Alan L Tyree

The business of banking

Alan L Tyree*

Abstract: Section 8 of the Banking Act 1959 prohibits a corporation from carrying on any banking business in Australia unless certain conditions are met. [emphasis added] This note discusses the legal meaning of “banking business” and of “any banking business”.

1  Background

Governments have always believed that banking is too important to leave to bankers. As a result, there have always been, and always will be, laws that regulate the business. On the other side of the same coin, bankers have always believed that government is too important to leave to the politicians and have never been reluctant to lobby for special legal treatment.

Regulation and special treatment both require a definition of “the business of banking”. For many years, this task was left to the judges in particular cases, but the 1989 rewrite of the Banking Act 1959 incorporated a definition of “banking business” in s 5.

The definition was almost immediately exposed as being inadequate. Regulations authorised by the Act have added several additional activities which are “banking business”. In addition, section 11 of the Act authorises APRA to determine that certain provisions of the Act do not apply to an individual or a corporation.

Section 7 of the Act prohibits non-corporations from carrying on “any banking business” unless subject to a s 11 determination. Section 8 prohibits non-ADI corporations from carrying on “any banking business” without a special determination.

There is concern about the meaning of “any” in these prohibitions. Does it mean “any part” of banking business or something else.

To understand the operation of these provisions, it is useful to have a brief review of both the judicial and statutory definitions.

2  Judicial definitions

The most important Australian case is Commissioners of the State Savings Bank of Victoria v Permewan Wright & Co Ltd (1914) 19 CLR 457. The Bank had collected misappropriated cheques, and the issue was whether it was entitled to the protection of the Bills of Exchange Act 1909, s 88. The High Court held that it was, although on the facts it failed to satisfy the requirements of s 88.

On the “business of banking” issue, Issacs J (at 470, 471) said:

The essential characteristics of the business of banking…may be described as the collection of money by receiving deposits on loan, repayable when and as expressly or impliedly agreed upon, and the utilisation of the money so collected by lending it again in such sums as are required

This is sometimes referred to as the “reservoir” definition. Note that there is no requirement for current accounts or for payment facilities. It is also interesting to note that Griffith CJ held that the Bank was not a “banker” since it did not allow funds to be drawn on by cheque nor did it collect cheques.

Permewan Wright was approved of and applied in Australian Independent Distributors Ltd v Winter (1964) 112 CLR 443 which is discussed below.

The next important case on the subject was Bank of Chettinad v Commissioner of Income Tax, Colombo [1948] AC 378, a taxation case.

On the “business of banking issue”, Lord Morton of Henryton, delivering the opinion of the Privy Council said (at 383):

Their Lordships think that the proper test for determining whether the Ceylon branch carried on the business of banking at the material time is to consider whether that branch, at that time, could fairly be described as “a company which carries on as its principal business the accepting of deposits of money on current account or otherwise, subject to withdrawal by cheque, draft or order.”

This definition is interesting since it omits any requirement of lending. The “withdrawal by cheque, draft of order” clearly contemplates a third-party payment facility.

The most important non-Australian case on the question of “banking business” is United Dominions Trust Ltd v Kirkwood [1966] 2 QB 431. The case concerned UDT suing the defendant indorser of a bill of exchange. The defence was that UDT was an unregistered moneylender. Indeed, Harman LJ (dissenting) summed up the issue (at 456):

The only point on this appeal, and indeed the only one in the court below, can be shortly stated in the form of question and answer: Q. When is a moneylender not a money-lender? A. When he is a banker.

Each member of the Court of Appeal remarked on the reputation of UDT as a banker, remarking that the Court should not lightly interfere with commercial judgment.

After reviewing the previous judicial definitions, including Permewan Wright, Denning MR (at 446) said:

The march of time has taken us far beyond those cases of 50 years ago. Money is now paid and received by cheque to such an extent that no person can be considered a banker unless he handles cheques as freely as cash.

His own, now famous, requirements were (at 447):

There are, therefore, two characteristics usually found in bankers today: (i) They accept money from, and collect cheques for, their customers and place them to their credit; (ii) They honour cheques or orders drawn on them by their customers when presented for payment and debit their customers accordingly. These two characteristics carry with them also a third, namely: (iii) They keep current accounts, or something of that nature, in their books in which the credits and debits are entered.

Diplock LJ agreed with these requirements. Harman LJ adopted the Bank of Chettinad definition, but then added (at 458) “ I think the collection of cheques is in English practice an additional requirement.”

3  Statutory definition

After many years of leaving the definition to the courts, the Banking Act effectively accepted the Isaacs J definition. Section 5 now provides:

banking business means:
  • a a business that consists of banking within the meaning of paragraph 51(xiii) of the Constitution; or
  • b a business that is carried on by a corporation to which paragraph 51(xx) of the Constitution applies and that consists, to any extent, of:
    • i both taking money on deposit (otherwise than as part-payment for identified goods or services) and making advances of money; or
    • ii other financial activities prescribed by the regulations for the purposes of this definition.

Note that the first part of the definition means that the Isaacs definition is not exhaustive.

The omission of any reference to payment mechanisms means that the definition is inadequate. This has been recognised implicitly by the addition of two additional prescribed financial activities.

The Banking Regulations 1966 now permit APRA to determine that the provision of certain “purchased payment facilities” (PPFs) is banking business: reg 3. The definition and concept of the PPF is defined in the Payment Systems (Regulation) Act 1998, s 9, and is itself deeply flawed: see Tyree (1999).

Regulation 4 provides that credit card acquiring and credit card issuing are banking business if the acquirer or issuer is a participant in a credit card scheme designated on 11 April 2001. The schemes so designated are Bankcard, Visa and MasterCard.

4  “Any” banking business

The prohibitions of s 7 and s 8 are against the carrying on of “any banking business”. The phrase is ambiguous. Is the carrying on of a business which accepts deposits included even if it doesn’t make any loans? Even worse, if a business provides loans but does not accept deposits carrying on “any banking business”?

There is some slight judicial support for the wide interpretation. In Re The Bottomgate Industrial Co-operative Society (1891) 65 LT (NS) 712 one of the issues was whether the society carried on banking business. Smith J said that it was not necessary to show that the Society carried on every part of a business carried on by some bankers. It was enough to show that the society carried on a principal part of the business of banking, namely, receiving money on deposit, allowing it to be repaid when the depositor desires and paying interest on the amounts standing on deposit.

The issue was addressed indirectly in Australian Prudential Regulation Authority v Siminton (No 6) [2007] FCA 1608. S had registered a business name under the Victorian legislation. The name was “Principality of Camside”. Shortly after, the Principality made a “Formal Declaration of War” against Australia. When Australian forces failed to respond, S, acting as “Governor – State of Sherwood HM Government of Camside” declared victory and ownership of Australia.

Following that minor skirmish, S got down to business. The Principality’s website announced the creation of Terra Nova Cache, “stage one” of its banking facilities. The description repeatedly referred to the new facility as a “bank”. Terra Nova Cache actually accepted deposits but, except for one short term facility, made no loans. It did, however, indicate it’s intention to make loans to its members. According to the information, a depositor became an “owner” of the bank.

Australia belatedly responded, but in the form of APRA rather than the expected defence forces. APRA sought an injunction under the powers given to it in s 65A(a).

S attempted to rely on the High Court decision in Australian Independent Distributors Ltd v Winter (1964) 112 CLR 443 where the court held that the society in question was not carrying on the business of banking. The lending power of the society was limited to making loans to its members for the purpose of acquiring land or buildings. In fact, none of the society’s money was used for making loans.

Tracey J dismissed the Winter defence, noting (at para 54) that the decision turned on the fact that the society had not loaned members funds to anybody. Not everyone agrees with this interpretation. Weaver et al. (2003) describe (at 1.1200, 1.5210 and 8.50) the grounds as being that the society’s power “was limited to the making of loans to its members”. On that ground, S would succeed since Terra Nova Cache proposed making loans only to its depositors/owners. Ellinger and Lomnicka (1994) attributes the decision to the fact that the society did not accept deposits from the public, but from members alone. He also suggests that the decision is wrong since it was as easy to join the society as it was to become a customer of a bank.

Tracey J therefore held that Terra Nova Cache was carrying on, or intended to carry on, the business of banking and issued injunctions accordingly. For our purposes, the important point to note is that Tracey J clearly felt that it was necessary to establish that Terra Nova Cache was engaging, or intended to engage, in conduct which satisfies both limbs of the Issacs test.

S appealed to the Full Court: Siminton v Australian Prudential Regulation Authority [2008] FCAFC 88. The Full Court noted that the single loan made to Technocash was sufficient to establish that Terra Nova Cache had engaged in banking business.

It is interesting to note that APRA invited the Full Court to limit Winter to its facts, arguing that the definition in the Banking Act did not require that full banking services be offered to the public. The Full Court held that it was not necessary to consider this submission in view of the actual loan made.

5  Conclusion

There would seem to be little support in Australia for the wide interpretation of “any business of banking”. It is not at all clear that the “any” serves a purpose, but perhaps it is there to catch foreign banks who wish to do just a part of their banking business in Australia.

The status of the Winter case is obviously precarious. APRA was clearly concerned in the Full Court that the interpretation given by the text book writers is the correct one. If that is the case, then it can only be concluded that the case was wrongly decided or, luckily, that it may be confined to its facts due to the happy accident that no loans were actually granted.

References

Ellinger and Lomnicka (1994)
E P Ellinger and E Lomnicka. Modern Banking Law, 2nd ed. Oxford University Press, 1994.
Tyree (1999)
Alan L Tyree. Regulating the payment system - part 4 - purchased payment facilities. JBFLP, 10 (4): 305–307, 1999.
Weaver et al. (2003)
George Weaver, C R Craigie, Gregory Burton, Prudence Weaver, Rena Sofroniou, and Alan L Tyree. The law relating to banker and customer in Australia. Thomson Lawbook Co, third edition, 2003.

*
Consultant; formerly Landerer Professor of Information Technology and Law, University of Sydney. The views expressed are those of the author and do not necessarily reflect the views of any other person or organisation.