Do banks have human rights?
On 1 October 2019 the Hazelhoff Centre for Financial law hosted its 19th guest lecture starring Paul Sharma, managing director at Alvarez & Marsal and co-head of the European Financial Industry Regulatory Advisory Services practices.
The lecture revolved around the question ‘do banks have human rights?’ Based on a wide range of arguments, Mr Sharma substantiated his conviction that banks indeed do have human rights.
Banks as victims
Firstly, Paul Sharma discussed the application of human rights to corporations in general. Conventional discussions on the interaction between human rights and corporations often focus on the violation of human rights by corporations. However, according to the European Court of Human Rights (ECHR) corporations can also be victims of human rights violations. Paul Sharma emphasized that the latter should not be overlooked. With regard to banks, three categories of human rights are possibly violated. Firstly, the right to protection of property. Due to intensive regulation of the banking sector, banks are not able to utilize their property rights as freely as other right holders can, which could compromise their property rights. Secondly, the right to a fair trial. Banks, and in particular their employees, are subject to criminal law and – as Paul Sharma calls it – ‘quasi-criminal law’. Paul Sharma qualifies the term ‘quasi-criminal law’ as punitive sanctions that strictly speaking do not fall under criminal law. Especially in quasi-criminal prosecution, the right to a fair trial is not always guaranteed. Thirdly, freedom of speech. Banks and their employees are subjected to regulation forcing them to make certain statements or to withhold information regarding their products and services (compelled speech). It thus can be argued that their freedom of speech is hereby restricted.
Piercing the corporate veil
Secondly, Paul Sharma focused on the original objective of a corporation: maximizing shareholder interest. According to Paul Sharma, new developments in the area of banking regulations will complicate realizing this objective. For example, in the Netherlands, the so-called ‘banker’s oath’ has been introduced in 2015, which requires all employees of a bank to explicitly state that they will practice their profession with integrity and diligence and that the client’s interests (and not the shareholders’ interests) are made central. As of 2016, the United Kingdom knows a similar regulation in the form of the Senior Managers Regime. At the European level, shareholder interest also appears to be moving increasingly to the background. As an example, Paul Sharma mentioned the creation of corporate roles by the European anti-money laundering regulation, such as Money Laundering Reporting Officer, Chief Compliance Officer and Client money Officer, which primarily serve the interest of the regulating authorities and not the interest of the shareholders. Paul Sharma concluded that regulating authorities are increasingly gaining more control over the policy of banks. Consequentially, directors may find themselves in a conflict: on the one hand they owe fiduciary duties towards shareholders and corporation and on the other hand they must comply with their regulatory duties.
Are banks owned by their shareholders?
Paul Sharma then raised the question if banks are truly owned by their shareholders. To answer this question, he used two characteristics to determine ownership: (1) control and (2) the recipient of rewards and the bearer the risks. The first characteristic is only to a limited extend applicable to shareholders of banks. Due to the intensive regulation of banks, shareholders can only exercise limited control compared to shareholders of other corporations. The same goes for the second characteristic, and in particular the bearing of risks, which is not fully applicable to bank’s shareholders. On the balance sheet of a bank, only a fraction concerns the shareholders, while the vast majority is meant for the deposit holders. The deposit holders’ obligations are largely guaranteed by the state, which means that the state bears for a large part the risk and is therefore one of the biggest stakeholders, according to Paul Sharma. In his opinion, the introduction of mechanisms like central banks and the deposit guarantee scheme are responsible for this transfer of risk.
Lastly, Paul Sharma focused on a form of regulation that became the standard after the financial crisis: judgement-based regulation. This form of regulation anticipates possible risks that could materialize and formulates corresponding norms (ex ante). According to Sharma, this type of regulation creates the incentive to use ‘weasel words’ such as ‘adequate’ and ‘reasonable’. The usage of ‘weasel words’ leaves room for interpretation. The biggest difference between judgement-based regulation and principle-based regulation is the method of interpretation. With principle-based regulation, the regulating authority interprets regulation by means of outliers. With judgement-based regulation, the regulating authority interprets regulation by reviewing each situation independently. Both methods of interpretation are retrospective and grant discretionary power to regulating authority to fill in open norms and impose retrospective burdens. Paul Sharma believes that judgement-based regulation is characterized by less legal certainty for parties because the room for interpretation by the state is even greater than with the principle-based model.
In conclusion, if banks have human rights, there are arguments to be made that these human rights are systematically violated by regulating authorities. Only when we abandon money in its current form, that is: money as a claim on the (central) banks, the role of banks in society, and with it the regulatory pressure, will decline.