Citation: 14 Asia Pac. L. Rev. 143 2006

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The Concept of 'Unsafe andUnsound Practice' under

Fiji Islands' Banking Act 1995

Kenneth K Mwenda'

1. Introduction

This paper examines the concept of unsafe or unsound practice (hereinafter referredto as 'unsafe and unsound practice') in Fiji Islands' banking law. The paper focuseson banking jurisprudence in Fiji Islands, drawing analogies from common law

jurisdictions such as the United States of America, the United Kingdom andZambia. Although many jurisdictions, including Fiji Islands and many parts ofthe United States of America, do not have a statutory definition of 'unsafe andunsound practice', the United States of America has had a number of court casesexamine the term 'unsafe and unsound practice'. The judiciary in the United Statesof America has often deferred to the expertise of bank regulatory agencies thedefinition of what constitutes an 'unsafe and unsound practice,' limiting their (iethe judiciary's) review to a determination of whether the regulatory agency's actionwas arbitrary, capricious, or otherwise unsupported by substantial evidence in therecord.' By contrast, Fiji Islands has not had much experience with the term 'unsafeand unsound practice.'

The paper argues that although what constitutes an'unsafe and unsound practice'depends on the facts of each case, the Reserve Bank of Fiji Islands should consider

* Dr Mwenda, a former Rhodes Scholar is the author of Combating Financial Crime: TheLegal, Regulatory, and Institutional Frameworks (Lewiston: E Mellen Press, 2006), FrontiersofLegal Knowledge: Business and Economic Law in Context (Durham: Carolina AcademicPress, 2003) and Banking Supervision and Systematic Bank Restructuring: an Internationaland Comparative Legal Perspective (London: Cavendish, 2000). Formerly a law lecturer atUniversity of Warwick, he is currently Senior Counsel, the World Bank, Washington DC,USA. The views expressed in this paper are entirely those of the author. They do notrepresent the views of the World Bank, its Executive Directors, or the countries they represent.kmwenda@worldbank.org.

I See below.

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KENNETH K MWENDA

spelling out an interpretation of 'unsafe and unsound practice' so as to promotethe regulator's consistent and well-meaning enforcement of the law. And althoughno statutory definition of 'unsafe and unsound practice' can be cited readily in any

jurisdiction, that argument alone does not defeat the view that the Reserve Bankof Fiji Islands, as the bank regulator in Fiji Islands, should provide an interpretationof 'unsafe and unsound practice'.

The crucial point here is in distinguishing the word 'definition' from'interpretation'. While parliament should, in the ordinary course of things, providea statutory definition of 'unsafe and unsound practice', the Reserve Bank can,however, give a policy interpretation of the meaning of 'unsafe and unsoundpractice', given the absence of a statutory definition. The initiative of the ReserveBank can be done through legal opinions of the head of the Reserve Bank's LegalDepartment, or through a policy statement, or through guidance notes, on what,according to the Reserve Bank, constitutes 'unsafe and unsound practice.' Indeed,section 78(1) of Fiji Islands' Banking Act 1995 empowers the Reserve Bank of FijiIslands to act through the Minister and pass regulations pursuant to the BankingAct 1995.

Without doubt, section 78(1) of the Banking Act 1995 provides the ReserveBank of Fiji Islands with the legal pedigree to issue a statutory interpretation of theterm 'unsafe and unsound practice'. And it is advisable that this interpretation isspelt out by the Reserve Bank of Fiji Islands since the Banking Act 1995 simplyprohibits any person from carrying out 'unsafe or unsound practice', but does notdefine the term 'unsafe or unsound practice'.

The uncertainty that comes with the absence of a statutory definition, or aregulatory norm, or some policy guidance interpreting 'unsafe and unsound practiceIpresents two choices: (a) the Reserve Bank of Fiji Islands can exercise discretionarypowers and capture incidents that were not contemplated as 'unsafe and unsoundpractices'; and, (b) some banks, financial institutions and investors will becomerisk averse and avoid pursuing product innovation in the banking sector, fearingthat if they did so they will be caught up by section 15(1) (f) of the Banking Act1995 as engaging in 'unsafe and unsound practices.' And while the latter choicecan affect investor confidence in the banking sector, the former choice could beabused, say, where there is political pressure from the State on the regulator topersecute a particular bank, financial institution or any of its directors for allegedacts or courses of conduct deemed as 'unsafe and unsound practice.' Again, suchdevelopments can affect investor confidence in the market. So, what is the wayforward?

An interpretation of 'unsafe and unsound practice' would lend more meaningto section 15(1)(f) of Fiji Islands' Banking Act 1995. Indeed, it is section 15(1)(f)that provides for the concept of 'unsafe and unsound practice' in Fiji Islands' bankinglaw. While we recognize that it is not the primary responsibility of either the

2 See Fiji Islands' Banking Act 1995, sec 15(1)(f).

144

THE CONCEPT OF 'UNSAFE AND UNSOUND PRACTICE'

UNDER FIJI ISLANDS' BANKING ACT 1995 145

courts or the Reserve Bank to legislate a definition of 'unsafe and unsound practice',the Reserve Bank of Fiji Islands is not prohibited by any law from providing policyguidance on the meaning of the term 'unsafe and unsound practice'. Indeed, whileit is parliament that should have provided a definition, in the absence of such adefinition, the Reserve Bank should give a policy statement interpreting the term'unsafe and unsound practice.'

Some superficial cynics will readily warm up to arguments in favor of'constructive ambiguity', agitating that providing a succinct interpretation of 'unsafeand unsound practice' could limit the scope of activities that the Reserve Bank ofFiji Islands can treat as 'unsafe and unsound practice', especially if some novelcircumstances arise, leading to malpractices that are not covered within thatinterpretation. But let us take a more reasoned look. We are not arguing that theReserve Bank should decree a definition of 'unsafe and unsound practice' to remedythe omissions of parliament. Rather, we are saying that the Reserve Bank shouldprovide a policy interpretation of 'unsafe and unsound practice.' An interpretation,unlike a definition, is more likely to provide the public with a less precise, butwider in scope understanding of what types of activities fall within the meaning ofthe term 'unsafe and unsound practice.' Overall, an interpretation would lendmore meaning to what the regulator can do and cannot do.

The Concept of 'Unsafe and Unsound Practice'Under the banking law of Fiji Islands, the concept of 'unsafe and unsound practice'is covered in section 15(1)(f) of the Banking Act 1995. Section 15(1) provides asfollows:

15(1) Where a licensed financial institution or any of its officers has -(a) delayed the submission of reports or returns or publication thereofas required by law, regulation, rules, orders or other directives;(b) refused to permit an examination into the affairs of the institution;

(c) in relation to any application or report under this Act, or inconveying any information, data or returns required to be conveyedunder this Act, made or caused to he made therein a false statement;(d) failed or refused to comply with, or violated any banking law,regulation or any rules, orders or other directives issued by the ReserveBank;(e) committed any irregularities in the conduct of the business of theinstitution; or(f) in the opinion of the Reserve Bank, been conducting business in anunsafe or unsound manner,

the Reserve Bank may impose on the licensed financial institution or its officersuch sanctions as specified in subsection (2) of this Section as the ReserveBank may determine, after taking into consideration the attendantcircumstances such as the nature and gravity of the violation or irregularity.

KENNETH K MWENDA

However, section 15(1) (f) of the Banking Act 1995 does not provide a definitionof unsafe and unsound practice but merely refers to the term 'unsafe or unsoundmanner', pointing to section 15(2) instead for steps that the Reserve Bank of FijiIslands should take when, in its discretion, it determines that the conduct of aparticular bank or financial institution constitutes unsafe and unsound practice.But even section 15(2) does not resolve the conundrum. It simply states that:

The sanctions referred to in subsection (1) of this Section are as follows -

(a) to impose penalties for each type of violation in amounts as may bedetermined by the Reserve Bank to be appropriate, including an initial finenot exceeding $5,000 and a further fine not exceeding $1,000 for each dayduring which the contravention continues, and(b) to direct the licensed financial institution to take any action or to do anyact or thing whatsoever as may be specified by the Reserve Bank by notice inwriting to that licensed financial institution.

Interestingly, sections 15(1) and 15(2) of Fiji Islands' Banking Act 1995 do noteven refer to situations where the Reserve Bank of Fiji Island may be of the opinionthat a bank's unsound and unsafe practice would jeopardize that bank's obligationsto its depositors or other creditors, or that the unsound or unsafe practice is likelyto adversely affect the operation or stability of the financial system in Fiji Islands.Also, it is not clear at what point the directions of the Reserve Bank of Fiji Islands,issued under section 15(2) of the Banking Act 1995, become effective.

Can these directions be revoked or varied? Do the directions remain in effect inaccordance with the terms on which they were passed until they are discontinuedon appeal? Fiji Islands' Banking Act 1995 does not provide any meaningful responseto such issues.

Can the Reserve Bank of Fiji Islands restrict the scope of business of a culpablefinancial institution? Or does the Reserve Bank have powers to impose limitationson the financial institution's acceptance of deposits, the granting of credit or themaking of investments? Indeed, can the Reserve Bank prohibit a culpable financialinstitution from soliciting deposits either generally or from persons who are notalready depositors? And given that section 15(2) of the Banking Act 1995 providesthe Reserve Bank of Fiji Islands with wide and sweeping powers to deal with unsafeand unsound practice, can the Reserve Bank take control of and manage the bankingbusiness of a licensed financial institution in order to protect the stability of thefinancial system, or the interest of depositors, or the public interest?

In principle, there would be no objection to the invocation of such wide rangingpowers of the Reserve Bank. But it would be prudent for the Reserve Bank to showalso that due to factors such as the unsafe or unsound practice of a licensed financialinstitution, the stability of the financial system, and the interest of depositors, orpublic interest, is likely to be impaired.

146

THE CONCEPT OF 'UNSAFE AND UNSOUND PRACTICE'UNDER FIJI ISLANDS' BANKING ACT 1995 147

As a general rule, the Reserve Bank of Fiji Islands and any of its directors,officers and appointees are exempt from liability arising out of anything done oromitted to be done in good faith in the discharge or purported discharge of thefunctions and duties of the Reserve Bank under the Banking Act 1995.1 But whatis good faith? The concept of good faith may have different meanings to differentpeople. However, in day to day ordinary parlance, the term good faith may beunderstood as complying with some standards of decency and honesty.

Keily argues that good faith is not a principle which can be adequately definedand that it has been described vaguely as a rechristening of fundamental principlesof contract law and a phrase with no general meaning but which operates to excludevarious forms of bad faith.' Good faith is also seen as a discretionary standardpreventing parties from recapturing opportunities that were foregone whencontracting.6 In addition, good faith has been compared with unconscionability,'fairness, fair conduct, reasonable standards of fair dealing, decency, reasonableness,decent behaviour, a common ethical sense, a spirit of solidarity, communitystandards of fairness' 7 and 'honesty in fact,' indicating that good faith is an extremelyversatile concept.' Commenting on good faith, Keily observes:

[i]ts versatility is an essential characteristic because, as stated by Aristotle,'there are some cases for which it is impossible to lay down a law, so that aspecial ordinance becomes necessary. For what is itself indefinite can only bemeasured by an indefinite standard.' However, good faith is not an obligationto act altruistically. Regretfully, Laicke writes, 'one must leave the universaladoption of such a noble motive to some far-distant and much moreenlightened age.' Good faith does not require the abandoning of self-interestas the governing motive in contractual relations. However, it may prevent aparty from abusing a legal right'

See Banking Act 1995, sec 77.See Vallejo v Wheeler 98 Eng Rep 1012; Banque Financiere de la Citd SA v Westgate InsuranceCo Ltd (Court of Appeal of England, 28 July 1988, unreported); Allen v Flood 1898 AppCas 1, at 46 (PC 1897); The ICCArbitration Case No 8611 of 1997.

5 T Keily, 'Good Faith and the Vienna Convention on Contracts for the International Saleof Goods (CISG),' Vindobona Journal ofInternational Commercial Law and Arbitration,Vol 3, No 1 (1999), pp 15-40, available Online at: <http://www.cisg.law.pace.edu/cisg/biblio/keily.html#faith>, visited on 11 February 2005.

6 See E A Farnsworth, 'The Eason-Weinmann Colloquium on International and ComparativeLaw: Duties of good faith and fair dealing under the UNIDROIT Principles, relevantinternational conventions, and national laws,' Tulanefournaloflnternationaland ComparativeLaw, Vol 3, No 47, at pp 59-61.See H K Licke, 'Good Faith and Contractual Performance,' in P Finn (ed), Essays onContract (Sydney: The Law Book Company Limited, 1987), p 160.

8 See generally T Keily, op cit note 5 above.I Ibid.

KENNETH K MWENDA

Let us now turn to look at how other developing countries, such as those in Africa,have dealt with the concept of unsafe and unsound practice. Following below is anexample from Zambia.

2. The Zambian Case of Access Finance Serviceset al v Bank of Zambia

In early 2003, the Bank of Zambia took over possession of both Access FinanceServices Limited (AFSL) and Access Leasing Limited (ALL).o The two companieswere alleged to have been involved in criminal activities that included unsafe andunsound practice." Contesting the decision of the central bank (BoZ), theapplicants, AFSL and ALL, applied for judicial review to the High Court ofZambia. 12

The applicants challenged the decision of BoZ to place them into compulsorywinding-up. BoZ argued that both AFSL and ALL not only breached the taw butalso operated their businesses recklessly, a situation that prompted BoZ to placethem under liquidation. According to BoZ, the two institutions were closed downon grounds that they violated the Banking and Financial Services Act 1994,including other written laws and, also, because they were insolvent.'" BoZ submittedbefore High Court Judge Japhet Banda that the wording of sections 81, 84(B) and101 of Zambia's Banking and Financial Services Act 1994 made it clear thatParliament left it to BoZ to determine and establish facts that may compel BoZ totake its supervisory actions against any bank or financial institution. 4 BoZcontended that the determination of insolvency or solvency of any financialinstitution and the determination of what action was necessary to enable it carryoutits functions under Zambia's Banking and Financial Services Act 1994 was a matter

10 See Bank of Zambia, 'Press Statement, January 14, 2003: BOZ takes possession of AccessFinancial Services and Access Leasing' available Online at: <http://www.boz.zm/MedialAccess %20FinancialServices.htm> visited on 17 April 2005. See also Access Finance ServicesLimited andAccess Leasing Limited v Bank ofZambia 2003/HP/359, unreported case in theHigh Court of Zambia (Judgement delivered on 1 September 2004).

11 See Bank of Zambia, 'Press Statement, 14 January 2003: BOZ Takes Possession of AccessFinancial Services and Access Leasing', Ibid.

12 Access Finance Services Limited andAccess Leasing Limited v Bank ofZambia 2003/HP/359,unreported case in the High Court of Zambia (Judgement delivered on 1 September 2004).

13 See Zambezi Times Online, 'Access Finance Engaged in Crime,' available Online at: <http://www.zambezitimes.com/fulltxt.php?id_news= 1879>, visited on 17 April 2005.

" Ibid.

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THE CONCEPT OF 'UNSAFE AND UNSOUND PRACTICE'UNDER FIJI ISLANDS' BANKING ACT 1995 149

that Parliament entrusted BoZ to resolve;" that it had exercised its supervisorypowers properly upon examining the business activities and financial books ofAFSL and All; and tht it was not open to the applicants in a judicial reviewapplication to challenge merits of BoZ's decision."6

BoZ argued further that although, as a supervisory agency, it had not prescribedaccounting systems and software packages to be followed by banks and financialinstitutions, AFSL and ALL did engage in obscure accounting practices designedto disguise sources of funds attributed to certain credit accounts and therebyobstructing the audit trail. 7 According to BoZ, AFSL and ALL had been using

journal vouchers to post receipt of funds to general accounts with confusing ormisguiding narrations, and this practice 'was obviously contrary to the spirit ofZambia's Banking and Financial Services Act."'

AFSL and ALL were quick to counter-argue that the alleged unsafe and unsoundpractices committed by AFSL and ALL were not defined anywhere in Zambia'sBanking and Financial Services Act 1994.9 Indeed, section 77(1) of Zambia'sBanking and Financial Services Act 1994 provides as follows:

Where, in the opinion of the Bank of Zambia, a bank or financial institutionis committing or pursuing or is about to commit or pursue on behalf of the bankor financial institution any act or course of conduct that is considered by theBank ofZambia as unsafe or unsound practice, the Bank of Zambia may enterinto one or more written agreements with the bank or financial institution orits board of directors to establish a programme of action to counteract theunsafe or unsound practice and to establish or maintain safe and soundpractices in the conduct of the business of the bank or financial institution.20

Section 77(1), as reproduced above, does not provide a definition of 'unsafe andunsound practice' but merely refers to the term 'unsafe and unsound practice' andhighlights the steps that BoZ should take whenever, in its discretion, it determines

15 Ibid.16 Ibid.17 Ibid.18 Ibid.19 Ibid.20 Section 77(1) of Zambia's Banking and Financial Services Act 1994, as amended by the

Banking and Financial Services Act (Amendment) Act 2000.

KENNETH K MWENDA

that an actor course ofconduct of a particular bank or financial institution constitutes'unsafe and unsound practice.'2 1

Notwithstanding the submissions made by the parties to the case,22 not muchthought was accorded by the court to the concept of 'unsafe and unsound practice'under Zambia's Banking and Financial Services Act 1994. Judge Banda merelyalluded to section 77 of Zambia's Banking and Financial Services Act 1994 onpages J 13 and J 19 of his ruling, without explaining, obiter dictum, what constitutesunsafe and unsound practice. And although an Order for Certiorari was granted,on the grounds that BoZ misdirected itself in determining that AFSL and ALLwere insolvent and that the two companies should be placed under compulsoryliquidation, the court did not address fully the issue whether AFSL and ALL hadengaged in unsafe and unsound practice to entitle BoZ to take punitive or correctivemeasures against the two companies. However, in making the ruling, Judge Bandashould have taken cognizance of the High Court's unlimited jurisdiction and shouldhave spelt out a judicial interpretation of unsafe and unsound practice.

A Critical Analysis of the Ruling in Access FinanceServices et al v Bank of ZambiaGiven the facts and ruling in Access Finance Services Limited and Access LeasingLimited v Bank ofZambia,23 what would happen if, for example, although having

21 Section 77(2) of Zambia's Banking and Financial Services Act 1994 is as follows: 'Wherethe Bank of Zambia is unable to obtain an agreement under subsection (1) within a time,and in a form and content, satisfactory to the Bank of Zambia, or where the Bank ofZambia considers that the need for prompt action makes the negotiating of such anagreement impractical, the Bank of Zambia may direct the bank or financial institution orany director, manager or other person concerned in its management to do either or both ofthe following: (a) cease or refrain from doing the act or pursuing the course of conduct; (b)perform such acts as, in the opinion of the Bank of Zambia are necessary to rectify thesituation.' In particular, but without limiting the generality of subsection (2) above, theBank of Zambia can, in accordance with section 77(3) of Zambia's Banking and FinancialServices Act 1994, (a) direct the culpable bank or financial institution to refrain fromadopting or pursuing a particular course of action or to restrict the scope of its business ina particular way; (b) impose any limitation on the bank's acceptance of deposits or thepayment of interest thereon, the granting of credit, the making of investments or the paymentof dividends; (c) prohibit the bank or financial institution from soliciting deposits or thepayment of the interest thereon either generally or from specified persons or classes orpersons; (d) prohibit the bank or financial institution from entering into any othertransaction or class of transactions, or from commencing or continuing any activity whichit is permitted under Zambia's Banking and Financial Services Act 1994 to carry on; or (e)require the suspension or removal from office of any director, officer or other person.

22 Constant reference was made in the Judgement to sections 81, 84, 86 and 101 of theBanking and Financial Services Act 1994.

23 2003/HP/359, unreported case in the High Court of Zambia (Judgement delivered on1 September 2004).

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THE CONCEPT OF 'UNSAFE AND UNSOUND PRACTICE'UNDER FIJI ISLANDS' BANKING ACT 1995 151

engaged in unsafe and unsound practices, AFSL and ALL had now ceased to doso? Would this fact alone exonerate AFSL and ALL from liability since section 77(1) of Zambia's Banking and Financial Services Act 1994 talks only in the presentand future tenses that 'where, in the opinion of the Bank of Zambia, a bank orfinancial institution is committing or pursuing or is about to commit or pursue onbehalf of the bank or financial institution any act or course of conduct that isconsidered by the Bank ofZambia as unsafe or unsound practice'? Indeed, these aresome of the issues that should have been resolved by an obiter dictum of the court.

Also, what would happen if, AFSL and ALL, for example, were to engage inunsafe and unsound practice solely for corrective purposes and in order to preventfuture abuses? Could they still be held liable under section 77 of Zambia's Bankingand Financial Services Act 1994? The court, with the assistance of legal counsel ofeither party, and through an obiter dictum, should have given thoughtfulconsideration to such matters since the High Court of Zambia does enjoy unlimited

jurisdiction.Furthermore, it would have been helpful if BoZ had promulgated some examples

of 'unsafe and unsound practice'. Such examples could have included tax evasion,money laundering and anti-competitive banking practices. In many other commonlaw jurisdictions, the business operations of banks and financial institutions thatinvolve such unethical practices as predatory lending, insider lending and thepayment of excessive management fees constitute 'unsafe and unsound practice'.Against this background, BoZ should have made an effort to interpret the statutoryterm 'unsafe and unsound practice'. A general policy statement could have beenadopted by BoZ to highlight examples of 'unsafe and unsound practice'. Such apolicy statement need not provide an exhaustive list of examples, but it shouldallow for constructive ambiguity so that BoZ can determine or include otherincidents that are not listed as constituting 'unsafe and unsound practice'. Toillustrate, the Statement on Unsafe and Unsound Banking Practices issued by theOklahoma State Banking Department provides as follows:

The concept of unsafe and unsound banking practices is one which touchesupon the entire operation of a bank. It is impossible to create a single, all-inclusive definition of activities which would fall within its scope. WHETHERA PARTICULAR ACTIVITY IS AN UNSAFE OR UNSOUNDBANKING PRACTICE MUST BE DETERMINED IN LIGHT OF ALLRELEVANT FACTS. The Oklahoma State Banking Department furnishesthe following list as a guideline only. The activities described herein are notirrebuttably presumed to be unsafe or unsound. Conversely, not all practiceswhich might under the circumstances be termed unsafe or unsound arementioned here.(1) Operating with management whose policies and practices are detrimental

to the bank or trust company and jeopardize the safety of the bank's ortrust company's deposits.

(2) Operating with total adjusted capital and reserves that are inadequate in

KENNETH K MWENDA

relation to the kind and quality of the assets of the bank or trust company.(3) Operating in a way that produces a deficit in net operating income.(4) Operating with a serious lack of liquidity, especially in view of the asset

and deposit structure of the bank or trust company.(5) Engaging in speculative and hazardous investment policies.(6) Paying excessive cash dividends.(7) Excessive reliance on purchased deposits.(8) Excessive reliance on letters of credit, either issued by the bank or accepted

as collateral to loans advanced.(9) Excessive amounts of loan participations sold.(10) Paying interest on participations without advising participating

institution that the course of interest was not from the borrower.(11) Selling participations without disclosing to the purchasers of those

participations material, non-public information known to the bank.(12) Failure to limit, control and document contingent liabilities.(13) Engaging in hazardous lending and lax collection policies and practices,

as evidenced by:(a) an excessive volume of loans subject to adverse classification,(b) an excessive volume of loans without adequate documentation,

including credit information,(c) excessive net loan losses,(d) An excessive volume of loans in relation to the total assets and deposits

of the bank or trust company,(e) an excessive volume of weak and self-serving loans to persons

connected with the bank or trust company, especially if a significantportion of these loans are adversely classified,

(f) excessive concentrations of credit, especially if a substantial portionof this credit is adversely classified,

(g) indiscriminate participation in weak and undocumented loansoriginated by other institutions,

(h) failing to adopt written loan policies,(i) an excessive volume of overdue loans, and(j) failure to diversify the loan portfolio of the bank.

(14) Permitting officers to engage in lending practices beyond the scope oftheir position.

(15) Operating the bank with inadequate internal controls.(16) Operating the bank with excessive volume of out-of-territory loans.(17) Failure to heed warnings and admonitions of the supervisory authorities

of the bank or trust company.(18) Continued and flagrant violation of any laws, rules, regulations or written

agreements between the bank or trust company and the BankCommissioner or the Banking Board, or orders of the BankCommissioner or the Banking Board.

(19) Any action likely to cause insolvency or substantial dissipation of assets

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THE CONCEPT OF 'UNSAFE AND UNSOUND PRACTICE'UNDER FIJI ISLANDS' BANIGNG ACT 1995 153

or earnings of the bank or trust company or likely to seriously weakenthe condition of the bank or trust company or otherwise seriouslyprejudice the interest of its depositors.24

The Hawaii Administrative Rules 5 provide another example. These rules state asfollows:

(a) The concept of an unsafe or unsoundpractice is one of general applicationwhich touches upon the entire field of operations of a financial institution.An unsafe or unsound practice encompasses any action or lack of action,which is contrary to generally accepted standards of prudent operation,the possible consequences ofwhich, if continued, would result in abnormalrisk of loss or damage to an institution, its depositors, or its shareholders.An activity not necessarily unsafe or unsound in every instance may be soin a particular instance when considered in light of all relevant factspertaining to that situation.

(b) An unsafe or unsound practice can result from either action or inactionby management. Although the law does not define the term unsafe orunsound practice, the division (ie in Hawaii) has established examples ofsuch practices, some of which are listed below.

(c) Inaction by management which is deemed an unsafe or unsound practiceincludes, but is not limited to:(1) Failure to provide adequate supervision and direction over officers of

the institution;(2) Failure to make provision for an adequate reserve for possible loan

losses;(3) Failure to post the general ledger prompdy;(4) Failure to keep accurate books and records;(5) Failure to enforce programs for repayment of loans; or(6) Failure to obtain or maintain on the premises evidence of priority of

liens on loans secured by real estate.(d) Action by management which is deemed an unsafe or unsound practice

includes, but is not limited to:(1) Operating with an inadequate level of capital for the kind and quality

of assets held;(2) Engaging in hazardous lending or lax collection practices such as:

24 US Oklahoma State Banking Department, 'Statement on Unsafe and Unsound BankingPractices,' available Online at: <http://www.state.ok.us/-osbd/Banks/Statutes/unsound.htm>, visited on 25 April 2005.

5 Hawaii Administrative Rules, Title 16, US Department ofCommerce and Consumer Affairs,Chapter 27, Supervisory and Enforcement Action Relating to Financial Institutions, availableOnline at: <http://www.hsba.org/hsba/LegalResearchiHawaiilHawaii/Admin/DCCA/ch27.cfin>, visited on 17 April 2005.

KENNETH K MWENDA

extending credit which is inadequately secured, extending creditwithout first obtaining complete and current financial information,extending credit in the form of overdrafts without adequate controls,and extending credit with inadequate diversification of risk;

(3) Operating without adequate liquidity, in light of the institution's assetand liability mix;

(4) Operating without adequate internal controls such as: failing tomaintain controls on official checks and unissued certificates ofdeposits, failing to segregate duties of institution personnel, and failingto reconcile differences in correspondent bank accounts;

(5) Engaging in speculative or hazardous investment policies; or(6) Paying excessive dividends in relation to the institution's capital

position, earnings capacity, and asset quality.2 6

Following below is an examination of some notable theories on statutoryinterpretation that can guide the Reserve Bank of Fiji Islands in interpreting theterm 'unsafe or unsound practice.'

3. Statutory Interpretation

There are various theories on rules of statutory interpretation." Let us take areasoned look at some of them, as we examine the term 'unsafe and unsoundpractice' under Fiji Islands' Banking Act 1995. The literal rule implies giving thetext its ordinary, everyday meaning, and applying it exactly as written.2 8 This rulecame into prominence in the 18th century. The British Parliament was becomingincreasingly significant as a source of law, usurping the common law and the Royalprerogative. 29 Until this time, the courts had tended to regard statutes as a deviceto plug holes in the common law.3 0

The golden rule, on the other hand, is best explained by referring to the usuallycited authority of Lord Wensleydale in Grey v Pearson: '[T]he grammatical andordinary sense of the words is to be adhered to, unless that would lead to someabsurdity ... in which case the ordinary sense of the words may be modified so asto avoid that absurdity and inconsistency but no farther'."

26 Ibid.27 See below.28 K Boone, 'Kevin's English law glossary: statutory interpretation, available Online at: <http:

//www.kevinboone.com/lawglos-statutory-interpretation.html>, visited on 18 April 2005.29 Ibid.3o Ibid.31 (1857) 6 HL Cas 1.

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THE CONCEPT OF 'UNSAFE AND UNSOUND PRACTICE'UNDER FIJI ISLANDS' BANKING ACT 1995 155

Probably the most famous application of the golden rule is R vAllen (1872),32a case of bigamy. The wording of the legislation at the time defined bigamy asbeing married more than once. Since the second attempt at marriage would bevoid it would be impossible, on such a definition, to commit bigamy. In this caseit was held that bigamy meant to go through the ceremony of marriage a secondtime.3

A more purposive approach to statutory interpretation can be found in themischief rule. The rule itself is venerable; the name is taken from Heydons case,-and in outline says that the job of the judge is to determine what defect in thecommon law the statute set out to remedy.35 A broader, and more usual, reading isthat the judge should apply what is ascertained to be the intention ofparliament.' But as Boone observes, courts do not always apply the mischief ruleeven when the 'mischief is clear, and it would be plainly sensible to do so.37 Forexample, in Fisher v Bell 38 the prosecution of a shopkeeper for displaying flick-knives for sale failed because the wording of the English statute, the Restriction ofOffensive Weapons Act 1951, used the term 'offer for sale.' An offer for sale hasthe sense that if it is accepted a contract is formed then and there. Displayinggoods in a shop is widely understood not to form an offer for sale in such terms: itis merely an 'invitation to treat.' The court expressed dismay that it could not findaccording to the clear intention of Parliament, and declined to apply the mischiefrule. In the longer term, it could be argued, this was the right decision, because thestatute was ammended less than a year later to correct the defect in wording.39 Thereality is that it is difficult to predict the interpretative approach that a court willadopt in a particular case." As early as 1938, Willis wrote:

[A] court invokes whichever of the rules produces a result that satisfies itssense of justice in the case before it. Although the literal rule is the one mostfrequently referred to in express terms, the courts treat all three as valid andrefer to them as occasion demands, but, naturally enough, do not assign anyreason for choosing one rather than another.4

32 See K Boone, 'Kevin's English law glossary. statutory interpretation,' available Online at:<http://www.kevinboone.com/lawglosstatutory interpretation.html>, visited on 18 April2005.

3 Ibid.3 (1584) 3 Co Rep 7a.35 See K Boone, 'Kevin's English law glossary. statutory interpretation,' available Online at:

<http://www.kevinboone.com/lawglosstatutory interpretation.htnl>, visited on 18 April2005.

3 Ibid.3 Ibid.31 [1961] 1 QB 394.3 See K Boone, op cit, note 35.40 Ibid41 See J Willis, 'Statute interpretation in a nutshell,' 16 Can Bar Rev 1 (1938).

KENNETH K MWENDA

In the case of Fiji Islands, could we say that the statutory words 'unsafe or unsoundpractice' should be taken together and read as one, or that the word 'unsafe' shouldbe distinguished and read separately from the word 'unsound'? Here, the word'or', standing between the words 'unsafe' and 'unsound' is not a conjunction. Thus,unlike in jurisdictions that use the rubric 'unsafe and unsound practice', such asZambia,4 2 where an act or course of conduct that is either unsafe or unsoundshould be seen to be both unsafe and unsound to constitute an offence,4 3 in FijiIslands the words 'unsafe' and 'unsound' should be distinguished and read separately.In short, the position in Fiji Islands is that if an act or conduct of a financialinstitution is unsafe, yet sound, liability can still ensue. By parity of reasoning, ifan act or conduct is unsound, yet safe, liability can still arise for 'unsafe or unsoundpractice'. All that needs to be proven here is that the conduct in question was

42 Under section 77 of Zambia's Banking and Financial Services Act 1994 (reproduced above),the statutory provision that covers 'unsafe and unsound practice' in Zambian banking law,the word 'and', standing between the words 'unsafe' and 'unsound' is a conjunction. Thus,unlike the case of Fiji Islands, in Zambia, the words 'unsafe' and 'unsound' should be readtogether as one. In short, the Zambian position is that if an act or conduct of a financialinstitution or bank is unsafe, yet sound, then no liability ensues. By parity of reasoning, ifan act or conduct is unsound, yet safe, then no liability arises for 'unsafe and unsoundpractice'. In Zambia, unlike Fiji Islands, the act or course of conduct in question should beboth unsafe and unsound for liability to arise.

4 In Zambia's case, the conjunction 'and', standing between the words 'unsafe' and 'unsoundpractice', in the title of section 77 of Zambia's Banking and Financial Services Act 1994, isconfined only to the title of that statutory provision. But the actual wording of section 77,in contrast to the title of that statutory provision, does not use the conjunction 'and'. Ituses the word 'or'. And the wording of both sections 77 and 81(1)(c)(i) of the Banking andFinancial Services Act 1994 adopts the phrase 'unsafe or unsound'. There is no use of aconjunction there. However, in an e-mail message to this author from the Bank of Zambia(dated 13 May 2005), commenting on a draft of this paper, no objection was raised regardingthe interpretation that the rubric or title 'unsafe and unsound practice' entails that an act orcourse of conduct must be both unsafe and unsound for liability to arise under section 77of Zambia's Banking and Financial Services Act 1994. This implicit acquiescence of thebanking supervisors themselves, confirms that the practice of banking supervision in Zambiafavours the view that for liability to arise under section 77 of the Banking and FinancialServices Act 1994, an act or course of conduct must be both unsafe and unsound. Indeed,this is the view that we also subscribe to, and the view is further buttressed by the implicitacquiescence of Bank of Zambia. We are, however, awake to possible arguments by somecynics that the tide of a statutory provision per se does not say much about what the statutoryprovision intends to achieve and that reference should be made instead to the actual wordingof the statutory provision. Convincing as this view may seem, it is the draftsman who didnot give thoughtful consideration to the discrepancy between the title of section 77 of theBanking and Financial Services Act 1994 and the actual wording of that statutory provision,including the wording in section 81(1)(c)(i) of the Banking and Financial Services Act1994. Therefore, to resolve the ambiguity here, recourse should be made also to the positionof Bank of Zambia since it is the sole banking supervisory authority in Zambia.

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THE CONCEPT OF 'UNSAFE AND UNSOUND PRACTICE'UNDER FIJI ISLANDS' BANKING ACT 1995 157

either unsafe or unsound for liability to arise under section 15(1) of Fiji Islands'Banking Act 1995. But, then, the Banking Act 1995 does not provide any definitionsof what constitutes 'unsafe practice', on the one hand, and 'unsound practice', onthe other. So, how do we even begin to ponder on the mischief rule or the goldenrule if we do not know the statutory meaning of the words 'unsafe' and 'unsound?

Let us turn to the United States of America to see how financial services regulatorsand the courts have approached the term 'unsafe and unsound practice.

4. The Treatment of 'Unsafe andUnsound Practice' in the USA

In the United States of America, the Federal Deposit Insurance Corporation (FDIC)argues that the term 'unsafe and unsound practices' is a generic term, like 'negligence'or 'probable cause,' having a central meaning that must be applied to constantlychanging factual circumstances." An unsafe or unsound practice, FDIC argues, isany action, or lack of action, that is contrary to generally accepted standards ofprudent operation, the possible consequences of which, if continued, would beabnormal risk or loss or damage to an institution, its shareholders, or the agenciesadministering the insurance funds.4 5

Section 8(b) of the US Federal Deposit Insurance Act refers to the term 'unsafeor unsound banking practices'. However, the statute does not define the phrase orspecify what particular acts and conduct constitute such practices. As FDIC notesin its initial brief,47 the legislative history of the Financial Institutions Supervisoryand Insurance Act of 1966 (which amended Section 8 by adding, among otherthings, subsection (b)) provides some clarity as to what constitute unsafe or unsoundbanking practices.

The Senate and the House both quoted with approval from a memorandumintroduced during committee hearings by then Chairman of the Federal HomeLoan Bank Board John E Horne.4 The memorandum stated that the term 'unsafeor unsound practices' is a generic term, like 'negligence' or 'probable cause,' havinga central meaning which must be applied to constantly changing factualcircumstances.4 9 Further, the memorandum provides that an 'unsafe or unsound

4 The US Federal Deposit Insurance Corporation, 'FDIC Enforcement Decisions and Orders:Unsafe or Unsound Banking Practice-Statutory Standard,' available Online at: <http://www.fdic.gov/banklindividual/enforcement/5030.html>, visited on 17 April 2005.

45 Ibid.46 12 USC § 1818(b).1 See The US Federal Deposit Insurance Corporation, op cit, note 44.48 112 Cong Rec 24022 (daily ed 4 October 1966) (House); 112 Cong Rec 25416 (daily ed

13 October 1966) (Senate).49 Ibid.

KENNETH K MWENDA

practice' is 'any action, or lack of action, which is contrary to generally acceptedstandards of prudent operation, the possible consequences of which if continued,would be abnormal risk or loss or damage to an institution, its shareholders, or theagencies administering the insurance funds.'5 o

In the United States of America, the courts have adopted the same definition ofthe term 'unsafe or unsound' practices for cases falling under section 8(b) of theUS Federal Deposit Insurance Act." In doing so, the courts have tended to deferto the expertise of the bank regulatory agencies in interpreting or defining whatconstitutes an 'unsafe or unsound' practice, limiting their review to a determinationof whether the agency's action was arbitrary, capricious, or otherwise unsupportedby substantial evidence in the record.52 And directors of banks are held to a standardof ordinary care and prudence in the administration of bank affairs.5' The directorsare entitled to delegate banking business to their duly authorized officers, but maybe held liable for negligence if they fail to exercise reasonable supervision over themanagement. 4 For example, where a bank's directors exercise less than ordinarycare by permitting loan and liquidity problems to steadily deteriorate after thoseproblems are brought to their attention by the regulator, then the directors can beheld liable for allowing the bank to engage in 'unsafe and unsound practices.'

In Lippitt v Ashley," the court held the directors of a bank liable for negligencein the failure of the bank due to the defalcations of its treasurer. The court statedthat the directors had failed to exercise ordinary reasonable care in supervising thebank's officers, even though they had discharged their duty to select an operatingofficer, had diligently attended directors meetings, had met often informally todiscuss the bank's business, had selected competent auditors and reviewed theirwork, and had made inquiry of the dishonest officer as to the condition of thebank. Indeed, the board of directors of a bank has a duty to investigate wherenecessary to protect shareholders' interests, to supervise the bank's afEirs, to havea general knowledge of its business, and to know to whom and upon what securityits large lines of credit are given. 6

5o Financial Institutions Supervisory and Insurance Act of 1966: Hearings on S 3158 Beforethe House Comm on Banking and Currency, 89th Cong, 2d Sess, 49-50 (1966).See First Nat' Bank ofEden v Department of the Treasury, 568 F2d 610, 611 n2 (8th Cir1978) (per curiam); First Nat' Bank ofLa Marque v Smith, 610 F2d 1258, 1265 (5th Cir1980).

52 See for example, Eden, 568 F2d at 611; Groos Nat' Bank v Comptroller ofthe Currency, 573F2d 889, 897 (5th Cir 1978); La Marque, 610 F2d at 1264. See also In re Franklin Nat'!Bank Securities Litigation, 478 F Supp 210, 221 (EDNY 1979).

5 Briggs v Spaulding, 141 US 132, 165-66 (1891).1 Ibid.5 94 A 995 (Conn 1915).56 De Pinto v Provident Security Life Insurance Co, 374 F2d 37, 46 (9th Cir), cert denied, 389

US 822 (1967); Gibbons v Anderson, 80 F 345, 349 (CC WD Mich 1897).

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THE CONCEPT OF 'UNSAFE AND UNSOUND PRACTICE'UNDER FIJI ISLANDS' BANKING ACT 1995 159

As a general rule, the plain language of section 8(b) of the US Federal DepositInsurance Act indicates that unsafe or unsound practices need not be ongoing atthe time a cease-and-desist order is issued.57 Section 8(b)(1) of the Act provides, inpertinent part," that a cease-and-desist order may be issued against any bank '[i] fupon the record made at any.. .hearing, the agency shall find that any violation orunsafe or unsound practice specified in the notice of charges has been established..'"Further, judicial interpretations of the cease-and-desist powers of FDIC and otheragencies support the view that a cease-and-desist order can be issued for unsafe orunsound practices a bank has committed for corrective purposes and in order toprevent future abuses.A And FDIC observes that such an approach is entirelyconsistent with the remedial and enforcement policies underlying section 8(b) ofthe US Federal Deposit Insurance Act.6 1

If cessation of prior unlawful activity were considered a sufficient defense to anaction under section 8(b), a bank could engage in unsafe or unsound practiceswith virtual impunity, knowing that it could bring those practices to a halt whenchallenged by a bank regulatory agency. Indeed, the cessation of unsafe or unsoundbanking practices is not a defense. The bank will still be liable if, with virtualimpunity, it engaged in unsafe and unsound practices, knowing that it could bringthose practices to a halt before being challenged by a bank regulatory agency. So,what lessons can the Reserve Bank of Fiji Islands draw from the positions of theUnited States of America and Zambia, respectively?

5. Conclusion

This paper has examined the concept of unsafe and unsound practice under FijiIslands' Banking Act 1995. It was argued that while jurisdictions such as the UnitedStates of America have had a number of court cases lend more meaning to theterm 'unsafe and unsound practice', and that bank regulators in a number ofdeveloped countries have been quick to provide policy guidance and interpretationof the term 'unsafe and unsound practice', in Fiji Islands, like the case of Zambia,that experience, hitherto, is not evident. Further, the paper noted that although

5 See The US Federal Deposit Insurance Corporation, 'FDIC Enforcement Decisions andOrders: Unsafe or Unsound Banking Practice-Statutory Standard,' available Online at:<http:/www.fdic.govlbanklindividuallenforcementl5030.html#HN 1>, visited on 17 April2005.

58 12 USC § 1818(b) (emphasis added).51 See The US Federal Deposit Insurance Corporation, op cit, note 57.6 See First Na'1 Bank ofBellaire v Comptroller ofthe Currency, 697 F2d 674, 680-81 (5th Cir

1983); and Zale Corp and Corrigan-Republic, Inc v FTC, 437 F2d 1317, 1320 (5th Cir1973).

61 See The US Federal Deposit Insurance Corporation, op cit, note 57.

160 KENNETH K MWENDA

what constitutes an 'unsafe and unsound practice' depends on the facts of eachcase, the Reserve Bank of Fiji Islands should consider spelling out an interpretationof 'unsafe and unsound practice' in order to promote the regulator's consistent andwell-meaning enforcement of the law.

Section 78(1) of Fiji Islands' Banking Act 1995 was identified as providing theReserve Bank of Fiji Islands with the legal pedigree to issue a statutory interpretationof the term 'unsafe and unsound practice'.

The interpretation by the Reserve Bank of Fiji Islands could be codified in amanner like the Statement on Unsafe and Unsound Banking Practices issued by theOklahoma State Banking Department and the Hawaii Administrative Rules. Andpursuant to section 78(1) of Fiji Islands' Banking Act 1995, regulations,interpretation bulletins or such other regulatory statements as the Reserve Bank ofFiji Islands may consider necessary or desirable for the administration of Fiji Islands'Banking Act 1995 all form the mediums through which the Reserve Bank of FijiIslands can provide an interpretation of the term 'unsafe or unsound practice.'