Financial (as opposed to finance) is a considerably wider and more inclusive term and subject matter which encompasses anything relating to finance.[1] This consists of a number of other more specific areas of law including financial institutions, financial markets or sectors and domestic and international financial systems as a whole. Financial law subsumes finance law as the law of financial instruments and claims and the law of money, credit and payment. This includes financial regulation, which is necessary to constrain financial risk and contain financial crisis (and financial scandals or bubbles) and maintain financial stability more generally,[2] as well as the law of financial remedies and recovery.[3] It can also be considered in terms of specific geographic sub-divisions of European Financial Law or International Financial Law and Monetary Law.

 

(1)      Financial Law

 

While the law of finance deals with the law of specific financial assets and claims directly, financial law is concerned with the structure and operation of the financial markets and financial systems within which assets and claims exist. It considers the use and application of financial rights and the effects of creating, exercising or discharging financial instruments as well as the larger context or environment within which financial assets are held and applied. It is concerned with the public effects of the exercise of private rights of action on how to manage these in the wider public interest. Financial law can be considered to include the oversight and control of financial markets or sectors more generally as well as individual markets such as specific stock markets and exchanges. This can consequently include a number of as different aspects of governance and control such as with regard to market entry (and exit), structure and operation, market conduct, common market functions (including as initial price disclosure, dealing or trading, clearing and settlement[4]) as well as oversight, sanction or enforcement and dispute settlement.

 

(2)      Financial Regulation

 

Financial law also includes financial regulation.[5] This arises due to the significant amount of financial risk and instability that is inherent in finance, financial transactions and financial markets. All forms of finance or financial activity generate risk. This is principally concerned with either the loss in value of a financial asset or failure to make payment under a financial obligation. The main categories of risk can be considered in terms of direct financial risks, legal risk and other operational, business or environmental risks.[6]

 

The objective of financial regulation is to ensure that necessary mechanisms are put in place to identify, measure and manage or contain these exposures. This is most commonly secured by imposing a series of financial (intermediary) rules, conduct (or counterparty) rules and market (or systems) rules.[7] The underlying objective is to allow financial institutions to operate and assume risk but to ensure that any loss is only private loss and assumed and borne by the parties to the specific transaction. The corollary of this is that public liability and public costs or loss are limited. Official intervention should only be required in an extreme situation where the stability of the markets or the market system more generally is threatened. This distinction between private and public cost or loss corresponds with the new focus on micro and macro regulation or micro and macro-prudential regulation after the global financial crisis. Modern financial regulation can generally be considered to be based on risk management, prudential regulation, resolution, support and wider Macro-prudential oversight.[8]

 

While regulations inevitably impose additional costs and obligations on financial firms, this is considered necessary in light of the additional exposures (or externalities) that arise in market operations. Some form of limited official intervention is then considered justified to ensure that markets operate in an efficient and effective manner and that no abuse or other unintended consequences arise.

 

(3)     European Financial Law

 

European financial law can either be considered to form a sub-part of international financial law (or regional financial law) or constitute a separate area of law in light of its separate and distinct institutional and legal infrastructure and substantive law basis.[9] The significance of European from a financial perspective is that it had to deal with the problem of creating a single internal market in financial services but with supervisory and regulatory control being dealt with on a national Member State basis.[10] Having attempted to adopt an earlier full harmonisation approach during the 1960s and 1970s, the European Commission constructive are new approach based on mutual recognition during the 1980s.[11] This involved the mutual recognition or validation of national licences with the creation of a single passport system, the imposition of common minimum standards and continuing home country control.[12]

 

The Commission’s new Mutual Recognition based approach was used to support its 1992 Single Market Programme which was set out in its 1985 White Paper with a number of treaty amendments being brought into effect under the 1986 Single Act.[13] This facilitated the adoption of a number of financial directives, including the Second Banking Directive (SBD), Own Funds Directive (OFD) and Solvency Ratio Directive (SRD) in 1989.[14] While these were of value in establishing a basic common regulatory infrastructure in the financial area across Europe, a number of significant differences and inconsistencies arose.[15] The doctrine of Mutual Recognition had then to be supported by a new principle of ‘Regulatory Equivalence’.[16] This has since been implemented with the preparation of a new common European Rule Book following the establishment of new financial institutional committees at the beginning of 2011.[17]

 

The significance of these developments is that the EU is now working towards the creation of a number of separate financial Rule Books in each of the key sector areas involved. This is supported by the new macro-prudential oversight regime set up under the ESRB with all of the new European agencies working together within the new ESFS. While a number of the regulatory standards adopted emanate from other international committees and bodies, Europe is in the process of constructing a substantial body of independent financial law which will be implemented through the new considerably enhanced integrated supervisory regime set up following the global and European financial crisis.

 

(4)     International Economic Law and International Monetary Law

 

International Economic Law is concerned with economic relations between countries and the laws governing the cross-border relations between private parties. International Economic Law can be considered to subsume International Trade Law, International Business Law and International Dispute Resolution as well as the Law of Regional Integration and International Development. It accordingly consists of both private and public aspects of economic.

 

International Monetary Law can either be considered to form part of International Economic Law or a separate part of International Financial Law more generally. While International Economic Law is more trade and transaction specific, International Monetary Law is concerned with the monetary relations between states and the stable and efficient operation of the international financial system more generally.[18] This will include what has not traditionally been referred to as the International Law of Money.[19] This will also include the law governing cross-border payment as this involves the exchange of one national monetary unit for another.[20]

 

International Monetary Law can be considered to include the role and function of International Financial Institutions (IFIs), such as the International Monetary Fund (IMF), the World Bank and Regional Development Banks (RDBs), where this involves financial or monetary issues although other aspects of this, such as reconstruction and development, will fall within International Economic Law more generally. As International Financial Institutions have become considerably more powerful and dominant in the post-war period and as they have the only treaty basis and are often involved with both monetary and non-monetary matters, the Law of IFIs may be treated as another separate area of International Financial Law more generally.

 

(5)     International Financial Law

 

International Financial Law is a collective term for all laws, regulations or other measures and formal or informal arrangements governing the structure and operation of the international financial system within which finance and financial markets operate. International financial law forms part of Public International Law. The principal sources of the Public International Law are International Treaties and Conventions, International Customary Law and certain general principles of law recognised by civilised nations.[21] While Public International Law is not directly concerned with national Parliamentary enactments as such, these may form part of International Financial Law more specifically where they impinge on cross-border financial transaction, conduct or relations. The traditional sources of Public International Law consist of.[22]

 

International Financial Law includes both International Economic Law and International Monetary Law as well as the Law of International Financial Institutions and Private International Law.[23] This will also include Private International Financial Law which concerned with the determination of relevant law and jurisdiction to determine disputes between private parties or government agencies dealing with private parties in cross-border transactions.[24] Private International Law difficulties arise where monetary obligations provide for payment in a foreign currency. As this essentially involves the determination of the allocation of domestic laws and domestic responsibility, this is not strictly an aspect of International Economic Law but can be considered to for, part of International Financial Law more generally as this includes both private and public issues. Specific issues arise under Private International Law with three separate legal systems being involved with the proper law of the money obligation (Lex Causae), the law of the currency (Lex Monetae), and the examining jurisdiction (Lex Fori).[25]

 

International Financial Law can also be considered to incorporate the Law of International Finance which relates to all of the more specific types of transaction that can be used in international lending, investment, financing, hedging or purchase transactions. This is principally based on domestic contract law. In light of the wholesale and unregulated nature of these markets, market participants have prepared various sets of the standard documentation through trade associations which set out common standards and agreed best practice in many areas. These include the term and syndicated loan documentation prepared by the Loan Markets Association (LMA), the securities documentation issued by the International Capital Markets Association (ISMA) and the master agreements prepared by the International Swaps and Derivatives Association (ISDA).[26] Local legal opinions are taken from domestic lawyers to confirm the application and enforceability of these standard terms in each national jurisdiction involved in a cross-border transaction.

 

International Financial Law can also be considered to include the development of technical regulatory standards to govern the operation or control of particular core market sectors such as banking, securities and insurance or on a cross-sector basis or connection with other common issues such as payment and settlement, accounting and auditing practices and financial crime.[27] The technical standards are not law as such being issued b`y informal technical committees. This is sometimes referred to as ‘Soft Law’.[28] Such standards are nevertheless still important and will generally be implemented at the national level through local laws or regulatory standards and practices. Membership of the committees themselves implies an obligation to adhere to and implement at the domestic level.[29]

 

[1]       Financial is pertaining or relating to finance or money matters (n) 921. Financial formerly related to pecuniary or monetary, money, economic fiscal, budgetary, commercial or entrepreneurial. Martin H Manser, The Chambers Thesaurus (Chambers 2004) 388. See also Oxford Thesaurus of English (Oxford University Press 2 ed 2004) 333.

[2]        Chapters 4, 5 and 6.

        For the purposes of this text, [3]domestic financial law will be considered to consist of other five main subject areas comprising Finance Law, the Law of Money, the Law of Markets, Financial Regulation and Financial Remedies. Sections 1 and 5.

[4]     On the function and structure and operation of financial markets, Walker, ‘Stock Markets and Exchanges’ in Michael Blair and George A Walker, Financial Markets and Exchanges Law (OUP Oxford 2006) Chapter 1.

           The term regulation will be used to refer to the body of legal rules and regulations or administrative requirements established by financial authorities or by market participants (generally referred to as self-regulatory systems) to limit or control the risks assumed by banks or other financial institutions and to the imposition of such provisions either generally or on the activities of a particular bank or other institution. Supervision will be understood to refer to the associated or [5]complimentary process of monitoring or reviewing compliance by financial institutions with any specific sets of regulatory provisions imposed or with more general standards of prudent or proper behaviour in any particular market. On the definition of financial regulation and financial supervision, G A Walker, International Banking Regulation – Law, Policy and Practice (Kluwer Law 2001), Introduction (n 1).

[6]           Section 6(4) and Chapter 3, Section 4.       

[7]           Chapter 4, Section.

[8]           On Financial Regulation, Chapter 4 and on Financial Stability and Macro-prudential Regulation, Chapter 7.

[9]           G A Walker, European Banking Law – Policy and Programme Construction (BIICCL London 2006).

[10]        This can be summarised in terms of a ‘single market and local control conflict’ with control, including both financial supervision (continuing oversight) and financial regulation (obligation). Walker (n).

           This was derived from the Commission’s 1980 interpretation of the European Court of Justice’s (ECJ) 1979 decision in Cassis de Dijon. See Case 120/78 Rewe-[11]Zentral AG v Bundesmonopolverwaltung fur Branntwein [1979] ECR 649 [1979] 3 CMLR 494; and Commission Communication OJ No C256, 3.10.80, 2. For discussion, Walker, Chapter 1, Section 3 and (nn 56 and 81).

        The single market conflict referred to (n) created the difficulties in terms of market access, market regulation and market supervision which were resolved through [12]adoption of the three parallel principles of Mutual Recognition (MR), Minimum Harmonisation (MH) and Home Country Control (HCC). Walker (n).

           Commission, Completing the Internal Market - White Paper from the Commission to the European Council (Milan 18-29 June 1985), COM (85) 310 final (14 June 1985). The Single Act was adopted by the European Council in Luxembourg in December 1985 and signed in February 1986. Walker (n), Chapter 1, Section 8 and  ([13]nn 130 and 135).

           Second Council [14]directive 89/646/EEC on the co-ordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions of 15 December 1998  (OJ L 386, 30.12.89, 1). Council Directive 89/299/EEC on the own funds of credit institutions of 17 April 1989  (OJ L 124, 5.5.1989, p 16) as amended by Directive 91/633/EEC of 3 December 1991  (OJ L  339 , 11.12.1991,  33) and Directive 92/16/EEC of 16 March 1992 (OJ L 75, 21.3.1992, 48); and Council Directive 89/647/EEC on a solvency ratio for credit institutions of 18 December 1989  (OJ L 386, 30.12.1989, 14) as amended by Directive 91/31/EEC (OJ L 17, 23.1.1991, 20). These were consolidated with a number of other directives under the Banking Consolidation Directive 2000 (BCD) which was reissued in a recast form in 2006. Directive 2000/12/EC May 2000 relating to the taking up and pursuit of the business of credit institutions.

[15]          Walker (n) Chapters 3, 4 and 5.

[16]          Walker (n) Chapter 5.

[17]          This led to the establishment of the European Banking Authority (EBA), European Securities and Markets Authority (ESMA) and European Insurance and Occupational Pension Authority (EIOPA). A separate European Systemic Risk Board (ESRB) and larger European System of Financial Supervisors (ESFS) were also created. Regulation of the European Parliament and of the Council establishing a European Banking Authority (23.9.2009) Com (2009) 501 Final, 2009/014 (COD); COM (2009) 502 Final; COM (2009) 503 Final, Article 1(2); Com (2009/499) Final, 2009/0140 (COD) and COM (2009) 252 Final. 

[18]          Mario Giovanoli, International Monetary Law ().

             Shuster defines the Public International Law of money as a ‘set of rules established by international law which effects some degree of regulation and control over certain areas of a State’s monetary affairs’. The public international law of money deals with currency valuation (exchange rates), exchange restrictions, [19]balance of payments and international liquidity. Citing Lazar Foscaneanu, ‘Les Aspects Juridiques du Systeme Monetaire International’ 95 Journal du Droit International (1968) 239-47 in M R Shuster, The Public International Law of Money (Clarendon Press Oxford 1973) 1.

[20]          Mario Giovanoli International Monetary Law (OUP Oxford).

[21]        The most important sources are international treaties and conventions although certain General Principles of Law do arise in this area such as with regard to Abuse of Law (Abus de Droit), Non-discrimination and the Illegal Interference with Property Right of Aliens. Shuster (n) 4.

[22]          Martin Shaw, Public International Law (Penguin London ed).

[23]          Sections 2(3) and 9.

[24]         Mann notes that, ‘There is probably no branch of the law where the intrinsic connection between private international law and municipal law is more apparent and more difficult than that relating to foreign currency’. Mann (5 ed) 185. [Where a foreign currency is specified, a distinction has to be drawn between the money of account, in which the obligation is expressed, and the money of payment, in which the obligation has to be discharged. The money of account refers to the nature of the obligation and payment to the nature of the performance or discharge with each possibly being governed by a separate law. Specific difficulties can arise with separate monies of account and payment under ‘foreign currency clauses’. For discussion, Mann (5 ed) 207-219. The countries concerned in any particular dispute may use a common money of account or this may be distinct or have changed over time. Mann, Ch.]

 See Section 8.

[25]          Differences arise in defining foreign money although Mann accepts that foreign money is any ‘such money as is not the currency of the United Kingdom’. Mann (5 ed) 190. Under English law foreign currency is generally being treated as a commodity rather than money as such. Mann (5 ed) 190-196. This position has nevertheless been reconsidered under more recent case law. Mann (6 ed). Where an obligation to pay a foreign currency is a monetary obligation, the creditor is entitled to insist on legal tender even where substantial amounts are involved such as under euro currency deals. Staughton J directed in the Libyan Arab Foreign Bank v Bankers Trust Company decision in 1989 that the creditor could insist on being paid in £150m sterling or $2,900 100 dollar bills. Libyan Arab Foreign Bank v Bankers Trust Company [1989] QB 728. Staughton J dismissed any implied term that market usage would have required payment to be made through the Clearing House Interbank Payments Systems (CHIPS) in New York. For comment, Mann (5 ed) 200-201.

[26]          Walker, ‘Markets and Exchanges’ in Blair and Walker (n) para.

[27]          G A Walker, International Banking Regulation – Law, Policy and Practice (Kluwer Law 2001).

[28]          See, for example, Chris Brummer, Soft Law and the Global Financial System (Cambridge University Press, Cambridge, 2012).

[29]          Walker (n 26).