Risks and returns of prior approval by licensing: The case of banking
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Risks and returns of prior approval by licensing: The case of banking Peter Cartwright University of Nottingham, University Park, Nottingham NG7 2RD, UK tel: 0115 951 5700; fax: þ 44 (0) 115 951 5696; e-mail: [email protected]
Peter Cartwright is Professor of Consumer Protection Law at the University of Nottingham where he specialises in Consumer Protection and Banking Regulation. He is a member of the UK Department of Trade and Industry’s Advisory Committee on Consumer Law Reform. He is author of Banks, Consumers and Regulation (Hart, 2004); Banks in Crisis: the Legal Response (Ashgate, 2002, with A Campbell); and Consumer Protection and the Criminal Law (Cambridge University Press, 2001), and editor of Consumer Protection in Financial Services (Kluwer, 2001). This article is based partly on chapter four of Banks, Consumers and Regulation. ABSTRACT
The regulation of banks involves utilising a variety of regulatory techniques including disclosure, mandatory standards and self regulation. The purpose of this article is to consider the role of prior approval by licensing in the regulation of banks. The article argues that while licensing performs an important role in meeting the principle of objectives of banking regulation, it is important that its potential risks are not ignored. Journal of Banking Regulation (2006) 7, 298–309. doi:10.1057/palgrave.jbr.2350028
INTRODUCTION Most countries require banks to be authorised before banking business can be undertaken. Banking is widely viewed as an industry that demands particularly close scrutiny, and this scrutiny is largely performed through a mixture
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of licensing and continued supervision. This article begins by setting out the main characteristics of prior approval by licensing (hereafter prior approval), and then moves on to consider the strengths and weaknesses of this form of regulation. The article argues that there is the potential for prior approval to lead to inefficient and unintended outcomes, and that the risks of this form of regulation should be taken seriously. THE DEVELOPMENT OF PRIOR APPROVAL FOR BANKS IN THE UK Prior approval (which is also known as screening, licensing or authorisation) involves giving the power to a body such as a regulatory agency or central bank, to screen out institutions which fail to meet minimum criteria.1 Ogus identifies the following characteristics of prior approval. First, the licences in question are issued before the regulated activity has taken place, the ostensible purpose of this being to prevent a socially undesirable occurrence. Secondly, the potential quality of all engaged in the activity is assessed to see if they achieve the minimum standards. Thirdly, the conditions of the licence involve only minimum and uniform standards. Fourthly, the ultimate sanction, which is revocation of the licence, and so removal from the sphere of activity, is particularly severe. Fifthly, the administrative costs of operating the scheme are high, and opportunity costs resulting from the delay before the licen
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