January 21, 2013 Banking and Finance How would you describe a bank?

In defining the word bank one needs to be aware that an institution that is a bank in one statutory context may not be so regarded in other contexts. The concept of a bank has two principal parts: one part considers the common law definition which is based on treating a bank as an institution engaged in banking business. In this jurisdiction parliament or the courts determine the nature of this kind of business. The other principal part reviews the statutory definitions of bank found in particular pieces of legislation, the policy and rationale underlying these definitions. With respect to the common law definition of banks, the courts have established three cardinal principles. 1) The meaning of banking business can change from time to time. In Woods v Martins Bank Ltd [1959] 1 QB Salmon J held that, the giving of advice on financial matters constituted banking business because inter alia the bank in this case held itself out as being in a position to advise its customers on their investments. He further stated the limits of a bankers business cannot be laid down as a matter of law. The nature of such a business must in each case be a matter of fact and accordingly cannot be treated as if it were a matter of pure law. This principle is extremely important because banks have now become multi functional institutions which, are engaged in a wide range of business activity, far beyond their traditional core activities i.e. Deposit taking lending providing payment services in connection with the operation of current accounts. Increased competitions form other financial institutions that have branched out into other areas. Banks now engage in activities as diverse as securities and derivative training, investment management, insurance and pensions. This is done through subsidiary companies within the same banking group. 2) A financial institution regarded as engaging in banking business in one jurisdiction, is not necessarily so considered elsewhere. According to Irish and Australian authority an institution that accepts money on deposit from the public in order to re-lend it, it is carrying on banking business, even if it does not open current accounts. In contracts in the United Kingdom and other common law jurisdictions, an operation of current accounts on behalf of customers is the touch stone of a bank according to the authorities.

3) An institution that is widely considered to be a bank will usually be treated by the courts as engaged in banking business. The meaning of banking business is subject to change. In these modern times, varying transactions characterize banking business. Traditionally, the hallmark of banking business involved the acceptance of money on deposit from members of the public who would then become customers to the bank. The funds so deposited were used for re-lending or re-investing by the bank to make a profit. Re: Shields Estate [1901] 1 IRR 173. In Australia in the case Commissioners of the State Savings Bank of Victoria v Permewan Wright & Co. Ltd. [1914] 19 CLR Ivan J described banking as the collection of money by receiving deposits upon loan, repayable when and as expressly or impliedly agreed upon and the utilization of money so collected by lending it again in such sums as are required. In Canada the Supreme Court in the 2004 case Canadian Western Bank v Alberta 2 SCR 3 it was held that banking includes the securing of loans by appropriate collateral. The traditional approach no longer applies following the land mark decision of the court of appeal in United Dominions Trust v Perkwood [1966] 2 QB. It was said in this case that engaging in lending by an institution does not make it a bank. Therefore, an entity cannot qualify as a bank at common law in the United Kingdom unless it opens on behalf of customers current accounts, operable by cheques, and into which customers can pay cheques and other effects for collection. Lord Denning stated there are therefore two characteristics usually found in banks today. 1) They accept money from and collect cheques for their customers and place them to their credit. 2) They honor cheques or orders drawn on them by their customers when presented for payment and debit their customers accordingly. 3) They keep current accounts or something of that nature in their books in which the credits and debits are entered. Diplock LJ further held that even if an institution was engaged in the above three activities it would not be regarded as a bank, if its banking business was negligible in size or if its current accounts were opened as a mere cloak for lending transactions. In addition a bank should also normally possess the qualities of stability, soundness and probity. At this time the use of cheques has been considerably reduced. The statutes provide the legal and policy parameters for 1) licensing and supervision of financial institutions 2) prescribe prudential criteria and minimum solvency standards to be maintained by the licensees 3) as well as the various powers available to the BOJ and the Minister of Finance and Planning in the event that bank distress or failure appear imminent or threatens the

soundness of the financial system. All commercial banks, building societies and licensees under the Financial Institutions Act have been licensed to act as authorized foreign exchange dealers. These institutions take deposits, buy and sell such currencies. The supervisory frame work for merchant banks and commercial banks are well established but, more recently credit unions were designated by the Minister of Finance as a specified financial institution under the BOJ Act. With that designation, the BOJ can obtain information on their operations. Operating within the financial system there are non deposit taking financial institutions. They fall under the FSC for regulations. The FSC came into existence in 2001 by virtue of the Financial Services Commission Act and has replaced the Office of the Superintendent of Insurance and Unit Trust and Securities Commission. The mandate of the FSC is to supervise and regulate the securities, insurance and pensions etc. The FSC has responsibility to manage proper administration of the pensions, securities and insurance laws. The FSC oversees the registration, solvency and conduct of approximately 614 firms and over 4800 individuals doing business in pensions, securities and insurance industries: Insurance companies, unit trust, insurance brokers, insurance agencies, insurance managing general agent, insurance sales representatives, insurance loss adjusters, insurance consultants, pension funds and retirement schemes, pension administrators, pension trustees, pension managers. Under the securities Act and the Unit trust act the FSC is responsible for ensuring that individuals and companies dealing in securities and managing unit trust schemes are properly licensed and operating according to the law. The FSC oversees the licensing, registration, capital adequacy and conduct of approximately 60 firms and 700 individuals doing business in the securities industry. The FSC is empowered under the FSC Act and the Securities Act to grant or refuse licenses and where there is a breach of the Act revoke the license. The licensees records are also examined, they test for competence and judgment through fit and proper assessment of all significant holders, directors and senior managers of securities firms. FSC introduces measures to reduce the threat of fraud or money laundering in licensed institutions.

 The FSC enforces the rules of a recognized stock exchange and hears appeals by members of a recognized stock exchange in matters relating to that organization. It takes action to prevent manipulation of the securities market and it takes action in the interest of the public to stop trading in a security. It applies penalties for breaches of the securities act. It educates the public about the securities industry. The JDIC, Department of DDP, Income tax Act, Proceeds of Crime act 2007 all to protect depositors but this does not cover the employees of the banks who steal. Confidence is crucial in banking and finance law. The secrecy of officials is mandated by statue with criminal sanctions. Megill v AG et al Mayne v AG A central bank is an institution that issues currency, administers monetary policy and holds deposits representing the reserves of other banks. Eg. The Bank of England was formed 1694 nationalized in 1846, The European Central Bank located in Europe, In the USA it is the Federal Reserve of the United States, The Peoples Bank of China. The primary function of the central bank is to manage the nations money supply. It is concerned with monetary policy, while the government is concerned with fiscal policies such as taxation and spending measures. Monetary policy includes managing interest rates, setting the reserve requirement, acting as a lender of last resort to the banking sector during times of bank insolvency or financial crisis or a shortage of foreign exchange. Central Banks usually have supervisory powers, intended to prevent commercial banks and other financial institutions from reckless or fraudulent behavior. Central Banks in most developed nations, are institutionally designed to be independent from political interference. The financial system

January 28, 2013 Unit 4 In the 19th century UK banks were selective in respect to their customs, so maintaining a bank account enhanced a persons financial standing and credit

worthiness. Until the end of WW1banks were generally active only for business men the professions and landed classes. The bank customer relationship was a particularly close one. Now a day it is expected that persons will maintain a bank account with several banks. There are legal consequences regarding holding a bank account. The bank owes a duty to honor its customers cheques and other payment instructions, and to obey its customers instructions as regards the collection of cheques and other effects payable to them. A bank owes certain incidental duties to its customers such as a common law duty of care {Abourahmah v Abacha (20050 EWHC 2662 QB 68}, a duty of confidentiality and also fiduciary duties similar to those that bind a trustee. Who is a customer? There was a time when it was thought that a person becomes a customer of the bank only when banking services were being performed for him or her by that bank. Merely opening an account in that customers name was insufficient to confer that status. Matthews v Williams Brown & Co. 1894 10 TLR 386 However in Ladbrooke v Todd 1914 30 TLR 433 Bailache J held that the theif had become a customer when the bank had agreed to open the account and that the advice to the theif that there had to be clearance before the proceeds could be withdrawn was irrelevant in this regard. A similar decision was arrived at in Commissioners of Taxation v English Scottish and Australian Bank Ltd 1920 AC 683 PC. In this case Dunedin LJ stated the word customer signifies a relationship in which duration is not of the essence. A person whose money has been accepted by a bank, on the footing that they undertake to honor cheques up to the amount standing to his credit is a customer of the bank; Irrespective of whether his connection is of short or long standing. Where the bank performs a casual service for someone, or even if the person cashes cheques on a regular basis this does not make them a customer. The House of Lords held in Great Western Railway Co. v London & County Banking Co. Ltd. 1901 AC 414 that although the bank cashed cheques regularly at the request of the Great Collector over the years he was not a customer as he did not maintain an account with the bank. Therefore, a person must operate an account with a particular bank in order to be defined a customer per the Iskandar v Bank of America National Trust & Savings Association 1998 1 SLR 37. However, in Canada, New Zealand and Malaysia, there are suggestions that customer might include persons who receive services from a bank without necessarily having an account there. [Formosa Resort Properties SDN BHD v Bank Bumiputra Malaysia Bhd 2009 MLJU 243 MCA] There are times when it is important to determine the precise moment when the banker, customer relationship comes into existence. Ladbrooke suggests that

this occurs the moment the bank agrees to open the account and this view is supported by Woods v Martins Bank Ltd. 1959 1 QB 55. The mere opening of an account in anothers name without their authority does not establish a banker, customer relationship between the nominal account holder and the relevant bank. Accordingly, the banker customer relationship comes into existence 1) when the bank agrees to open an account in a persons name it is consenting to having a regular business relationship with that person. To honor his or her cheques and executing other types of payment and collecting cheques and other effects payable to him or her. 2) The bank agrees to act as the customers agent in banking transactions and to exercise the same degree of care and skill in this regard as can be expected of a reasonable banker. 3) A bank acquires certain defenses vis a vis third parties in situations where the banks operations on behalf of its customer, such as the honoring and collection of cheques would otherwise expose the bank to claims e.g. conversion of a cheque. The Nature of the relationship between Banker and Customer It is a contractual relationship. The nature of this agreement is that an amount equal to that deposited has to be repaid by the bank. In respect of a current account the amount is repayable without interest or with minimal interest against the customers demand and the customer retains the right to draw on his funds by means of a cheque or other payment instructions. As with regards to a fixed deposit the savings amount usually is repaid with interest at a determined date or on call. The essence of the banker customer contract, is the banks right to use deposits for its own purposes and its undertaking is to repay an amount equal to that deposited with or without interest either on call or at a fixed time. The House of Lords in Foley v Hill 1848 2 HLC 28 HL held that the banker customer contract was fundamentally a contract between debtor/borrower and creditor. Lord Cottenham stated that when the account was in credit the banks duty was to repay to the principal when demanded a sum equivalent to that paid into his hands. The obligation of the bank to repay the debt exists only when the demand is made per Joachimson v Swiss Bank Cooperation 1921 KB 110 CA. the fundamental banker customer relationship is not based on agency, trust or bailment. Though, this may be the situation in particular contracts in the broad relationship. (ladbrooke) Opening of the account is crucial (commissioner of taxation). There are different types of contracts such as agreement to operate current and savings account, loan agreements letters of credit, safety deposit box, credit card. Deposit of funds without accounts does not constitute the relationship.

World Wise Partners Ltd v Rbbt and NCB v Olint 2009 Confidentiality The secrecy of officials is mandated by statute with criminal sanctions. Do not divulge information except in any of the circumstances specified in the 34 (d) schedule Bank of Jamaican Act, section 85,the 8th schedule of the Building societies act, Section 13 credit Reporting Act. February 4, 2013 The action that a demand for repayment must be made at the branch where the account is held, does not operate according to that. In Damayanti Kantilal Dashi v Indian Bank [1999] 2 SLR 306 the Syngapore Court of Appeal suggested that it was obsolete for customers to make demand at the branch at which the account was held, especially where technological developments are occurring. The matter of the demand being made in writing was left open in However, in modern banking the trend is for banks to dispense with such writing; relying instead on other security devices such as passwords and codes. In Morrell v Workers Savings and Loan Bank Uk pc judicial support was given to the modern practice of acting upon a customers oral instructions. The fact that a bank impliedly promises to repay any amount against the written order, from the customer addressed to the bank at the branch, does not exclude the possibility of an oral order. If a bank is wound up or the account is closed, the customers credit balance becomes payable. The Confidential Nature of the Contract This arises from the fact that the banker customer relationship includes elements of an agency relationship. The general rule is that an agent owes a duty of loyalty and confidentiality to his principal; but that duty varies depending on the type of agent involved. For e.g. the confidentiality expected of the attorney-at-law client relationship is much higher than that expected in other relationships. The connection between the banks duty of confidentiality on one hand and other types of agency relationships, involving the provision of highly personal services on the other was emphasized by Diplock LJ in Parry Jones v Law Society such a duty of secrecy exists not only between solicitor and client but for e.g between banker and customer, doctor and patient, accountant and client. Such a duty of confidence is subject to and overridden by the duty of any party to that contract to comply with the law of the land. It is the duty of such a party to a contract to disclose in defined circumstances, confidential information then he or she must do so. Any express contract to the contrary would be illegal and void.

From the perspective of the agent, the existence of a duty of confidentiality allows him (the agent) to retain others in his business confident that such a duty will protect him from unnecessary external attempts to ascertain knowledge of his affairs, or to obtain his trade secrets. This facilitates his entry into an extremely competitive kind of business which he would not have otherwise entered. In addition the agent is well aware that there exists professions that could not be carried on at all or at least not successfully should the person undertaking the confidential work, not being able to reassure those instructing him not only of his own personal discretion but also that he cannot generally be compelled to disclose confidential information. An attorney-at-law cannot represent his interests effectively unless the client is able to discuss his matters openly. This justifies the duty of confidentiality in the banker/customer relationship. Persons are encouraged to enter into a banking relationship since they can conduct their financial dealings with the bank in private away from his family and or his commercial competitors, as the services offered by the bank facilitates the customer being willing to provide the bank with detailed information of his financial affairs if this is done on a confidential basis. However the banks duty of confidentiality may at times be superseded by matters of state which are considered to be of greater importance. Presently the banks duty of confidentiality is in the form of a term implied into the banker customer contract. Suggestions have been made that this principle should be codified. This course has been adopted in Austria, Singapore whose legislation was described as providing a more comprehensive regime in relation to bank confidentiality than the previous common law principles. Read Banking act Financial services act Terrorism prevention act Insurance act Proceeds of crime act Money lending act February 11, 2013 The Banks responsibility as Fiduciary As its customers agent a bank has a duty to adhere strictly to the customers mandate. Similarly the customer owes his bank a duty as in agent principal relationship to issue clear and unambiguous instructions, to draw cheques with

reasonable care, and to inform the bank of his knowledge relating to fraud on the account. Apart from the banks core duty to obey its customers instructions the execution of its customers payment instructions or the performance of other incidental banking services for him, may lead to the imposition of other duties or forms of liability on the bank. These services may include: A bank may become a fiduciary owing its customer the core fiduciary duties of loyalty and fidelity. A bank attracts fiduciary duties arising from its proximate relationship with a given customer whether by actually assuming the role of a fiduciary or by knowingly dealing with a customer in circumstances that have induced the customer to regard the bank as having assumed such a role. The validity of mortgages1 or guarantees granted in non commercial settings is determined by asking whether the bank exercised undue influence or committed some other legal or equitable wrong against the surety or more usually, whether the bank had notice of such wrong doing by third party vis--vis the surety. A bank owes its customer concurrent common law and contractual duties to exercise reasonable care when providing banking services or products. In those rare circumstances where a bank becomes a fiduciary the bank will owe its customer an equitable duty to take care. In the case Bristol & West Building Society v Matthew [1998] Ch 1 CA Miller LJ clearly distinguished this duty from the so called fiduciary duties. Unlike the equitable duty of care fiduciary duties are prescriptive in nature in that they tell the fiduciary what he must not do, not what he ought to do and they attract remedies that are primarily restitutionary or restorative rather than compensatory. The distinguishing obligation of a fiduciary is the obligation of loyalty. Breach of fiduciary obligation therefore connotes infidelity or disloyalty. Mere incompetence is not enough. In Bristol there was a claim by a building society against a solicitor who had been engaged to report whether a purchaser to whom the societies had advance monies for the acquisition of a property had incurred further borrowings to acquire the house . The solicitor acted for both parties and failed to advise the building society that the purchaser had obtained a second mortgage on the property. When the borrower defaulted on the loan the building society enforced the mortgage, but suffered a shortfall which it sought to recover from the solicitor interalia on the grounds of breach of fiduciary duty. The Court of Appeal held that whilst the solicitors negligent oversight of the transaction rendered him liable to the society for breach of contract, there was no breach of fiduciary duty. The building society had authorized the solicitor to act both for itself and the purchaser despite their potentially conflicting interest. The solicitor

had served each principal loyally and faithfully and avoided any actual conflict between the duties owed to each principal. According to millet LJ a fiduciary is someone who has undertaken to act for an on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The principal is entitled to the single minded loyalty of the fiduciary. Hence a fiduciary must act in good faith, he must not make a profit out of his trust, and he must not place himself in a position where his duty and his interests may conflict. He may not act for his own benefit or the benefit of a third person without the informed consent of his principal. Beyond the duties of skill and care banks do not generally owe their customers the fiduciary duties of loyalty and fidelity. The courts do not impose fiduciary duties on banks towards their commercial customers and this reluctance has also been extended to personal customers who might be considered to be more vulnerable when dealing with a bank. Undue Influence In the Uk in the cases of actual undue influence the claimant had to prove affirmatively that the wrong doer had exerted undue influence over the complainant to enter into the impugned transaction. The juridical nature of undue influence has engendered considerable debate. One view is that the equitable doctrine of undue influence looks to the lack of good conscience on the part of the person exercising the influence and the wrongful exploitation of his counter party. See National Commercial Bank Jamaica Ltd. v. Hew UK PC 51 February 18, 2013 Duty of Care in Contract A customer may try to recover his loses from the bank by pleading the breach of an implied term, in the banker customer contract to exercise reasonable care and skill. This implication arises either at common law or by virtue of the relevant of Jamaica. In Selangor United Rubber Estates Ltd. v Cradock No. 3 1968 1 WLR 1555 Ungoed-Thomas J put forward the general principle concerning a banks duty of care to its customers: A bank has a duty under its contract with its customer to exercise reasonable care and skill in carrying out its part with regard to operations within its contract with its customer. The standard of that reasonab8le care and skill is an objective standard applicable to bankers.

 Whether or not the standard has been attained in any particular case, will be decided on the relevant facts which can vary greatly. The relevant considerations include the prima facie assumption that men are honest. The practice of bankers, the very limited time in which banks have to decide what course to take with regard to a cheque presented for payment, without risking liability for delay and the extent which an operation is unusual or out of the ordinary course of business. If reasonable care and skill is brought to the consideration of such an operation, there is no need for any intervention by the bank. Any intervention required in the exercise of reasonable care and skill again depends on the circumstances. Where it is to enquire then failure to do so is not excused by the conviction that enquiry would be futile or that the answer would be false. The relevant principles in Selangor were restated by the court of appeal in Lipkin Gorman v Karpale & Co 1989 1 WLR 1340 CA which like Selangor claimed that the bank was negligent. In respect of the banks alleged breach of its duty of care May LJ said that conceptually the reasonable banker test propounded in Selangor imposed too stringent a duty on banks. Courts should not be too ready to hold that a bank had acted in breach of its duty of care, when it has honored without question a cheque drawn within the authority of its customers agent. Accordingly, a bank would only have acted negligently in paying a cheque if any reasonable teller would hesitate, to pay the cheque without first referring it to a superior, who in turn would hesitate to honor the instrument without making further enquiry. For example if the cheque appears to be signed by the account holder and there is no reason to question the genuine-ness of the signature, then there will be nothing on the face of the instrument indicating fraud. However, a bank is not entitled to ignore clear evidence of fraud being perpetrated on a customer. Parker LJ held that there are certain unusual cases when a bank would be put on enquiry and when its failure to investigate circumstances further would constitute a breach of its duty of care. The test applied in Selangor is whether, if a reasonable and honest banker knew of the relevant facts he would have considered that there was a serious or real possibility albeit not amounting to a probability that its customer was being defrauded. Banks could neither be expected to review accounts on a periodic or continued basis, nor to assume a suspicious attitude towards its customers. Therefore their Lordships approach is justified; both in terms of protecting banks from potentially endless litigation given the number of transactions with which they are involved and also requiring customers to safe guard their own interest

rather than relying upon the bank to do so at least when undertaking straight forward banking transactions. The proposition in Lipkin Gorman is that a bank does not owe its customer any particular duty of care in respect of ordinary payment transactions carried out by the authorized signatory on the customers account. However this blanket proposition might need some modification in light of the banks extensive obligations under the Anti-Money Laundering Legislation. The courts are reluctant to impose a contractual or common law duty of care not limited to the provision of ordinary banking services or products. This applies to banking products that are particularly risky, sophisticated or unusual where a bank provides its customer with financing that he uses for speculative dealings or to enter into risky transactions (such as ponzi schemes) and the customer subsequently complains that its losses result from the banks failure to warn him of a particular risk or particular market conditions. The speculative or risky nature of such transactions usually makes it difficult to predict whether they are likely to have a positive outcome for the investor. Accordingly this militates against requiring banks to provide advice in relation to such investments and against allowing a customer to argue that he was reasonably entitled to rely on the banks guidance. A bank may however be liable for misrepresentations regarding the nature of the banking facilities, provided to a customer or regarding the risks associated with a particular banking product sold to him. As with fiduciary duties the general principle is that a bank does not ordinarily owe its customers any general duty to furnish careful advice on business or banking transactions unless such advice is specifically requested and the bank specifically undertakes to provide it. The difficulty lies in identifying those circumstances in which a bank may be taken, to have crossed the line and assumed an advisory role with the attendant duties see J P Morgan Chase Bank v Springwell Navigation Corporation 2008 EWHC 1186. In Springwell the defendant bank had never specifically undertaken to provide advisory services to the claimant. However, the issue arose as to whether the bank nevertheless owed a common law duty to provide the claimant with whatever advice was necessary to ensure that his investment portfolio was suitably diversified. There are four factors that a court can give weight to when determining the existence of a duty to advise; A court should assess the customers degree of commercial sophistication and financial acumen. In Springwell Gloster J considered the customer to be a highly sophisticated investor and was a material factor in denying the existence of any duty to advise. A court should examine the extent to which a bank has held itself out as offering advisory services or a as a financial expert whether orally

in its contractual documentation, or in promotional literature. In Springwell the absence of a formal agreement for the provision inter alia for advisory services militated against the existence of a common law duty to advise. A court should treat as relevant the status and role within the bank of any individual with whom the customer deals and the capacity in which that person tenders any alleged advice. In Springwell Gloster J drew a distinction between an investment advisor properly so called and a bonds sales man. Even in circumstances where the bank might otherwise have crossed the line to become a financial advisor, a court must consider the possibility that the terms of the parties contractual relationship may operate to negate the existence of any implied or concurrent duty of care. In Springwell Gloster J held that the contractual documentation showed that the parties specifically contracted upon the basis of a trading and banking relationship which negated any possibility of a general or specific advisory duty coming into existence. March 11, 2013 Banks and Finance Lending Lending is one of the services provided by banks. In order to obtain a loan from the bank customers must satisfy some requirements. These requirements include proof of earning, collateral, proof of address, TRN and a valid identification. You must execute the right documents. Loans may be had in Jamaican or foreign currency. Types of loans -Consumer loans, Mortgage, Commercial loans, Cash secured loans The bank has to satisfy itself of the viability of the loan application made by the proposed borrower. In reviewing the loan application, the aim of the bank is to avoid speculative transactions. Therefore they consider the financial soundness of both the venture and the borrower; the profitability of the transaction; its legality and its regularity. In respect of commercial loans the bank will not lend if it has any doubt about either the mandate or bona fides of the corporate officers, who are applying for a loan on behalf of the company or the companys capacity to borrow. Usually the directors negotiate for loans on behalf of the company. They have to pass the fit

and proper test under the FSC loan. They also need to present a guarantee. The main concern with regards to business loans is the borrowers cash flow and source of repayments. The conditions precedent must be satisfied prior to the borrower accessing any draw down of the funds. The corporate borrower must provide inter alia the articles of incorporation, a copy of the minutes showing the resolution to sign for the loan. As a general rule a bank owes no duty to its customer to give advice on the soundness of the transaction for which the customer requires the loan or overdraft. In Williams and Glyns Bank Ltd. v. Barnes [1981] Com. LR 205 the claimant an experienced business man and a customer of the defendant bank, personally borrowed money to invest in his company. The company was also a customer of the bank to which it was heavily indebted. The company collapsed and the bank called in the personal loan. The claimant argued that the bank owed a duty to have warned him that this supposed investment was unsound. Rejecting this argument, Ralph-Gibson J said no duty in law arises upon the bank to consider the prudence of the lending from the customers point of view or to advise with reference to it. Such a duty could arise only by contract. In the absence of an expressed contractual undertaking to advise the borrower, such a duty is unlikely to be implied in a loan contract. Lord Millet National Commercial Bank Jamaica Ltd. v Hew [2003] Uk PC said that the viability of a transaction may depend on the vantage point from which it is viewed. What is a viable loan may not be a viable borrowing. This is one reason why a borrower is not entitled to rely on the fact that the lender has to chosen to lend him money as evidence still less as advice that the lender thinks that the purpose for which the borrower intends to use it is sound. In bank lending a bank is said to have security where it has proprietary or possessory rights in its customers or a third partys property that it may exercise in order to enforce repayment of the loan. Although banks often require some form of insurance as a precondition of mortgage lending this is usually done in the banks own commercial best interest and should not translate into any general duty to advise borrowers to take up insurance or to take any particular step to safe guard their position in the event of death, incapacity or unemployment. March 18, 2013 The Banking Collapse of the mid 1990s The financial institutions in Jamaica were Jamaicanized in the 1960s and 70s. There were no new regulatory structures at that time and as new managers

took over the old rules were soon abandoned. Changing market conditions in the 1980s saw the divestment of the state owned National Commercial Bank, the opening up of the country to foreign capital and a rapid proliferation of new financial institutions (building societies, trust companies). These new financial institutions were run by staff members who were unaware of the need for proper risk management. The stock market was booming at that time and expansionary government policies and the issuing of high interest debt securities and although there was increase profitability it masked inherent weaknesses in Jamaicas financial sector. High inflation encouraged the over valuation of real assets, especially real property which often served as a guarantee for bank loans. In the 70s people were able t purchase a cherry gardens home for 35000. At the beginning of the 90s persons could no longer do this. The high inflation subsequently caused the government of Jamaica to take anti inflationary measures that least exposed the sectors fundamental instability. Against this background in mid 1996 there arose a severe liquidity and solvency crisis. In several large companies in Jamaicas insurance sector the companies approached the government for assistance. The Crisis was not confined to insurance companies only, the banking industry was also ailing. This was due to some extent because the insurance and banking sectors had over the preceding years, become inextricably interconnected. Complexly structured conglomerates owned multiple financial institutions as well as all types of other non financial businesses. Banks, insurance companies and other enterprises were all linked together in a web of related party transactions. In the early 1990s symptoms of a possible collapse of Jamaicas financial system began to show. In December 1992 new legislation was enacted to strengthen and re-structure the countrys banking and insurance industries. The next five years saw the government of Jamaica assuming management or control of a number of failed financial institutions including Blaize, Century National Bank and Eagle Financial Entities. Blaize was put under temporary management of the minister of finance and planning in December 1994. After investigations uncovered substantial irregularities in the management of the institution. In 1995 Century National Bank ran into problems, it was subsequently put under temporary management in 1996 and eventually closed. During 1996 a group of CEOs of life insurance companies, approached the government for help with what they described as liquidity problems. Preliminary analysis revealed that there was a mismatch of the assets and liabilities but was in fact a problem of insolvency of varying degrees. Even more significantly it became clear that the difficulties affecting the insurance sector had contaminated the banking sector given their

connection under the group umbrella, through inter-company lending as one cash rich company advanced funds to another in the group which was short of cash. By late 1996 the government recognized that the whole indigenous financial system, had reached a state of considerable distress. So that the investments of Jamaican depositors policy holders and pensioners therefore urgent action needed to be taken. In 1995 when the Century National Bank was closed many Jamaicans for the first times in their lives could not access their funds and for the first time questions were raised about the security of money in all banks. By 199697 rumors of insolvency triggered from two banks. Confidence in the banking sector was at an all time low and many considered whole sale panic a real possibility. The views in 1997 revealed several factors contributing to the sectors turmoil. Internal Factors Absence of or failure to comply with proper internal control procedures. The troubled banks showed a high incidence of fraud and irregularities, indicating weaker controls. Poor risk management and inadequate portfolio diversifications. This resulted in i) a high ratio of bad loans ii) poor portfolio diversification as evidenced by unacceptably high exposure to single borrowers and other industries. To further compound the situation, where portfolio diversification occurred it was into areas where they had low competencies. (NCB managing an orange farm) High and increasing levels of non-performing assets. Due to inadequate investment assessment and monitoring there were increasing levels of non0performing assets. By not matching the maturity of assets to liabilities banks became vulnerable to movement in asset crisis, interest rates and exchange rates. For example banks used short term deposits to invest in long term investments like real estate. High operating costs. The troubled institutions were inefficient requiring large spreads between lending and deposit rates. Whereas the spread were 14-15% in 1992 they increased to 21-22% in 1995-97. Owners of large operating banks have said that larger spreads are needed to compensate for

the higher reserve requirements. Which average about 48% of deposit liabilities compared to half this percentage in Guyana and Trinidad and 39% in Barbados between 1993 an1997. The Larger spreads pushed up spreads and in some instances no doubt compounded customers indebtedness and inability to pay thereby contributing to bad debts. The high spreads continued with a recent World Bank study of a hundred and thirty two countries ranking Jamaicas interest rate spread of 19.1% in 1998 as the seventh highest in the world. Poor Quality of Management and Strategic Planning Domestic banks had negative return on assets compared with positive although slightly declining return on assets of 2% - 3.5% in the case of foreign banks in Jamaica. Failure to exercise due diligence and care Financial institutions operated without sound corporate governance practices and with limited involvement of their boards of directors. Unusually High Appetite for Risk Most local financial sector entrepreneurs, have been cited as been too quick to risk depositors funds, too competitive with each other to exhibit the trappings of success hence the edifice complex and too prone to bend prudential norms regulations A high incidence of connected party lending for example when depositors began to withdraw funds placed in lump sum, intra sensitive policies, insurance companies tapped into their affiliated banks for funds to meet withdrawal demands. Thus, weakening the banks when the insurance companies were unable to repay these loans. Breach of fiduciary duty and fraud. Several files have been turned over to the DPP indicating forensic evidence of fraud and breach of fiduciary duty among other crimes.

Macro-Level Contributory Factors At the macro level over view sector studies have shown regulatory weakness among the important contributory factors to the crises. With the move away from director controls, to a system of rules and supervision in the early 90s the three main statutes governing the financial sector were amended in 1992. These statutes are the Bank of Jamaica Act, The Banking Act and the Financial Institutions Act. The Bank of Jamaica Act was amended to make monetary policy more effective, regulate the management of foreign exchange and to give statutory recognition to the Bank of Jamaicas department of bank inspection. However, while the legislation was timely, institutional strengthening and the supervisory agencies was not yet in place. By 1997 new legislation was put in place to stem the imprudent practices that the financial sectors crises had unearthed and to provide stiffer penalties for infringement. Consequently the situation had already become a crisis, and the deterioration could not be stemmed. The deposit insurance which would have placed the cap on sums recovered, and lessen the cost of FINSAC intervention to tax payers did not come on stream until 1998. By which time all indigenous banks had failed or were in sever difficulties. The Banking Act and the Financial Institutions Act provided for: stricter licensing of banks; minimum levels of capital; stricter prudential controls; provisioning for loan losses; strengthening of supervision and regulation and mechanisms for identifying and punishing the culpable in troubled institutions. The amendments also enhanced the power of the Minister of Finance to intervene in troubled institutions. The Financial Sector Adjustment Company Limited (FINSAC) To rescue the sector and to provide a solid foundation for return to a healthy financial environment an important new government body was formed. FINSAC Ltd was established by the Government of Jamaica January 29, 1997 with a mandate to restore stability to Jamaicas financial institutions. It was similar in mission to the Resolution Trust Company which was set up by the USA government to deal with the savings and loan crises in 1989.

FINSACs Objectives To restore liquidity and solvency to distressed institutions. To strengthen the financial management of institutions To improve the efficiency of the sector in mobilizing and allocating financial resources i.e. effectively marshal savings for on-lending to the productive sector. To create an attractive environment for investors to re-capitalize financial institutions. The Asset Management and Divestment Division This division was established in September 1998 and had a specific charter to: Speedily dispose of assets acquired through the Government of Jamaicas intervention in the financial sector. Rehabilitate non performing loans acquired by FINSAC. Oversee the divestment process by intervened institutions which undertake their own disposal of assets. Efficiently manage and maintain until the sale all such assets. Divestment of the assets transferred to Financial Institutions Services Ltd from Government control of the Blaze Companies Ltd. 1994 and the Century financial entities 1996. FINSACs Duties To accommodate efficient handling of assets the division is further structured into two distinct units: the loan recovery unit and the asset disposal unit. On February 7 1997 the prime minister announced in parliament that government would guarantee depositors funds in licensed deposit taking institutions, pension funds managed by authorized institutions and policy holders funds in insurance companies. The result of that commitment is that the man in the street stepped back from the edge of panic even with new revelations with banks in crises. At the end of the interventions over two million depositors and over five hundred thousand policy holders funds had been secured in failed banks and insurance companies. The melt down cost the Government 120 billion dollars representing 66% of GDP in 1998. The next highest bail out cost was Japan at 25%. Under performing loans have increased 46.3% as at September 2011 and non performing loans overall in 2011 amounted to 28.9 billion dollars.