Keith Mack
Common law, also known as case law, is a body of unwritten laws based on legal precedents established by the courts. It is one of the two main types of legal systems in the world, with most countries adopting features from either Common Law or Civil Law into their own legal systems. Common law applies to financial services in several ways, including through the regulation of financial markets, the interpretation of contracts, and the determination of legal rights and duties in financial transactions. For example, in the United States, the Financial Services and Markets Act of 2000 is based on common law principles and sets out rules for the financial services industry. In Australia, common law principles may be applied in financial services litigation, such as in cases involving negligence or breach of fiduciary duty by financial advisers.
| Characteristics | Values |
|---|---|
| Definition | Common law is a body of unwritten laws based on legal precedents established by the courts. |
| Application | Common law influences the decision-making process in unusual cases where the outcome cannot be determined based on existing statutes or written rules of law. |
| Sources of Law | Countries following a common law system are typically those that were former British colonies or protectorates, including the United States. |
| Judicial Decisions | Judicial decisions are binding and can only be overturned by the same court or through legislation. |
| Freedom of Contract | There are few provisions implied into the contract by law, although provisions may be supplemented by laws in equity, tort, and statute. |
| Regulatory Bodies | The FCA, ASIC, and FSA play a role in regulating financial markets, with the common goal of protecting investors and consumers through sensible regulations. |
| Soft Law | Soft law, or voluntary legal schemes, can fill market uncertainties produced by common law schemes. |
| Consumer Rights | Soft law helps protect consumer rights, as in the case of Office of Fair Trading v Abbey National [2009] UKSC 6. |
| Globalization | Soft law is notable in its relationship with globalization and the financial markets, as seen with the incorporation of lex mercatoria into English law. |
| Common Law Actions | Common law actions have been superseded by Acts but are still available and raised in conjunction with the Acts or as the only claim available. |
| Unconscionable Conduct | Unconscionable conduct is a claim regularly invoked by customers against financial services providers, alleging a relationship that places one party at a special disadvantage. |
| Litigation | There are no specific procedural rules for financial services litigation, but there is a Federal Court Central Practice Note and similar state jurisdiction practice notes. |
| Arbitration | Arbitration in Australia is voluntary, and financial institutions may agree to arbitration provisions, although ASIC does not use arbitration. |
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Common law and financial services litigation
Common law, also known as case law, is a body of unwritten laws based on legal precedents established by the courts. Common law influences the decision-making process in unusual cases where the outcome cannot be determined based on existing statutes or written rules of law. Common law draws from institutionalized opinions and interpretations from judicial authorities and public juries. The goal of common law is to establish consistent outcomes by applying the same standards of interpretation. However, the elements of common law may differ between districts, and past decisions can shape future rulings until societal changes prompt a judicial body to overturn the precedent.
Financial services litigation involves disputes and legal proceedings related to the provision of financial services, such as banking, investment advice, and insurance. It covers a range of topics, including compliance, regulation, and consumer protection. Financial services litigation can arise from various causes of action, including negligence, breach of contract, and breach of fiduciary duty.
In the context of financial services litigation, common law principles can interact with regulatory frameworks and statutory provisions. For example, in Australia, financial services licensees and credit providers are under a general obligation derived from common law to provide their services "efficiently, honestly, and fairly". This obligation is now being reviewed by the Australian Law Reform Commission (ALRC) to improve clarity and minimise compliance difficulties.
Additionally, the concept of "unconscionable conduct" is commonly invoked in financial services litigation in Australia, available as a claim under both common law and statute. To establish a claim of unconscionable conduct in equity, it must be shown that one party had a special disadvantage, the other party was aware of this disadvantage, and they took unconscionable advantage of their position.
While there are no specific procedural rules for financial services litigation, it is governed by practice notes at both the federal and state levels in Australia. Arbitration is voluntary, and while financial institutions may agree to arbitration provisions, the Australian Securities and Investments Commission (ASIC) does not use arbitration for dispute resolution with financial services providers.
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Common law and financial services regulation
Common law, also known as case law, is a body of unwritten laws based on legal precedents established by the courts. It influences the decision-making process in unusual cases where the outcome cannot be determined based on existing statutes or written rules of law. Common law draws from institutionalized opinions and interpretations from judicial authorities and public juries. It promotes stability and consistency in the legal justice system, with higher courts setting binding examples for lower courts to follow.
In the context of financial services regulation, common law plays a significant role in shaping the legal landscape. Financial services providers, including banks and financial advisors, are subject to common law principles in their dealings with customers. For instance, customers may bring claims of negligence and breach of fiduciary duty against financial advisors, which are based on common law concepts.
Additionally, the relationship between banks and their customers is governed by contract law, supplemented by laws in equity, tort, and statute. The Banking Code of Practice, while voluntary, sets standards and obligations for banks, and its signatories are contractually bound by its terms. Breach of contract claims often arise in relation to this code, and common law actions can be raised in conjunction with statutory claims or where they are the only claim available.
In Australia, the Australian Securities and Investments Commission (ASIC) plays a crucial role in regulating financial services. While ASIC does not use arbitration for dispute resolution, it enforces arbitration awards made in other contracting jurisdictions. ASIC also receives complaints about breaches of the general obligation to provide services efficiently, honestly, and fairly, which is a principle grounded in common law.
Furthermore, the historical influence of common law on financial markets is evident in the long-standing incorporation of lex mercatoria into English law. The Bills of Exchange Act 1882, for example, demonstrates the integration of common law rules and merchant law.
Common law continues to shape financial services regulation, often in conjunction with statutory and regulatory frameworks. The dynamic interplay between common law and financial services regulation ensures stability, consistency, and adaptability in the financial sector.
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Common law and fiduciary duties
Common law is a body of unwritten laws based on legal precedents established by the courts. It influences decision-making in unusual cases where existing statutes or written rules of law cannot determine the outcome. Common law relies on detailed records of similar situations and statutes, as there is no official legal code that can be applied to a case. Judges presiding over a case determine which precedents apply.
Fiduciary duty is an obligation to act in another party's best interest. It is the highest standard of care in equity or law. A fiduciary is expected to be extremely loyal to the person to whom the duty is owed (the "principal") and must not profit from their position without the principal's consent. Fiduciary duties are taken on by individuals and entities for various types of beneficiaries. These relationships include lawyers acting for clients, company executives acting for stockholders, financial advisors acting for investors, and trustees acting for estate beneficiaries.
In the financial sense, fiduciary duties exist to ensure that those who manage other people's money act in their beneficiaries' interests rather than serving their interests. For example, a fund manager selected by personal investors to manage their assets must act in the investors' best interests. Similarly, a trustee to whom property is legally committed is the legal owner of all such property and must administer the property only for the benefit of the beneficiary.
In the United Kingdom, the Judicature Acts merged the courts of equity with the courts of common law, making the concept of fiduciary duty applicable in common law courts. When a fiduciary duty is imposed, equity requires a stricter standard of behaviour than the comparable tortious duty of care in common law. A fiduciary must not be in a situation where their personal interests and fiduciary duty conflict, and they must not profit from their fiduciary position without the consent of the principal.
Breach of fiduciary duty may occur in insider trading when an insider makes trades based on non-public information obtained during their duties. A successful breach of fiduciary duty lawsuit can result in monetary penalties for direct and indirect damages and legal costs.
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Common law and consumer rights
Common law is a body of unwritten laws based on legal precedents established by the courts. It influences decision-making in unusual cases where existing statutes or written rules of law cannot determine the outcome. Common law, also known as case law, relies on detailed records of similar situations and statutes because there is no official legal code that can be applied to a specific case. The judge presiding over a case determines which precedents apply to that particular case.
In the context of financial services, common law plays a crucial role in protecting consumer rights and ensuring fair practices. Consumers have common law rights to bring claims, such as for breach of contract or torts. For example, consumers can take action if they feel discriminated against by lenders or financial institutions on the basis of age, sex, colour, ethnic origin, marital status, religion, or the exercise of their rights under consumer credit protection laws.
Additionally, regulatory policies and legislative regimes also contribute to consumer rights in the financial services industry. In the United States, federal agencies and sub-agencies, such as the CFPB, oversee and regulate financial institutions to protect investors and consumers through sensible regulations. The CFPB has proposed rules to prohibit certain terms and conditions in consumer financial product agreements that may waive consumer protection laws or give companies the sole right to modify contracts unilaterally.
In the European Union, directives such as MiFiD II and the Payment Services Directive regulate financial trade and consumer protection in financial services. For instance, Directive 2002/65/EC establishes common rules for the marketing of financial services, ensuring consumers receive comprehensive information and have the right to withdraw from contracts within 14 days.
To stay informed about their rights, consumers can refer to published sources, such as pamphlets from the Federal Reserve, or contact federal regulatory agencies responsible for drafting and interpreting consumer laws and regulations.
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Common law and financial services licensees
Common law is a body of unwritten laws based on legal precedents established by the courts. It influences decision-making in unusual cases where existing statutes or written rules of law cannot determine the outcome. Common law, also known as case law, relies on detailed records of similar situations and statutes. The judge presiding over a case determines which precedents apply to that particular case.
Financial services licensees and credit providers are under a general obligation to ensure that their services are provided efficiently, honestly, and fairly. A breach of this general obligation is the most commonly reported breach to the Australian Securities and Investments Commission (ASIC). A breach of this provision can result in penalties, the imposition of licensing conditions, and, in serious cases, loss of license.
In the context of financial services, common law actions have largely been superseded by specific Acts. However, common law actions are still available and are sometimes raised in conjunction with the Acts or when they are the only claim available. For example, unconscionable conduct is a claim regularly invoked by customers against financial services providers. It is available at general law (as an equitable doctrine) and under statute.
In addition to regulation, soft law plays a vital role in the financial markets. Soft law can fill market uncertainties produced by common law schemes. For example, in the case of Office of Fair Trading v Abbey National [2009] UKSC 6, the bank was fined by the FSA for failing to handle complaints set out in soft law principle practices.
Financial services litigation has no specific procedural rules. Arbitration in Australia is voluntary, and financial services institutions may agree to arbitration provisions, more commonly with institutional clients. The ASIC does not use arbitration as a dispute resolution method with financial services providers.
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Frequently asked questions
Common law is a body of unwritten laws based on legal precedents established by the courts. It relies on detailed records of similar situations and statutes because there is no official legal code that can be applied to a case at hand.
Common law influences financial services through the application of legal precedents in unusual cases where existing statutes or written rules of law cannot determine the outcome. For example, in Australia, common law actions are available for customers to bring claims against financial services providers for unconscionable conduct.
In the context of financial services, common law principles have been applied to cases involving negligence, breach of fiduciary duty, and unconscionable conduct. For instance, the Potts Opinion in 1997 reshaped the derivatives market and helped expand the prevalence of derivatives by categorizing credit derivatives as outside of insurance contracts.
Common law interacts with regulatory frameworks in financial services by providing a basis for evaluating and interpreting rules and codes of conduct. Regulatory policies and extra-statutory codes of conduct in financial services are often informed by common law principles to ensure coherence with market practices.
Yes, common law has limitations in financial services, particularly in the context of contractual relationships. For example, arbitration in Australia is voluntary, and while financial services institutions may agree to arbitration provisions, the Australian Securities and Investments Commission (ASIC) does not use arbitration as a dispute resolution method with financial services providers.
