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Enforcements in Financial Disputes: a Case for An ENFORCEMENTS IN FINANCIAL DISPUTES: A CASE FOR AN INTERBANK AWARD CLEARING FRAMEWORK Mohamed Raffa U1320615 A Thesis submitted in partial fulfilment of the requirements of the University of East London for the degree of Doctor of Philosophy in Law Supervisors Dr. Iwa Salami University of East London Law Department School of Business and Law 2 Abstract Resolving disputes resulting from high speed and fast-moving financial transactions has become an essential requirement for the stability of global financial markets as proven by previous crises. In the 2007 crisis, millions of investors ended with worthless investment agreements. The public did not believe they could pursue claims in state courts and had no faith in the operating regulatory systems. Delays in the enforcement of compensatory awards drained the concept of justice of its meaning. Bankers were bailed out instead of being made to pay for acts of recklessness, information asymmetry and mis-selling. The result was panic and a run on investment banks and the financial crisis ensued. The question is whether an arbitration process that guarantees immediate payment of arbitral awards can accelerate recovery from a crisis and alleviate the burden on state bailouts using taxpayers’ money? Empirical research show that enforceable and swift dispute resolution for financial disputes can establish certainty in the financial markets and assist in deterring imbedded acts of moral hazard within the financial sector. This in turn will impede the main ingredient for financial crises generated within the financial institutions sector and reduce the possibility of recurrences of financial crises such as that of 2007/2008. It is against this background that this thesis is proposing the instant monetizing mechanism of arbitral awards that result from banking disputes. The purpose behind the choice of the financial sector as a pilot for such a proposal is the ready availability of interbank clearing networks. Such networks can play an important role re-injecting funds back into the market through the ease of monetizing the awards and instantly transferring funds to claimant investors. Applying this concept particularly in the financial sector will clear backlogs of investors’ funds that will unfailingly find their way back into the financial markets through the banks. Recycling the funds back into the markets will instantly speed the markets’ recovering cycle and avert deep crises. This thesis acknowledges the role of arbitration in the settlement of financial disputes and the integral role that the enforcement of financial dispute can have in facilitating financial stability in a crisis. It recognises that an arbitration process is as effective as the swiftness by which its awards are enforced. It, as such, argues that a framework that can use existing interbank clearing networks to enforce and clear arbitral awards will efficiently address investors’ disputes. In turn it will help stabilize financial markets by removing uncertainty. The proposed framework will identify possibilities of clearing, trading and discounting arbitral awards while guaranteeing the maintenance of liquidity within the financial markets. Once implemented, the framework will remain innovative as it will operate through already functioning networks using up-to-date clearing technology such as blockchain. As the clearing networks continue to develop in to match the speed by which financial markets progress, the award clearing framework will remain as fast and innovative. 3 List of Abbreviations AAA - American Arbitration Association ADR - alternative dispute resolution BaFin - Federal Supervisory Authority (Germany) BoE - Bank of England BIT - bilateral investment treaty CDP - City Dispute Panel (UK) CFDs – Complex Financial Disputes CFTs – Complex Financial Transactions CIETAC - China International Economic and Trade Arbitration Commission DIAC - Dubai International Arbitration Centre DOCDEX - Documentary Credit Dispute Resolution Expertise EC - European Community ECB - European Central Bank ECT - Energy Charter Treaty EEA - European Economic Area EFTA - European Free Trade Association EU - European Union FCA - Financial Conduct Authority FET - fair and equitable treatment FPC - Financial Policy Committee FRB - Federal Reserve Board FOS - Financial Ombudsman Services FSA - Financial Services Authority FSMA - Financial Services and Markets Act HKIAC - Hong Kong International Arbitration Centre ICC - International Chamber of Commerce ICDR - International Centre of Dispute Resolution ICLCA - International Centre for Letters of Credit Arbitration ISDA - International Swaps and Derivatives Association ICSID - International Centre for Settlement of Investment Disputes IMF - International Monetary Fund IP - intellectual property IPB - international private banking IPR - intellectual property rights ISDA - International Swaps and Derivatives Association LCIA - London Court of International Arbitration L/C - letter of credit LIBOR - London Interbank Offered Rate LLC - limited liability company/corporation MFN - most favoured nation MIT - multilateral investment treaty NAFTA - North American Free Trade Agreement 4 NYC Convention - United Nations Convention on the Recognition and Enforcement of International Arbitration Awards 1958 OECD - Organisation for Economic Co-operation and Development OTC - over the counter secrities PRA - Prudential Regulation Authority P.R.I.M.E. Finance - Panel of Recognised International Market Experts in Finance RBS - Royal Bank of Scotland REPO - Repurchase Agreement SIAC - Singapore International Arbitration Centre TBTF - too big to fail UCP - Uniform Customs and Practice for Documentary Credit UCTA - Unfair Contract Terms Act 1997 (UK) UK - United Kingdom UN - United Nations UNCITRAL - United Nations Commission on International Trade Law US - United States UTCC - Consumer Contracts Regulations 1999 (UK) WIPO - World Intellectual Property Organization 5 Table of Contents ABSTRACT 3 LIST OF ABBREVIATIONS 4 TABLE OF CONTENTS 6 ACKNOWLEDGEMENT 11 CHAPTER ONE 12 A FRAMEWORK FOR FINANCIAL DISPUTES 12 1. SETTING OUT THE FRAME OF THE DISCUSSION 14 1.1. RESEARCH METHODOLOGY 17 1.2. NOTES IN REGARD TO METHODOLOGICAL APPROACH 17 1.3. STRUCTURE OF THE THESIS 18 1.4. SCOPE AND PURPOSE OF THE THESIS – A SPEEDY COMPENSATION PROCESS RESULTS IN SWIFT PECUNIARY RETRIBUTION 21 2. AWARDS – ENFORCEABILITY AND PRESENTMENT 22 2.1. PAYMENT OF AWARDS – PRESENTMENT AND PAYMENT 23 2.2. TRADING OF AWARDS 24 3. SUGGESTIONS OF THE THESIS - THEORETICAL BACKGROUND ON BANKS, MORAL HAZARD AND ARBITRATION 26 3.1. ENFORCEABILITY OF BANKING DISPUTE AWARDS UNDER THE AUSPICES OF THE NY CONVENTION – PROCEDURAL ISSUES IN ENFORCING CROSS-JURISDICTION ARBITRAL AWARDS 29 3.2. ISSUES WITH THE WORDING OF THE ARTICLES IN THE NY CONVENTION ON THE ENFORCEMENT OF FOREIGN AWARDS 30 3.3. LIMITATIONS AS TO THE APPLICABILITY OF THE NY CONVENTION 31 3.4. ANCILLARY ENFORCEMENT IN VIEW OF NY CONVENTION LIMITATIONS 33 4. RESEARCH QUESTION 35 4.1. NOTION OF AWARD ENFORCEMENT PROCESSES IN LEX FINANCIERA 35 4.2. CONCEPT OF A SWIFT MECHANISM FOR BANK DISPUTES 37 4.3. FINANCIAL MARKET DISPUTES REQUIRE FINANCIAL EXPERT JUDGES 38 5. THE NECESSITY OF ARBITRATION – CASE LAW 39 6. CHALLENGES TO INTERNATIONAL AWARDS 42 7. CONCLUSION 44 CHAPTER TWO 48 6 ARBITRATION IN BANKING DISPUTES 48 1. SECURITIES TRADING, DEALING AND ORIGINATION 48 1.1. FIRMS ACTIVE IN SECURITIES MARKETS 49 1.2. TRADING OF SECURITIES AND POSSIBLE MORAL HAZARD 51 1.3. FUNCTIONS OF SECURITIES FIRMS AND TRADERS 52 1.4. RULES AND REGULATIONS GOVERNING SECURITIES TRADING 53 1.5. BROKERAGE AND BANKING SERVICES 54 2. LITIGATION AND ADVANTAGES OF ARBITRATION 55 2.1. LEGAL RISK 55 2.2. STANDARDISED AGREEMENTS NOT SYSTEMISED DISPUTES 56 2.3. DEVIOUSNESS IN CFT LEGAL STRUCTURE 56 2.4. DISPUTES FOLLOW TRANSACTIONS IN LEGAL COMPLEXITY 57 2.5. SPECIALISED PARTIES RATHER THAN SPECIALISED JUDGES 58 2.6. ENFORCEABILITY IN LITIGATED DISPUTES 59 3. FINANCIAL ARBITRATION 59 3.1. ARBITRABILITY 60 3.2. ARBITRATION TRIBUNALS’ FAMILIARITY WITH CFTS 60 4. PARTIES TO FINANCIAL TRANSACTIONS 62 4.1. FINANCIAL TRANSACTION AGREEMENTS 64 4.2. FINANCIAL AGREEMENT INTERPRETATION 68 4.3. MIS-SELLING CLAIMS IN UNIVERSAL AGREEMENTS 69 4.5. EXPLOITATION OF CONTRACTUAL ESTOPPEL 69 5. ANATOMY OF FINANCIAL DISPUTES 73 5.1. ISSUES IN INTERNATIONAL AWARD ENFORCEMENT 75 5.2. ISSUES IN FINANCIAL ARBITRATION AWARD ENFORCEMENT 77 5.3. AWARD CLEARING FORUM 78 5.4. RETRIBUTION v. RESTITUTION 79 6. IMPACT OF FINANCIAL DISPUTES ON SOCIETIES 81 6.1. NATURE OF ARBITRATION AND ITS EFFECT ON SOCIETY 83 6.2. INTERNATIONAL ARBITRATION IN LOCAL SOCIETIES 84 6.3. IMPLICATIONS OF FINANCIAL CRISES ON SOCIETIES 85 6.4. DIFFERENT CONCEPTS OF JUSTICE, IN DISPUTES 86 6.5. SOCIAL EFFICIENCY IN RESORTING TO ARBITRATION 87 6.6. PARTICIPATION OF THE COMMUNITY. 88 7. ANTICIPATED SOCIAL EFFECT OF PROPOSAL IN THESIS 88 7.1. CONFIDENCE IN BANKS DERIVED FROM RESOLVING THEIR INNER DISPUTES 90 7.2. THE CONCEPT OF SPEEDY DISPUTE RESOLUTION 91 8. CONCLUSION 92 CHAPTER THREE 94 MORAL HAZARD IN FINANCIAL DISPUTES 94 7 1. THE NATURE OF MORAL HAZARD AND THE FINANCIAL CRISIS 94 1.1 REGULATORY AUTHORITIES 95 1.2. MORAL SENTIMENT AND THE FINANCIAL SECTOR 96 2. SYMPTOMATIC MORAL HAZARD 98 2.1. ASYMMETRIC INFORMATION 98 2.2. LARGE BONUSES 99 3. MORAL HAZARD IN CONTRACTUAL AGREEMENTS 99 4. GOVERNANCE OF MORAL HAZARD IN BANKS 100 5. HIDDEN MORAL HAZARD 102 5.1. DERIVATIVES 102 5.2. THE CRISIS 104 6. MISREPRESENTATION AND MISSELLING MORAL HAZARD 105 6.1. CONTRACT LAW
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