Emergent Trends in Bank Supervision in the United Kingdom
| DOI | http://doi.org/10.1111/j.1468-2230.1993.tb01896.x |
| Author | Ken McGuire |
| Published date | 01 September 1993 |
| Date | 01 September 1993 |
Emergent Trends in
Bank
Supervision in the United
Kingdom
Ken
McGuire*
Introduction
The purpose of
this
article is to examine two emergent trends in the supervision of
banks in the United Kingdom.’ The first trend concerns the use of statutory law
in the supervisory process, and the second the role played by bank auditors in that
process. It will be argued that,,historically speaking, the Bank of England’
developed a flexible and co-operative3 approach to bank supervision. Recently,
however, attempts have been made at building statutory foundations into this
process of supervision, and bank auditors have been drawn into the supervisory
process. In turn, these developments prompt the two questions which are
considered in this article. First, what are the consequences for the law of its
instrumentalisation by government in the sphere of bank supervision? Second,
what are the implications for the audit function of the bank auditor’s evolving
supervisory responsibilities? In answering these questions, frequent reference will
be made to the scandal surrounding the collapse of the Bank of Credit and
Commerce International which in recent years has done so much to highlight the
Government’s responsibility for bank supervision.
It is a truism that the
UK
Government habitually resorts to legislation to further
its policy
objective^.^
Given the pre-eminent position of the Government in the
law-making process, this is not surprising. Daintith, however, has observed that
‘many lawyers still react with unease or even distaste when invited to view law as
an instrument of policy, and even those who find nothing strange about the notion
will readily admit that the relationship between law and policy remains a
problematic The claim frequently made is that the instrumentalisation of
law by national governments for policy purposes has precipitated a transformation
*Lecturer, London School of Economics and Political Science.
This article does not examine in any detail contemporary European and international initiatives in bank
supervision. There has been much written in these areas since the collapse of the Bank Credit and
Commerce International in
1991.
See, for example, Dale,
International Banking Deregulation
(Oxford,
1992);
‘Symposium: International Bank Supervision Post BCCI’
(1992) 26
The Internutional
Lawyer
943- 1023;
and Scott, ‘Supervision of International Banking Post-BCCI’
(1992)
8
Georgia
State
U
L
Rev
487.
s
l(1)
of the Banking Act
1987
placed the Bank of England under a duty to supervise the banks
authorised by it. Although this was the first time the supervisory responsibility of the Bank
of
England
had been set out in statute, the Bank, as we shall see below, had in fact accepted this duty some time
Dreviouslv.
3
?he Bak of England’s traditional approach to supervision depended on the co-operation of the banks
being supervised for its effective operation. It could, of course, be argued that most regulatory
processes rely to one degree or another on the co-operation of the ‘regulatees’ for their success;
see
Hancher and Moran, ‘Organizing Regulatory Space,’ ch
10,
in Hancher and Moran
(eds),’Capitalism,
Culture and Economic Regulation
(Oxford,
1989).
The Bank’s supervisory regime was an extreme
example of this because it operated within a non-statutory framework and had at its centre meetings
between the Bank and the senior management of individual banks; see Clarke,
Regulating the City:
Competition, Scandal and Reform
(Milton Keynes,
1986)
ch
2.
4
For an account of why this should be, and an examination of how a number of national governments
use law in the pursuit
of
policy objectives, see Daintith, ‘Law as Policy Instrument: A Comparative
Perspective,’
3,
at pp
12-13,
in Daintith
(ed),
Law as an Instrument
of
Economic Policy:
Comparative and Critical Approaches
(Berlin,
1988).
5
ibid
p
4.
0
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1993
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56
in the ‘character’ of law6: there has been, to use Weber’s terms, a shift from
formal to substantive legal rati~nality.~ Reactions to this development have
varied. For example, in countries influenced by the Diceyean concept of the ‘rule
of law,
’
commentators have attacked the increasing policy-oriented and
discretionary nature of ‘modern law.
’8
These commentators have often argued
for the development of administrative procedures aimed at minimising the
potential for the abuse of discretionary
power^.^
Modern law, especially
‘regulatory law,’ has
also
been the subject of criticism in the work of Gunther
Teubner. Regulatory law ‘coercively specifies conduct in order to achieve
particular substantive ends.’I0 Teubner’s thesis is that the onslaught of
Verrechtlichung
(‘juridification’) has resulted in a weakening in the idea of
‘generality’ in law (consequently leading to its increasing particularisation) and has
facilitated the irresistible rise of ‘purpose in law.
’
Ultimately, Teubner concludes,
these developments could have severe dysfunctional consequences for the legal
system as a whole by threatening its essential characteristic of normativity.”
It is against this background that our enquiry into the consequences for law of its
instrumentalisation by government in the field of bank supervision will be
conducted. In the United Kingdom the control of banks’ activities was originally
effected entirely on a non-statutory basis. Successive Banking Acts in
1979
and
1987
attempted to put in place
a
statutory framework for bank supervision. This
would appear to be an ideal arena, therefore, in which to assess the consequences
for law of its instrumentalisation for policy purposes.
The second trend in bank supervision identified above was the role played by
auditors in the supervisory process. Banks, like other companies, must appoint
auditors.’* Until recently the rights and duties of bank auditors, for example the
duty to observe ‘client confidentiality,’ were similar to those of ‘ordinary’
company
auditor^.'^
Section
47
of the Banking Act
1987,
however, formally
6
7
8
9
10
11
12
13
The literature on this is abundant. For a good review,
see
Cotterrell,
The Sociology of
Law:
An
Introduction
(London,
1992)
ch
5,
pp
161-66
and the references cited therein, and Daintith,
op cit
n 4.
The common observation is that legislation in the age of the Welfare State does not display the
characteristics associated with the Weberian picture of law, that is a coherent, rational and
comprehensive system of rules. Modem law is said to be characterised by discretionary, mechanical
and particularised regulation. See Weber,
On
Law
in
Economy
and Society,
trans by
E.
Shils and
M.
Rheinstein (Cambridge,
1954),
Cotterrell,
ibid,
and Loughlin,
Public Law and Political Theory
(London,
1993)
ch
10.
Cotterrell,
op cit
n
6.
ibid.
Stewart, ‘Regulation and the Crisis of Legalization in the United States,’
97- 133,
in Daintith (ed),
op
cit
n
4,
cited in Teubner, ‘Juridification: Concepts, Aspects, Limits, Solutions,’
3,
pp
18- 19,
in
Teubner
(ed),
Jurid@cation of Social Spheres: A Comparative Analysis
in
the Areas of Labor,
Colporaie, Antitrust
and
Social Welfare
Law
(Berlin,
1987).
ibid
pp
19-22.
Other German legal sociologists, it should be noted, have vehemently refuted these
suggestions, in particular deriding the idea of the existence of a ‘regulatory crisis’ in law. See
Rottleuthner, ‘The Limits of Law
-
The Myth
of
a Regulatory Crisis’
(1989) 17
Int
J
Soc
Law
273.
The debate is continued in Smith, ‘Beyond “Mega-Theory” and “Multiple Sociology”: A Reply to
Rottleuthner’
(1991)
Znt
J
Soc
Law
321.
ss
226
and
227
of the Companies Act
1985
require the directors of UK incorporated companies to
prepare their companies’ annual accounts.
S
235
of the same act reuqires these accounts to
be
audited
by
an external auditor with a view to confirming,
or
not confirming as the case may be, that they
represent a ‘true and fair’ view of the financial position of the company. In the UK, banks invariably
take the form of corporate bodies and, with certain technical exceptions, are required to comply with
the general provisions of
UK
company law.
For a discussion
of
the duties of auditors, see
Jackson
&
Powell on Professional Negligence
(London,
1992)
ch
8.
670
The
Modem
Law Review Limited
1993
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