AFM231 Chapter Notes - Chapter 25: Electronic Funds Transfer, Brokerage Firm, Corporate Law
18 May 2018
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Chapter 25- Business and Banking
Business law in practice
• Bill and Martha operate a building supply outlet in Timmins through a corporation- Hometown
Hardware Ltd
• Bill is CEO and majority owner
• Martha is VP and owns the remaining shares
• The business dealt with the local branch of the same bank for many years now- Full Service Bank
(FSB)
• Reetl, F“B got e aages so Bill ad Matha’s aouts ae hadled ufailia people that
are not interested in Hometown Hardware and therefore, appearing as unhelpful
• Bill is concerned with the high service fees on his accounts and raising interest rates on his loans
• He is wondering if he should switch bank or re-negotiate term with FSB
• Bill is also concerned about the growing number of cheques being returned to him by the bank
eause of ustoes’ isuffiiet fuds
Business and Banking
• This chapter looks at the relationship between a business and its bank
The Regulation of Banks
• Traditionally, the financial service industry had four distinct sectors: banks, trust companies, stock
brokerages, and insurance companies.
• They were prohibited from conducting business beyond that sector
• In 1987, Canadian legislation allowed banks to go beyond traditional banking and participate in
other sectors in their branches or through subsidiary firms
• Banks now can do a variety of roles
• Now there are greater structural flexibility between different types of financial institutions
• The key remaining limit on aks’ usiess is the prohibition against selling or promoting insurance
products in their branches
• So, branches conduct insurance on the side and online
• Banks are increasingly offering international banking services, such as letters of credit, cross-border
transfers, and accounts in different currencies.
• Parties involved in international transactions frequently incorporate these rules into their
agreement
• In Canada, banks are under federal jurisdiction and are regulated through the federal Bank Act
• The terms and conditions of the banks and its customers are primary concern, found in the
agreement, which are influenced by banking practice and common law rules
• Contract law is the primary source of guidance
The Bank- Customer Relationship
• One bank account into which the business deposits its cash receipts from customers and from which
it takes payments to suppliers, employees, etc.
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• Due to ak’s ieasig age of seies, its had fo usiess to deide hat akig seies the
need
• Normally the ak does’t gie adie to ustoe uless its fiaial adie seie hih the,
there would be a fiduciary relationship, and the bank has several additional onerous duties including
to:
• Provide advice with care and skill
• Disclose any actual or potential conflicts of interest
• Consider the interests of the customer ahead of those of the bank
• E.g. if Bill has received advice from his banker as to the amount of the financing Hometown
needs, he can expect to receive competent advice from the bank and should be encouraged
to seek independent legal advice before agreeing to a financing arrangement which may
opeate heail i the ak’s faou
• Financial Consumer Agency of Canada (FCAC) is to protect and educate consumers through the
monitoring of institutios’ usiess paties egadig suh attes as aout fees ad edit ad
rates
• Centre for the Financial Services OmbudsNetwork (CFSON) provide a one-stop complaint procedure
covering brokers, banks, insurance companies, and sellers of mutual funds in order to ensure fair
and impartial complaint resolution for consumers
Duties of the Bank and the Customer
• The bank must
• Honour payment instructions and repay deposits
• Collect payment for the customer
• Provide account information to the customer on a regular basis
• Maitai see of the ustoe’s affais. This dut is ualified legislatio
• Customers must
• Take reasonable steps to provide documentation as to who is authorized to give instructions
to the bank, in order to prevent fraud and forgery
• Keep authorizations current
• Notify the bank of any suspected problems
• Provide safeguards for electronics communications
The Bank-Customer Agreement
• Standard banking documents are to protect the bank, not the customer
• Small firms have little bargaining power with the bank
• Understanding the terms and conditions in the agreement will make Bill and Martha to identify risks
arising from the banking aspects of their business
• The purposes of the account agreement (a contract that specifies the rights and obligations of a
bank and its customer) are to
• Specify who has the authority to issue instructions to the bank and sign cheques on behalf
of the customer
• Allocate the risk of loss resulting from problems with verifying the custoe’s authoit and
aig out the ustoe’s istutios
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• Describe the fees and other service charges which the bank may charge the customer
• Describe the manner in which cheques and other instruments will be handled by the bank
• Establish procedures and allocate risk for the security of accounts and confidential
information
• Some terms of the account agreement may be negotiable, most are not including terms which limit
the aks’ duties ad liailities
• E.g. a verification clause commonly found in account agreement gives the customers 30
days to detect and report any unauthorized payments that the bank makes from the
ustoe’s aout. Beod this peiod, the ustoe ill e esposile fo the loss.
• Many business accounts have an overdraft feature which operates in a similar way to a line of credit
and allows an account to temporarily have a negative balance in order to prevent cheques written
on the account from being returned for insufficient funds.
• A high interest rate is charged on any overdraft balance- making it unattractive
Electronic Banking
• Electronic banking is financial transactions carried out through the use of computers, telephones, or
other electronic means
• E.g. ATM, online
• Some new banks have no physical branches and conduct all business online
• Several legal issues arising from electronic transactions
• Data are subject to system crashes or hackers
• Fraud has become a significant concern
• Transmission failures or system crashes
• Last minute crashes cause delay in transfer can be significant
• The process and timing of electronic transactions do not fit with existing rules related to risk
allocation for authentication, verification, and finalization of payments in paper-based transactions
• The gap in the rules is being filled with banks assuming some risks and customers assuming others
• E.g. customers are generally required to report suspicious transactions to the bank.
Provided they do so, the bank will often assume responsibility for a fraudulent transaction
iolig the ustoe’s aout
• In addition, industry codes have been created to provide guidance.
• There are also international rules since electronics transfers are often used for international
business transactions
• If the sending and receiving banks are in different countries, these international rules deal
with the obligations of the parties, timing for payment, and liability and damages
• Identity theft- the faudulet use of othes’ personal information to create a false identity
• Oe a fo iitiatig idetit theft is phishig hee faudstes sed eail that appea to
be from reputable companies and ask for personal information in order to verify their
accounts
Methods of Payment
• Cash -inconvenient ad does’t leae a pape tail
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Document Summary
Chapter 25- business and banking: bill and martha operate a building supply outlet in timmins through a corporation- hometown. Business and banking: this chapter looks at the relationship between a business and its bank. The regulation of banks: traditionally, the financial service industry had four distinct sectors: banks, trust companies, stock brokerages, and insurance companies, they were prohibited from conducting business beyond that sector. Electronic banking: electronic banking is financial transactions carried out through the use of computers, telephones, or other electronic means, e. g. Provided they do so, the bank will often assume responsibility for a fraudulent transaction i(cid:374)(cid:448)ol(cid:448)i(cid:374)g the (cid:272)usto(cid:373)e(cid:396)"s a(cid:272)(cid:272)ou(cid:374)t. In addition, industry codes have been created to provide guidance: there are also international rules since electronics transfers are often used for international business transactions. If the sending and receiving banks are in different countries, these international rules deal with the obligations of the parties, timing for payment, and liability and damages.
