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Statutory Protections for Banking Supervisors

By Ross S. Delston
Acknowledgments

Background

    Principle 1 of the Basel Core Principles1 provides that “[a] suitable legal framework for banking supervision is…necessary, including…legal protection for supervisors.” The explanation of this provision is found in the commentary to Principle 1, which states that a suitable legal framework requires a number of components to be in place, including “protection (normally in law) from personal and institutional liability for supervisory actions taken in good faith in the course of performing supervisory duties….”

    The need for such protection is based on the chilling effect that even the threat of litigation can have on the performance of a banking supervisor’s work. That threat tends to be greater when, as is the case today, banking systems are under stress. This threat tends to be particularly significant where large numbers of banking institutions are insolvent, resulting in more stringent enforcement and remedial measures, as well as revocation of banking licenses.

    To address this problem, research was undertaken to determine current international practices and make recommendations to ensure that the widest possible coverage for banking supervisors is enacted into law wherever possible. The research consisted of a survey of statutory protections in 20 countries; from that survey, this paper presents (a) common elements, and (b) recommendations and conclusions. The appendix sets forth the text of relevant legal provisions of the 20 jurisdictions surveyed; a chart is attached summarizing the statutory protections of the jurisdictions whose laws are set forth herein.

    The 20 countries2 are as follows: Australia, Canada, Denmark, Ecuador, Germany,3 Hong Kong, India, Ireland, Japan, Malaysia, New Zealand, Norway, Philippines, Singapore, South Africa, Spain, Sweden, Switzerland, United Kingdom (“U.K.”), and United States (“U.S.”).

    In some cases, all government employees are protected by a generic provision, while in others banking supervisors are the subject of special protections. It should be noted that in some jurisdictions the banking regulator is a component of the central bank, whereas in others it is a separate and distinct agency.

    For purposes of this paper:

  1. The term “banking supervisor” is meant to include all directors, officers, and employees of the central bank, the banking regulator, and the deposit insurance corporation, and not only those who are directly associated with banking supervision or examination.
     
  2. The survey covers only those legal protections found in statutes, and therefore leaves open the question whether countries may have protections that arise from case law, executive decrees, government regulations and orders, or legal customs and practices.
     
  3. Wherever possible, an attempt was made to capture the protections for the central bank, the banking regulator, and the deposit insurance corporation, if any.

Common Elements

    There are a number of common elements in these legal protections (see attached chart for summary):

  1. Twelve of the twenty jurisdictions have specific statutory protections for banking supervisors (as opposed to all government employees).
     
    1. Of those12, (i) 10 are Commonwealth or former Commonwealth jurisdictions that provide comprehensive coverage: Australia, Canada, Hong Kong, India, Ireland, Malaysia, New Zealand, Singapore, South Africa, and the U.K.; (ii) the 11th, the Philippines, has both generic protections for all government employees as well as specific protections for banking supervisors, and (iii) the 12th, Ecuador, has procedural protections that are more limited in nature and apply only to certain officials.4
       
    2. The protection extends to all employees of the central bank or banking regulator, with the exception of Ecuador, New Zealand, and the Philippines, which protect only certain officials.5
       
    3. In 7 of the 12 such jurisdictions, the government, central bank, or banking regulator itself is protected from civil suit, in addition to the employees of such entities.
       
  2. Of the eight European countries surveyed in this paper,
     
    1. Six—Denmark, Germany, Norway, Spain,6 Sweden, and Switzerland—have generic legal protections for all government employees.
       
    2. Two—Ireland and the U.K.—have specific protections for banking supervisors.
       
  3. Most of the statutes provide that in order for the legal protections to be effective,
     
    1. The employee’s work must be performed within the scope of his or her official authority or pursuant to the law that is being administered by the employee, and
       
    2. The employee must be acting in good faith or there must be an absence of bad faith. Note that: (i) In the case of Australia, there must be an absence of negligence as well as the presence of good faith in order for the protections to be effective. (ii) In the case of Germany, good faith is an implied condition, and in Switzerland, the Confederation is liable only if the tort was committed unlawfully.
       
  4. Both acts and omissions of employees are typically covered.
     
  5. All actions by employees under the laws being administered are typically covered.
     
  6. Regarding coverage of agents (for example, accountants hired under contract to perform a specific task, such as to assist in a bank examination):
     
    1. In 5 of the 20 jurisdictions—Australia, Canada, Ireland, Malaysia, and Singapore—agents or others operating under the direction of the central bank or banking regulator are explicitly covered by the law.
       
    2. In 5 others—Germany, Japan, Spain, Switzerland, and the U.S—research indicates that the law has been or would be interpreted as covering agents.
       
  7. In two jurisdictions—New Zealand and the Philippines—a limited statutory indemnity is provided in addition to other statutory protections. Indemnity in this case means protections in law that provide for reimbursement of expenses to defend lawsuits, and, in some cases, the damages themselves, as distinguished from statutory protections that limit the ability of an injured party to bring suit against the government employee or banking supervisor.

Recommendations and Conclusions

    A number of issues should be addressed in drafting any law protecting bank supervisors:

    U.S. law, because of its complexity and the ambiguity of language used, would not be a good model for most countries.

    The Commonwealth approach is noteworthy for its conciseness of language and breadth of coverage. For example, U.K. law incorporates in a single sentence most of the key elements7 necessary to protect both the banking regulator and its employees.8

    Irish law is noteworthy for its innovative language which provides (a) that the authorization of a banking license does not constitute a warranty as to a bank’s solvency, and, further, (b) that “neither the State nor the Bank shall be liable for any losses incurred through the insolvency, default or performance” of any bank.9

    Consideration should also be given to whether the central bank, banking regulator, or deposit insurance agency should be subject to the protections of any such statute, as is provided in Australia,10 Canada,11 India, Malaysia, the Philippines,12 and the U.K. This should be strongly considered if there is a high level of litigation expected as a result of the activities of banking regulatory agencies during a banking crisis.

    A related consideration is whether the government itself should be covered by these protections, as is provided in Canada, India, and Malaysia. However, this latter approach should be balanced against an injured party’s right to seek compensation for damages by bringing suit against the government, in conformity with the rule of law.

    Finally, consideration should be given as to whether an explicit statutory indemnity for employees is needed in addition to statutory protections from suit, such as may be found in New Zealand or the Philippines. The main advantage of an indemnity is that it removes the financial burden and the chilling effect related thereto that the cost of defending any lawsuit may bring, even if the suit is ultimately dismissed or the employee is not found liable for damages.13 Unlike the laws of New Zealand and the Philippines, however, the terms of the indemnity need not be incorporated in a statute, but rather the statute may simply authorize the central bank or banking regulator to provide such an indemnity by adopting a regulation or administrative decree. In any event,

  1. the statute or regulation first should provide as broad as possible coverage for all employees, since any employee, no matter how high or low their status, may be sued for actions taken by them, and
     
  2. second, the indemnity should cover all acts taken by the employee under all relevant laws and there should be as few as possible restrictions on any payments under the indemnity by the central bank or banking regulator.

    In conclusion, to the extent that there is a political consensus which often occurs during a banking crisis that banking laws should be amended to provide greater authority for central banks and regulatory agencies, there may also be an opportunity to include legal protections for banking supervisors as part of any such legislation. The rationale for the need for such protections may be found in the Basel Core Principles, which are a useful means of explaining any such legislative proposal to lawmakers. There are a number of models on which statutory protections for banking supervisors may be based, but care should be taken to ensure that the widest possible coverage for banking supervisors is enacted into law.

Attachments:
Appendix I - Survey of Relevant Laws
Summary of Statutory Protections for Banking Supervisors (chart)


1The Basel Core Principles comprise 25 internationally accepted principles necessary for a supervisory system to be effective.
2The statutory protections surveyed herein consist of all such laws that the author’s research has disclosed other than Austria, for which a translation was not available as of this writing.
3Note that Germany provides such protections in its constitution, and not a statute.
4In the case of Ecuador, certain officials of the Central Bank and Deposit Guaranty Agency are protected from civil and criminal liability through the use of specialized administrative procedures to screen accusations, and the process of bank interventions is protected by preventing any legal action brought by third parties from suspending the process until final judgment is rendered.
5With respect to New Zealand and Philippine law, it is the indemnity provisions that contain such limitations.
6Spanish law provides that government agencies may be sued for actions of employees, but does not explicitly protect employees themselves from civil suit.
7U.K. law does not cover agents.
8The most significant suit against the Bank of England in recent years was brought with respect to the deposits of B.C.C.I as a result of its 1991 failure but did not challenge the statutory immunity of the Bank directly; the suit was based on the common law tort of misfeasance in public office, as well as liability for breach of European Community law. See Three Rivers District Council v. The Governor and Company of the Bank of England (No. 3), [1996] 3 All E.R. 558, Q.B.D., Commercial Court. The action was dismissed by an order of the High Court on October 2, 1997 (not officially reported) and that order was upheld by the Court of Appeal in a judgment delivered on December 4, 1998 (only so far reported in the Times on December 10, 1998). The plaintiffs are appealing to the House of Lords.
9This language, insofar as it relates to any duty owed by a banking supervisor to a supervised entity, is consistent with the holding in Minories Finance Ltd v. Arthur Young [1989] 2 All E.R. 105, QBD.
10With respect to the Australian Prudential Regulation Authority.
11With respect to the Central Bank, the Office of Superintendent of Financial Institutions, and the Canada Deposit Insurance Corporation.
12With respect to the Philippine Deposit Insurance Corporation.
13Any suit brought against an employee may also have a chilling effect based on injury to reputation.

 

 ***
Ross S. Delston is a legal consultant to the World Bank. Correspondence may be addressed to him as follows:
Ross S. Delston
Law Office of Ross S. Delston
3013 Beech Street, NW
Washington, DC 20015-2203 USA
Telephone: 202/362-2260
Fax: 202/362-2754
E-mail:
rdelston@delston.com
with a copy to:
Margery L. Waxman, Legal Advisor, The World Bank
E-mail:
mwaxman@worldbank.org

 

ACKNOWLEDGMENTS
While any mistakes are mine, the research for this project could not have been completed without the generous assistance of many, most notably the following:

Special thanks to Larry Promisel and Margery Waxman, World Bank, Washington, DC and to Christopher Grierson, Lovell White Durrant, London

World Bank: Jose Antonio Alepuz, Nagavalli Annamalai, MacDonald Benjamin, Jerry Caprio, Augusto de la Torre, Carlos Escudero, Patrick Honohan, Vivien Richardson, Kazuhiro Sakamaki, Carlos Serrano
IMF: Marco Committeri, Enrique de la Piedra, Robert Effros, Peter Hayward, Eva Hupkes, Mats Josefsson, Ross Leckow, Ake Lonnberg
BIS: Betsy Roberts
Australia: Marianne Gizycki, Reserve Bank of Australia; William R. Jones, Australian Prudential Regulation Authority
Austria: Gerald Husa, Austrian National Bank
Canada: Deborah Duffy, Bank of Canada - Banque du Canada
Chile: Juan Laval, Central Bank of Chile
Denmark: Kirsten Mandrup and Leif Thomassen, Danish Financial Supervisory Authority
Germany: Harmut Poppe, Federal Banking Supervisory Authority
Hong Kong: Christopher Jackson, Hong Kong Economic & Trade Office, Washington, DC
Ireland: Grace O’Mahony, Central Bank of Ireland
Italy: Marino Perassi, Bank of Italy
Netherlands: Manon A.A. Sevenheck, Bank of the Netherlands
New Zealand: Stephen Dawe, Reserve Bank of New Zealand
Norway: Harald Hammer, The Banking, Insurance and Securities Commission of Norway
Philippines: Armando Suratos, Central Bank of the Philippines; Rescina Bhagwani and Manuel Lino G. Faelnar, Philippine Deposit Insurance Corporation
Singapore: Loo Siew Yee, Monetary Authority of Singapore
South Africa: Johann De Jager, South African Reserve Bank
Sweden: Robert Sparve, Central Bank of Sweden
Switzerland: Urs Zulauf, Swiss Federal Banking Commission
U.K.: Greg Choyce, Financial Services Authority; Len Berkowitz and Jane Ferguson, Bank of England
U.S.: Larry Bates, Hughes Hubbard & Reed, LLP, Washington, DC; Rodney Ray, FDIC
 

 


Copyright 2000, Financial Sector of the World Bank Group, All Rights Reserved.

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