THE LAW AND PRACTICE OF INTERNATIONAL BANKING CHARLES PROCTOR LLD (B'HAM) Solicitor of the Supreme Court England and Wales Partner, Bird & Bird LLP, London Honorary Professor of Law, University of Birmingham Visiting Professorial Fellow Centrefor Commercial Law Studies Queen Mary College, University of London OXFORD UNIVERSITY PRESS
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THE LAW ANDPRACTICE OF
INTERNATIONALBANKING
CHARLES PROCTOR LLD (B'HAM)
Solicitor of the Supreme CourtEngland and Wales
Partner, Bird & Bird LLP, London
Honorary Professor of Law,University of Birmingham
Visiting Professorial FellowCentre for Commercial Law Studies
Queen Mary College,University of London
OXFORDUNIVERSITY PRESS
CONTENTS—SUMMARY
Table of Cases xxxvTables of Legislation lxviiList of Abbreviations lxxix
A REGULATORY MATTERS
1. The Regulation of Deposit-Taking Business 3
2. EU Banking Law 19
3. The Conduct of Retail Banking and Investment Business 35
4. The Regulation of Lending Business 51
5. The Regulation of Payment Services 75
6. Capital Adequacy, Liquidity, and Large Exposures 117
7. Money Laundering Legislation 143
8. The Market Regulators 173
B MERGER, REORGANIZATION, AND INSOLVENCY OF BANKS
9. UK Bank Mergers and Business Transfers 193
10. Foreign Bank Mergers 209
11. Bank Rescues and Financial Stability in the United Kingdom 219
12. Cross-Border Reorganization and Winding Up of Banks 251
13. Deposit Protection Schemes 265
14. The Liability of the Regulator 281
C THE BANKER-CUSTOMER RELATIONSHIP
15. The Banker-Customer Contract 297
16. Cheques 313
17. Duties of the Paying Bank 321
18. Duties of the Collecting Bank 339
19. Electronic Funds Transfers 349
D THE BANK AS SERVICE PROVIDER
20. The Bank as a Lender 365
21. Syndicated Loans 387
IX
Contents—Summary
22. Trading Loan Assets 411
23. Swaps and Derivatives 425
24. Bank Guarantees, Performance Bonds, and Documentary Credits 435
25. Sources of Bank Liability 471
E GUARANTEES AND SECURITY
26. Guarantees 479
27. Security—Characterization, Formalities, and Registration 511
38. Transactions Between Companies and their Directors 623
39. Avoidance of Security in Insolvency 627
F SELECTED CROSS-BORDER ISSUES
40. The Banker-Customer Contract in Private International Law 641
41. Cross-Border Financial Services, Consumer Protection, and
Unfair Contract Terms 657
42. The Banker's Duty of Confidentiality 675
43. Freezing Injunctions and International Banks 711
44. Execution Proceedings and Foreign Deposits 731
45. Liability for Branch Deposits and the Impact of Foreign Law 739
46. Economic Sanctions 757
47. Customer Obligations and Foreign Law 761
Contents—Summary
•G ISLAMIC FINANCE
48. Islamic Finance—Principles and Structures 767
49. Islamic Finance Transactions in the Courts 787
50. Corporate and Regulatory Issues 801
51. Harmonization and the Development of the International IslamicFinancial Markets 813
Index 821
XI
CONTENTS
Table of Cases xxxv
Tables of Legislation lxvii
List of Abbreviations lxxix
A REGULATORY MATTERS
Introduction
1. The Regulation of Deposit-Taking Business
Introduction 1.01
The History of Banking Regulation in the United Kingdom 1.04
Introduction : 1.04
Deposit-Taking as a Regulated Activity 1.09
Introduction 1.09Acceptance of Deposits 1.10Deposits 1.13,Accepting Deposits 1.14Carrying on a Business 1.15In the United Kingdom 1.16Exempt Persons 1.19Consequences of Contravention 1.20
The Authorization Procedure 1.22
Powers of the FSA 1.26
EEA Firms 1.27
2. EU Banking Law .
Introduction 2.01
Background to the EU Banking Directives 2.02
The Deposit-Taking Prohibition 2.09
The Authorization Process ' 2.11
The Treaty Freedoms—General Considerations 2.13
The Right to Establish a Branch 2.16
The Right to Provide Services 2.17
Provision of Services from within the Home State 2.18
Free Movement of Capital and Banking Services 2.22
The Commission Interpretative Communication 2.25
Conclusions 2.29
./ xiii
Contents
3. The Conduct of Retail Banking and Investment Business
Introduction 3.01
Scope of BCOBS 3.04Application 3.04Communications with Customers 3.09Distance Marketing 3.11Information Requirements 3.17Post Sale Requirements 3.22Cancellation 3.23
Investment Services 3.26Introduction 3.26Scope of MiFID 3.28MiFID—Overview 3.30Client's Best Interests 3.34Client Categorization 3.36Information Requirements 3.38Client Agreements 3.39Client Money 3.41Suitability 3.43Appropriateness 3.46Conflicts of Interest 3.47Best Execution 3.50
4. The Regulation of Lending Business
Introduction 4.01
Consumer Credit 4.02
Introduction 4.02Regulated Agreements 4.05Types of Consumer Credit Agreement 4.07Exempt Agreements 4.09The Effect of Regulation 4.13The Licensing Requirement 4.15Advertising 4.23Contents of Agreements and Formalities 4.25Matters arising during the Currency of the Contract 4.30Court's Powers of Intervention 4.38Recent Reforms—The Consumer Credit Directive 4.40
Mortgage Regulation 4.43
Introduction 4.43The Scope of Regulation 4.44The Nature of the Regulation 4.52
The Lending Code 4.55
Contents
5. The Regulation of Payment Services
Introduction 5.01
Implementation of the Payment Services Directive 5.04
Payment Services 5.07
The Definition 5.07Exclusions 5.11Territoriality 5.14
The Authorization Requirement 5.17
Authorized Payment Institutions v _ 5.20
Introduction 5.20Capital Requirements for Payment Institutions 5.24Small Payment Institutions 5.26Ancillary Business 5.28Passporting 5.29
Conduct of Business Requirements 5.34
Segregation Requirements . 5.35Information Requirements 5.40Scope of Requirements 5.42Single Payment Service Contracts 5.46Framework Contracts 5.48Common Provisions 5.53
Rights and Obligations of Providers and Users 5.54
Scope 5.55Charges for Transactions 5.56Authorization of Payment Transactions 5.57Limits and Use of Payment Instruments 5.61Misuse of Payment Instruments 5.65Time Limits 5.67Evidence and Liability for Unauthorized Transactions 5.68Execution of Payment Transactions 5.76Execution Time and Value Date 5.82Liability \ 5.86
Access to Payment Systems 5.87
Powers of the FSA 5.89
The Single Euro Payments Area 5.90
Introduction 5.90The Aims and Objectives of SEPA 5.93The Role of the EPC 5.96The Benefits of SEPA 5.97Progress with SEPA 5.98Charges for Cross-Border Payments 5.100Information on the Payer 5.104
Contents
6. Capital Adequacy, Liquidity, and Large Exposures
Introduction 6.01
Capital Adequacy—The Broad Framework 6.05
The Basel Standards 6.08The Basel Committee on Banking Supervision 6.08
International Background 7.06International Law 7.06Community Law 7.08
Overview of the United Kingdom Regime 7.10
Legislation 7.10Role of the Financial Services Authority 7.13Role of Market Associations 7.15
The Money Laundering Regulations 2007 7.17Customer Due Diligence 7.18Record Keeping 7.21Policies and Procedures 7.23Internal Training Procedures 7.25
Contents
Proceeds of Crime Act 2002 •• 7.28
'Criminal Property' and 'Criminal Conduct' 7.30Concealing Criminal Property 7.37Acquisition, Use, and Possession of Criminal Property 7.40Arrangements Relating to Criminal Property 7.42The Regulated Sector Offence 7.47The Disclosure Defence 7.52The 'Reasonable Excuse' Defence 7.59The Foreign Legality Defence 7.62The'De Minimis'Defence 7.65Offences by the MLRO v - - • 7.67Tipping off— Regulated Sector 7.70
Terrorist Financing 7.74
Introduction 7.74'Terrorism' and 'Terrorist Property' 7.76The Offences 7.78
Civil Consequences of Money Laundering Legislation 7.83
Receipt of Funds 7.85Suspicion Arising in Relation to Funds already Held 7.90Dealings with the Customer in Relation to POCA 7.93
8. The Market Regulators
Introduction 8.01
The Financial Services Authority 8.04
History and Functions of the FSA 8.04Rule-making and Other Powers 8.07The FSA Handbook 8.08
The Bank of England 8.12
History and Functions of the Bank 8.12Stability of the Financial System 8.18Monetary Policy 8.24
The Treasury \ 8.29
History and Functions of the Treasury 8.29
Role of the Treasury 8.31
Current Reforms 8.34
The European Framework ' 8.38European Systemic Risk Board 8.40
European System of Financial Supervisors 8.45
The EU Memorandum of Understanding 8.49
International Developments 8.51
Conclusions 8.55
xvn
Contents
B MERGER, REORGANIZATION, AND INSOLVENCY OF BANKS
Introduction
9. UK Bank Mergers and Business Transfers
Introduction 9.01
Effect of Part VII 9.04
Scope of Part VII 9.07
Procedure under Part VII 9.13
Effect of Court Sanction 9.18
'Property'and'Liabilities' 9.21
The Cross-Border Mergers Regulations 2007 9.25
Conclusions 9.29
10. Foreign Bank Mergers
Introduction 10.01
Recognition of the Merger 10.05
The Transferred Assets and Liabilities 10.17
Consequences for the Transferor 10.22
Consequences for Transaction Counterparties 10.24
The Cross-Border Mergers Regulations 10.28
Conclusions 10.30
11. Bank Rescues and Financial Stability in the United Kingdom
Introduction 11.01
Collapse of Northern Rock 11.05
Banking (Special Provisions) Act 2008 11.09The S cheme of the Legislation 11.09
Challenges to the Legislation 11.16
Other Financial Crisis Events 11.20
Banking Act 2009 11.24Introduction 11.24Scope and Content of the Act 11.26General Considerations 11.29
The Stabilization Options 11.37Transfer to a Private Sector Purchaser 11.38Transfer to a Bridge Bank 11.40Temporary Public Ownership 11.43Share Transfer Orders 11.45Property Transfer Instruments 11.49Partial Property Transfers 11.51
xvill
Contents
The 'No Creditor Worse Off' OrderCompensation for TransferorsContinuing Obligations and Other Matters
Bank Insolvency
Bank Administration
Investment Banks
Interbank Payment Systems
Emergency Liquidity AssistanceThe Nature of the Assistance vRecent Use of Emergency Liquidity AssistanceLegal Aspects of Emergency Liquidity Assistance
Other Forms of Assistance to the Financial Markets
Conclusions
12. Cross-Border Reorganization and Winding Up of Banks
Introduction
Scope of the Directive
Impact of the Directive on EEA Credit Institutions
Payment by Cheque 16.18Introduction 16.18Acceptance of a Cheque 16.19
Contents
Cheque Guarantee Scheme ' 16.21
Cheque Clearing 16.26
17. Duties of the Paying Bank
Introduction 17.01
The Duty to Pay 17.04
The General Nature of the Obligation 17.04The Bank's Duty in Executing Payment Instructions 17.05Termination of the Bank's Authority to Pay 17.06Failure to Comply with Payment Instructions " 17.11
Nature and Consequences of Unauthorized Payment 17.13
Introduction 17.13Payment beyond the Scope of the Mandate 17.16Forged Signatures 17.20Misappropriation by an Authorized Signatory 17.24The Recovery of Payments Made 17.33
Statutory Protection of the Paying Bank 17.40
Introduction 17.40Payment in Due Course 17.41Material Alteration to the Cheque 17.43Incomplete Cheques 17.44Forged and Unauthorized Indorsements 17.46Section 80 of the Bills of Exchange Act 1882 17.52Section 1 of the Cheques Act 1957 17.55
Events of Default/AccelerationPayment MechanicsSet-offAssignments and TransfersGoverning LawJurisdiction
Conclusions
21. Syndicated Loans
Introduction v.
The Arranger
Duration and Nature of the RoleFunctions of the ArrangerLiability of the Arranger
The Agent
Duration and Nature of the RoleFunctions of the AgentLiability of the Agent—Gross Negligence and Wilful MisconductOther Sources of Liability and Protections
Relationship between Individual Banks and the Borrower
Relationship between the Individual Banks
IntroductionSeveral ObligationsConsents, Instructions, and Waivers; Majority RulePro Rata SharingLiability and Regulatory Aspects
24. Bank Guarantees, Performance Bonds, and Documentary Credits
Introduction
Bank Guarantees
Performance Bonds
IntroductionNature of a Performance BondTypes of Performance Bond
Documentary Credits
IntroductionDefinitionContracts, the Parties, and their ObligationsTypes of Commercial CreditIssuing Commercial CreditsApplication of Autonomy PrincipleTransfer and Assignment of Credits
Private International Law Issues 24.72Introduction 24.72English Buyer—English Issuing Bank 24.74Issuing Bank—Seller 24.78Confirming Bank—Seller 24.82Issuing Bank—Confirming Bank 24.84The Impact of the Applicable Law 24.86
25. Sources of Bank Liability
Introduction 25.01
The Springwell Navigation Case 25.06
Factual Background 25.06Claims in Contract and Tort 25.07Contractual Disclaimers 25.10Misrepresentation 25.12Breach of Fiduciary Duty 25.13Conclusions 25.15
Other Cases 25.16
Advisory and Management Arrangements 25.18
Conclusions 25.21
E GUARANTEES AND SECURITY
Introduction
26. Guarantees
Introduction 26.01
Purpose, Definition, and Characteristics 26.02Purpose * 26.02Definition 26.04Characteristics 26.06
Formalities 26.10
Introduction 26.10Offer and Acceptance 26.12Consideration 26.14Intention to Create Legal Relations 26.16Requirement of Writing 26.19
Guarantees and Indemnities 26.23
Introduction 26.23Distinction between Guarantees and Indemnities 26.24
Contents
Interpretation and Liability
IntroductionInterpretationThe Guaranteed LiabilitiesEssential ValidityNature of the Guarantor's Liability
IntroductionA Duty to Advise?A Duty of Good Faith?A Duty of Disclosure?A Duty to take Other Security?A Duty of Realization?
Discharge of the Guarantor
IntroductionDischarge by PaymentDischarge of the Guarantor
Vitiating Factors
PreferenceTransactions at an Undervalue
Termination by the Guarantor
Introduction ;
Express and Implied Termination Rights
Rights of the Guarantor following Payment
Rights of the GuarantorObligations of the Bank
Conflict of Law Issues
27. Security—Characterization, Formalities, and Registration
Introduction
Contractual Nature of SecurityWhat is a Security Interest?The Scope and Extent of the SecurityFormalities
26.28
26.2826.2926.3226.3526.37
26.38
26.3826.4126.44
26.45
26.4526.4626.4926.54
26.55
26.5526.5726.5926.60
•- 26.6326.66
26.69
26.6926.7026.72
26.74
26.7626.79
26.81
26.8126.82
26.84
26.84
26.86
26.88
27.01
27.02
27.0427.0827.15
Contents
Part 25 of the Companies Act 2006 27.18Foreign Assets 27.24Foreign Companies 27.33Summary of Registration Requirements—Foreign Companies 27.42
28. Types of Security
Introduction 28.01
Fixed Charges 28.03
Floating Charges 28.06
Definition " " " " 28.06Importance of the Characterization 28.10Crystallization 28.11
Priorities 28.14
Introduction 28.14Categories of Priority Claims 28.15Statutory Priorities 28.16The Prescribed Part 28.20Occupational Pension Schemes 28.22Employees 28.23
Priority as against other Secured Creditors 2 8.24
Priority as against Unsecured Creditors 28.27
Rights of Set-off 28.28Liens 28.30Execution Creditors 28.32Distress for Rent 28.35
29. Charges Over Shares and Other Securities
Introduction 29.01
Legal Charge 29.05
Equitable Charge 29.09
Foreign Shares ' 29.12
Charges over Uncertificated Securities 29.15
Registration Formalities 29.22
Priorities 29.25
30. Charges Over Receivables
Introduction 30.01
Essential Validity 30.02
Foreign Receivables 30.06
Registration Formalities 30.07
Priorities 30.09
XXVll
Contents
31. Charges Over Bank Balances
Introduction 31.01
Features of the Security 31.02
Registration Formalities 31.03
Priorities 31.05
32. Charges Over Real Estate
Introduction 32.01
Nature of the Asset ~ " ' 32.05
Nature of the Security 32.11
Extent of the Security 32.15
Registtation of the Security 32.19
Remedies of the Mortgagee 32.21Power of sale 32.23Appointment of Receiver 32.25Taking Possession 32.28Restrictions on the Exercise of the Mortgagee's Powers 32.30Consolidation 32.32Priorities • 32.37
Grounds of Challenge 32.39
Security Over Foreign Land 32.49
33. Charges Over Aircraft
Introduction 33.01
UKAircraft 33.03
Priorities 33.09
Foreign Aircraft 33.10
International Issues 33.13
34. Charges Over Ships
Introduction 34.01
English Ship Mortgages 34.03
Priorities 34.08
Foreign Ship Mortgages 34.10
Enforcement of Ship Mortgages 34.13
35. Financial Collateral Arrangements
Introduction 35.01
Settlement Finality Directive 3 5.04
XXVlll
Contents
Structure of the Settlement Finality RegulationsPrivate International Law Issues
Financial Collateral Regulations
36. Lien and Set-off
Introduction
Right of Lien
Bank's Right of Set-off
Other Rights of Set-off v .
37. Vitiating Factors—'Financial Assistance'
Introduction
Financial Assistance
Scope of the Prohibition
'Financial Assistance'
'Larger Purpose' Exemption
Other Exemptions
Consequences of Breach
Illustrative Transactions
38. Transactions Between Companies and their Directors
Introduction
Substantial Property Transactions
Transactions involving Directors
39. Avoidance of Security in Insolvency
Introduction
Transactions at an Undervalue
Preferences
Extortionate Credit Transactions
Avoidance of Floating Charges
Transactions Defrauding Creditors
F SELECTED CROSS-BORDER ISSUES
Introduction
40. The Banker-Customer Contract in Private International Law
Nature and Scope of the Duty of Confidentiality 42.10
Compulsion of Law 42.16
Introductory Remarks 42.16Statutory Obligations of Disclosure 42.18Limitations on the 'Compulsion of Law' Exception 42.19Disclosure Orders made by an English Court in relation to Materials in England 42.22Disclosure Orders made by an English Court in relarion to Materials held Abroad 42.26Disclosure Orders made by a Foreign Court 42.34
Interests of the Bank 42.42
Public Interest 42.47
Consent of Customer 42.56
Contents
Express Consent 42.58Implied Consent 42.60Liability to the Recipient 42.62
Damages for Breach 42.63
Data Protection Act 1998 42.65
The Wider Duty of Confidence 42.68
Duties of Confidentiality to Third Parties 42.73
Other Duties of Confidentiality 42.77
Conclusions ' — 42.81
43. Freezing Injunctions and International Banks
Introduction 43.01
Nature and Effect of a Freezing Injunction 43.05
Action to be taken by the Bank 43-13Necessity for Compliance 43.14Steps to be taken 43.16The Extent of Compliance 43.18
Impact on Banker-Customer Relationship 43.22
Set off 43.27Enforcement of Security 43.29
Relationship between the Bank and the Applicant 43.31Obligations of the Bank 43.32
Obligations of the Applicant 43.36
Relationship between the Bank and Third Parties 43.39
Territorial Issues 43.42Foreign Branches 43.44Assets held Abroad 43.48
Conclusions 43.51\\
AA. Execution Proceedings and Foreign Deposits
Introduction 44.01
Third Party Debt Orders 44.04
Attitude of the English Courts in Extra-Territorial Cases 44.09
The Case Law ' 44.11
Special Cases 44.18
Conclusions 44.19
45. Liability for Branch Deposits and the Impact of Foreign Law
Introduction 45.01
The General Principles 45.04
xxxi
Contents
Closure of a Branch 45.10
Outbreak of War 45.14
Foreign Customers of UK Banks 45.15
UK Customers of Foreign Banks 45.16
Expropriation 45.18
Other Forms of Seizure 45.21
Exchange Controls 45.27
Moratoria 45.28
Blocking Orders ' " ' 45.31
Conclusions 45.38
46. Economic Sanctions
Introduction 46.01
The Sources of Sanctions Legislation 46.06
Effect of Sanctions 46.10
Conclusions 46.13
47. Customer Obligations and Foreign Law
Introduction 47.01
Moratoria 47.06
Exchange Controls 47.10
Conclusions 47.14
G ISLAMIC FINANCE
Introduction
48. Islamic Finance—Principles and Structures
Introduction 48.01
The Foundations of Islamic Finance 48.04Riba 48.08Gharar 48.15Maisir 48.19Unjust Enrichment 48.20
English Case Law 49.03Islamic Investment Company of the Gulf (Bahamas) Ltd v Symphony Gems NV 49.04Beximco Pharmaceuticals Ltd v Shamil Bank of Bahrain EC 49.08The Investment DAR Company KSCC v Blom Development Bank SAL 49.15English Case Law—Conclusions 49.19
Malaysian Case Law 49.21
Introduction 49.21Earlier Cases 49.27Later Cases 49.32Malaysian Case Law—Conclusions 49.36