Overview of the Legislation governing Banking and Financial Services Industry and Role of Regulators
1. Provide an overview of the legislation that governs the Banking and Financial Services Industry and discuss the role of the various regulators such as ASIC and APRA and RBA. How effective have they been especially given the recent events in the Royal Commission into the Banking Sector?
2. Discuss the Bank and Customer relationship and comment on the importance of this relationship for the proper maintenance of integrity in the Banking Sector?
3. Discuss the importance of the duties that are owed by the various parties to a banking transaction?
4. What are the various types of payment systems and why they are important for the stability of the banking system?
5. Describe the various types of lending and discuss the importance of regulation in relation to such types of lending practices?
The banking industry in Australia is governed by the Banking Act 1959 and the financial services industry is governed by Corporations Act 2001. Such legislation regulates the business of banking by providing a legal framework. Such legislation results in the involvement of banks in the payment systems of Australia. The regulators such as ASIC, APRA and RBA play an important role in the banking sector. ASIC is responsible for consumer protection and market integrity and is also concerned with the regulation of finance companies and investment banks. APRA bears the responsibility for the prudential supervision and licensing of Authorized Deposit- taking Institutions (ADIs), superannuation funds and general insurance companies. On the other hand, RBA is responsible for the performance of central banking functions including monitory policy and payment systems.
Effectiveness of Regulators in the Royal Commission into the Banking Sector-
Such legislation and the role of ASIC, APRA and RBA have proved to be of great importance given the recent events in the Royal Commission into the Banking Sector. ASIC or APRA have the power to conduct investigation, examine people on oath and require the production of documents. Under the Banking Act 1959, they had power to take action against the bad behavior of the banks. However, in the recent events such as billing the customers after their deaths for ongoing services by subsidiary of the Commonwealth bank, ASIC proved to be a hesitant and timid regulator which quickly accepted the assurances of regulated bodies.
There is a contractual relationship between the bank and customer. A variety of services are offered by a bank to the customers and therefore, the relationship between the customers and bank varies in accordance with the kind of service rendered by the bank. The general relationship between the customer and the banker is in relation of a debtor and creditor. This is due to the fact that the deposits of money are accepted by the bank from its customers for lending and investment and is liable for repaying it on demand according to the contract of deposit terms. Another relationship is that of trustee and beneficiary where items like documents and securities are accepted by bank from the customers for keeping it in the safe custody. When safe deposit lockers are hired by the customers from the bank, the relationship of a lessor and lessee arises between the customers. The relationship between customer and the bank is that of the agent and principal when bills, cheques and other instruments are collected by bank for the customers. Moreover, the relationship converted in that of a bailor and bailee when some goods are delivered to the bank (bailee) by the customers (bailor) and are to be returned back after a specified time.
Effectiveness of Regulators in the Royal Commission into the Banking Sector
Importance of Relationship for maintain Integrity in the Banking Sector-
The relationship between bank and customers is important for the maintenance of integrity in the banking sector. Such relationship cannot be expressed in terms of contract but are completely dependent on trust and integrity. It is not only a bilateral relationship between the parties but is considered to be an activity caused by coordination among several parties. Integrity in the banking sector is maintained due to the fact that the same activities will result in high transaction costs if transaction is made with some other party. So many functions are performed by bank for the benefit of the customers which cannot be performed by others with so much integrity. The different roles performed by the bank also involve an intermediation role, the achievement of which is not possible without contracting with a bank. The safety and security of money, securities, documents, etc. is contracted by banks which maintain integrity of the customers in the banking sector.
There are a number of parties to a banking transaction depending upon the nature of transaction. For example, in case of credit card transaction, the parties involved are cardholder, car-issuing bank, merchant, acquiring bank, independent sales organization, credit card association, transaction network and affinity partner. Similarly, in a normal banking transaction where money is deposited in the bank account, the main parties are the bank and customer. However, there are other parties such as bank teller, customer service representatives, etc.
The parties involved in the banking transaction also have some duties. Such duties are of equal importance in a banking transaction as they create obligations on part of the party. The party is also required to take due care at the time of drawing cheques so that it does not result in forgery or misleading of bank. Parties are also responsible for notifying the bank regarding the known misuse and forgeries in the account. This is important as the bank cannot be held responsible in cases where the party already has some knowledge regarding some unauthorized activity. The banker plays an essential role in the success of the banks and is responsible for sales and administrative duties. They play the role of providing essential information to the clients regarding savings and investments. Their role is important as they bear the responsibility of creating awareness among the customers regarding the schemes and products offered by the bank. On the other hand, bank tellers are responsible for managing the financial transaction of the customers such as withdrawals, deposits, checking, money orders and transfer. Their duties may also include counting cash, paperwork, filling deposit slips, answering phones, managing ATM deposits and balancing accounts at the end of the day. The customer service representatives perform their duties by providing operational support to the customers, resolving their problems and selling the products of the bank. Their role is important because if the queries of the customers will not be resolved on time then the bank might lose the customers.
Relationship between Bank and Customer
Payment systems act as the medium for the transfer of funds between persons with the help of which the payment obligations of a payer is discharged to the beneficiary. Following are the different types of payment systems-
Large Value payment system- high value critical payments are processed by such systems. Speed, reliability and accuracy are offered by such systems and are regulated by the Central Banks such as SWIFT (Society for the Worldwide Interbank Financial Telecommunication).
Retail Payment System- such systems are mainly related with the settlement of obligations that arises from the buying of goods and services. The classification of retail systems is made as paper based payments, cash payments, card based payments and electronic payments and remittances. Further, the paper based payments involves cheques, demand drafts and payment orders. Credit cards and debit cards are included in the card based systems. Moreover, the electronic payment and remittances include electronic clearing services, electronic funds transfer, real time gross settlement, internet banking and mobile banking.
Importance of Payment Systems for maintaining Stability in the Banking Sector-
Such payment systems play an important role for maintaining stability in the banking sector. The banking sector stabilizes when the components of the financial system including payment systems, financial markets and banking institutions become resistant to economic shocks. The Payment System Board established within the Reserve Bank of Australia is authorized for the maintenance of stability and safety of payments system and is backed by robust regulatory powers. The regulators uphold the financial stability with the help of payments system by assessing the scale and nature of financial impact of any vital financial stress including the implications for financial markets. Payments systems are important for the smooth functioning of the economy. So many activities are underpinned by payment systems from paying the wages to people to assisting in the purchase of groceries. In other words, without a payment system, it is impossible to have effective competition, sustainability and innovation in the economy.
Following are the different types of lending:
Secured- in this type of lending, some asset is pledged by the borrower and includes mortgage against the mortgage of assets. If the borrower becomes unable to repay the loan, there is a legal right of the bank to repossess the property and recover the due amount.
Unsecured- this type of lending is not secured against the assets of the borrower. It involves personal loans, credit card debt, bank overdrafts, corporate bonds and peer-to-peer lending. The interest rates are applicable depending upon the borrower and lender.
Importance of Relationship for maintain Integrity in the Banking Sector
Demand- this type of lending is for a short term and do not have fixed dates for repayment. Floating interest rates are carried by such demand loans which vary in accordance with the prime lending rate or other contract terms.
Subsidized- this type of lending involves the reduction of interest by a hidden or explicit subsidy. No interest is accrued n such lending in case of college loans.
Concessional- this type of lending is made on more generous terms than the market loans either by grace period or through below-market interest rates or a combination both.
Importance of Regulation in Lending Practices-
Secured lending practices are regulated by ASIC and APRA. Other types of lending practices are not covered under the regulation are of ASIC and APRA. Registration and reporting requirements are required to be complied under the Financial Sector (Collection of Data) Act 2001. ASIC and APRA performs the important function of regulating the finance broking and consumer credit along with supervising the financial institutions. These regulators aim to maintain integrity in the market and protect the interest of the customers. It allows the level of satisfaction to the customers that there is no fraud in case of interest rates quoted by these regulators and will be maintained at the rates specified in the contracts.
References
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