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Banking Law Study Notes

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  • Course
  • Banking Law (LAW317)
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  • The University Of Liverpool (UoL)
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  • Banking Law

Scored 85% on this module. The study notes provide a complete set for exam preparation. They include information from lectures, textbooks, as well as academic commentary. There are also tips on how to tackle the exam question whether problem question or an essay question. The notes cover everything...

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  • July 10, 2020
  • 92
  • 2019/2020
  • Study guide

Subjects

  • classification of banks
  • bank of england
  • concept of money
  • global financial crisis
  • financial crisis
  • fina
  • legal nature of the bank account
  • bank customer relationship
  • financial crisis causes and responses

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  • The University of Liverpool (UoL)
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  • Banking Law (LAW317)
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BANKING LAW




Marija Sannikova

,THE CONCEPT OF MONEY AND THE LEGAL NATURE
OF THE BANK ACCOUNT
INTRODUCTION

- In this lecture, we will be looking at the legal nature of money. What is the legal position of that deposit made,
whose money is it, as far as the law is concerned?
- We will look at the legal nature of money: What is it that makes the money special? What are the legal
consequences, and why does it have value?
- Later on, in the module, we will look into other areas: legal nature of money; what is it that makes the bank of
England so powerful and special within the UK economy? Matt will cover the financial crisis; this will be a case
study of what went wrong in order to cause a global financial collapse? Then, we will look at banker/customer
relationship; legal duties that follow from opening a bank account; money laundering. The latter is one of the
biggest financial crimes and which gives governments and crime agencies special powers including powers of
disclosing what is otherwise confidential information under a banker/customer relationship. When we talk about
duties, one of the duties owed by a bank to a customer is a duty of confidentiality. But there is a huge exception to
it – money laundering.

OVERVIEW OF THE LECTURE

1. How we define money;
2. The legal nature of money;
3. Fiat currency and legal tender
4. The bank’s role as a depository
5. The bank’s role as a paymaster of accounts
6. The current account
When looking at the legal nature of money, in the reading you might come across what at one time applied to most
currencies across the world – the gold standard. Most currencies were once backed by gold. You could back then go
into the bank with e.g. 10£ and ask for this amount worth of gold. This is not possible anymore because most of the
money now is fiat currency. Money is no longer backed by gold. This is what raises a question today, what is it that
gives that 10£ note a value when it is not backed by gold anymore.
Then we will look at the role of the bank as a depository – what is it the bank is doing, what kind of responsibilities does
it undertake when it allows you to deposit the money with it? Then, having taken the money in, what kind of services
will it perform? These days, it is quite common for an individual to give instructions to your bank, and as your agent it
has to carry out those duties, instructions for you.
So, we will touch upon the role of the bank as a Paymaster. You will use those deposits to discharge debts you owe to a
third party but in most cases, we do not go to the bank and ask if you can have your 10,000 worth of cash please, I need
to pay X. What will happen is that you will probably do this electronically, you will not go to the bank branch, you will
simply give an electronic instruction. This is as much a mandate as you going to the bank branch and saying it 1-1.
Therefore, we will look at the bank’s role as a paymaster acting on your instruction. From that arrangement flow
various duties that we will look later.
Then we will look at the nature of the current account only to the extent of the legal implications. i.e. if you open a
current account what is the effect of that? What are the legal ramifications as far as your credit balance is concerned?




1

,HOW DO WE DEFINE MONEY?

• ‘The love of money is the root of all evil’ (1 Timothy, 6:10 (King James Bible)
• ‘Evil is the root of all money.’ (Kiyotaki and Moore, 2002)

WHAT IS MONEY?

• We use money every day – but ‘what is money?’
• Everyday understanding would be notes and coins.
• In many ways, this is the archetypal and most reliable payment system, since it is created, regulated and backed by
the state.
When you buy goods there is an exchange of goods for the money – consideration. Money facilitates the exchange of
goods and services in contracts and transactions. It is a reliable payment system, and the reason why we have
confidence in the piece of paper that states 10£ is because it is backed by the state, this is where the money gets its
value from. Governments and states recognize that this piece of paper as being a legal tender.


Moss v Hancock [1899]
• First attempt at defining money, Darling J:
“that which passes freely from hand to hand throughout the community in final discharge of debts and full
payment for commodities, being accepted equally without reference to the character or credit of the person who
offers it and without the intention of the person who receives it to consume it or apply it to any other use than in
turn tender it to others in discharge of debts or payment for commodities.”
Whoever has possession of the 10£ note, has that spending power, and facility to exchange it for goods and services.
From that follows a number of consequences. If you have possession, effectively you are the owner. Possession equates
ownership in this context, and you can pass the title by simply handing it over with intention to pass ownership. The
fact that the state recognizes this piece of paper having some value, gives it/allows the holder the power to exchange it
for goods and services e.g. to discharge debts.


Reference Re Alberta Statutes case [1938]
• Canadian case; Construes the definition more widely:
“any medium which, by practice, fulfils the function of money which everyone will accept in payment of a debt is
money.”
This is so, even though that medium may not be legal tender. What is it then, which serves to discharge debts, if the
state doesn’t accept that as legal tender? So, if someone offered a payment of money, they owe you, but they asked
whether I will take US dollars. This is not a legal tender in the UK. Are you bound to accept the payment in US$? No,
because it is not a legal tender in the UK.


Professor Friedman, ‘Money Mischief’
“whatever is generally accepted in exchange for goods and services – accepted not as an object to be consumed but as
an object that represents a temporary abode of purchasing power to be used for buying still other goods and services.”
So, what happens if a person doesn’t offer you 10£ but a watch? Is this a legal tender? You might accept in exchange
and in the settlement of the debt the person owes you, but it doesn’t make the watch a legal tender.
There is a difference between what the state recognizes as legal tender and what you might use to discharge debts by
contract. But it will not give the watch the requisite of legal tender.



2

, So, what can we take away from these attempts at definitions?
• Money allows the holder to manage and organize their affairs in the way best suited to him (it gives them
purchasing power), and often enhances (puts a holder in a stronger position) the negotiating power.
E.g. you can say either accept 20,000£ for this car or I will go elsewhere. The seller might think that he/she
doesn’t want to lose these 20,000£ and take it even though the car might be worth a little bit more. Because
20,000£ will mean to them more than sitting with the car for another period of time. so those who have
money have enhances negotiating power.
• However, this negotiating power only exists so long as what is being offered is recognised as legal tender,
recognised as means of settling debt and enabling performance of agreements. It allows the holder to alter his
legal position, because he can exchange that money for goods and services at the price agreed by him.
• It is only of power / use when society recognizes it as a means of regulating conduct and compelling performance
(or rather importance is placed on it);
• It enables the holder to alter their legal position by exchanging money for goods or services (not a new concept).
• As was said before the money notes are not backed by gold, so you cannot exchange it for anything of value. So
why is it that we have confidence that the 10£ note will give you power to buy goods and services. It is a circular
reasoning of confidence trick.
• All relies on confidence! It is all based on a promise by the Bank of England which is a government’s bank.
• And sometimes, when you lose confidence it will have an adverse effect. In the financial crisis we have seen banks
closing down because we lost confidence in the banking sector and the economy. That confidence trick brings in all
kind of factors: a stable financial system; stable economy and stable political system. All these factors affect the
confidence in money/legal tender.

WHAT ARE THE KEY FUNCTIONS OF MONEY?

It takes into account economic and legal aspects.
• A store of value – people can save it and use it later – smoothing their purchases over time.
• It is used as a unit of account – provide a common base for prices. It allows to put a value on things.
• Medium of exchange – something that people can use to buy and sell from one another.

MONEY AND ITS VALUE

• Originally determined by its alternate uses, and the fact there were replacement costs.
• We then moved to precious metals – seemed to serve all three of the roles of money described on last slide.
• At any point a customer could go into a bank and demand the relevant precious metal that backed the note.
• BoE removed the ’gold standard’ in 1931.
• For interesting discussion on the removal of the gold standard see:
http://www.telegraph.co.uk/finance/commodities/11330611/How-the-Bank-of-England-abandoned-the-gold-
standard.html
• Looking at the history of banking, this deposit facility started through traders, they would accept the gold from
people for safe keeping and gave you a piece of paper i.e. person X deposited 100£ worth of gold with me, which I
will refund whenever. It is a document you can pass from one person to another as a monetary value.
• Constituent elements of money are irrelevant, what is important is that money in the abstract is given certain legal
relevance. It represents certain rights recognised by the law.




3

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