way for consumers.<ref>See ''[[Office of Fair Trading v Abbey National plc]]'' [2009] UKSC 6 and ''[[Director General of Fair Trading v First National Bank plc]]'' [2001] UKHL 52</ref> Most importantly, since ''[[Foley v Hill]]'' the courts have held customers who deposit money in a bank account lose any rights of property by default: they apparently have only contractual claims in debt for the money to be repaid.<ref>(1848) 2 HLC 28</ref> If customers did have property rights in their deposits, they would be able to claim their money back upon a bank's insolvency, trace the money if it had been wrongly paid away, and (subject to agreement) claim profits made on the money. However, the courts have denied that bank customers have property rights.<ref>''[[Vincent v Trustee Savings Banks Central Board]]'' [1986] 1 WLR 1077, denying that the [[Trustee Savings Bank]] customers were, despite the name of the bank, in any trustee-beneficiary relation, either at common law or under statute. The customers, apparently, only had contractual rights.</ref> The same position has generally spread in banking practice globally, and Parliament has not yet taken the opportunity to ensure banks offer accounts where customer money is protected as property.<ref>See the [[Safety Deposit Current Accounts Bill 2008]] cls 1-2, proposing a proprietary saving account option.</ref>

===Deposit protection===
Because insolvent banks do not enable customers to recover their money as a [[English property law|property right]] (only [[English contract law|contract]]), governments have found it necessary to publicly guarantee depositors' savings. This follows the model, started in the [[Great Depression]],<ref>[[Banking Act of 1933]]</ref> the US set up the [[Federal Deposit Insurance Corporation]], to prevent [[bank run]]s. In 2017, the UK guaranteed deposits up to £85,000,<ref>[[Financial Services and Markets Act 2000]] ss 214-215</ref> mirroring an EU wide minimum guarantee of €100,000.<ref>See the [[Deposit Guarantee Directive 2014]]/49/EU</ref>

==Markets==
===Insolvency===
{{see also|UK insolvency law|2008 United Kingdom bank rescue package|2009 United Kingdom bank rescue package}}
Because of the knock-on consequences of any bank failure, because bank debts are locked into a network of international finance, government has found it practically necessary to prevent banks going insolvent. This system began with the [[Banking (Special Provisions) Act 2008]], emergency legislation for the nationalisation of [[Northern Rock]], which was recast the following year. Under the [[Banking Act 2009]] if a bank is going into insolvency, the government may (and usually will if "the stability of the financial systems" is at stake) pursue one of three "stabilisation options".<ref>See [[Banking Act 2009]] ss 1, [http://www.legislation.gov.uk/ukpga/2009/1/part/1/crossheading/exercise-of-powers-general 7-13]</ref> The Bank of England will either try to ensure the failed bank is sold onto another private sector purchaser, set up a subsidiary company to run the failing bank's assets (a "bridge-bank"), or for the UK Treasury to directly take shares in "temporary public ownership". This will wipe out the shareholders, but will keep creditors' claims intact.

All other standard rules of the [[Insolvency Act 1986]] apply, including [[wrongful trading]] provisions, and the rules in the [[Company Director Disqualification Act 1986]].

===Capital requirements===
One fashionable method to prevent bank insolvencies, following the "[[Basel III]]" programme of the international banker group, has been to require banks hold more money in reserve based on how risky their lending is. EU wide rules in the [[Capital Requirements Regulation 2013]] achieve this in some detail, for instance requiring proportionally less in reserves if sound government debt is held, but more if mortgage-backed securities are held.<ref>(EU) No 575/2013, arts 114-134</ref> It is not clear that a lack of capital is the [[root cause analysis|root cause]] of the problem, although the [[Basel Committee]] of banks advocates it.

===Competition law===
*[[Competition Act 1998]]
*[[Libor scandal]]

==See also==
{{Portal|Banks}}
*[[UK company law]]
*[[UK enterprise law]]
*[[Bank regulation in the United States]]
*[[Glass–Steagall Act of 1933]]
*[[Depository Institutions Deregulation and Monetary Control Act]] of 1980

==Notes==
{{reflist|2}}

==References==
*EP Ellinger, E Lomnicka and CVM Hare, ''Ellinger's Modern Law of Banking'' (2011)
*E McGaughey, ''Principles of Enterprise Law: the Economic Constitution and Human Rights'' ([https://www.cambridge.org/gb/academic/subjects/law/corporate-law/principles-enterprise-law-economic-constitution-and-human-rights?format=PB Cambridge UP 2022]) ch 10

[[Category:United Kingdom banking law| ]]
[[Category:Bank regulation]]