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Financial Law
15PFMC058-A14/15
Dr. Richard Alexander
Assignment 1
Word Count Including Footnotes, Excluding Title Page and
Bibliography: 3999
activities has left any attempted classification inadequate. 1 This universal model
of banking has begun to change, as increasingly tough regulation and capital
requirements make the costs of maintaining a global, universal bank untenable 2.
Nonetheless, deposit accounts continue to represent a major portion of a retail
banks business, with over 90% of the United Kingdoms adult population
[maintaining] a bank account. 3 As the proportion of UK citizens with an account
has increased so has the belief that [f]rom a customers view, maintaining a
bank account is an essential form of social inclusion, 4 as participation in banking
has increased so has retail customers exposure to shocks in other areas of
banking.
The core business of banking has traditionally encompassed deposit-taking and
lending5 and the question of what the duties owed by a deposit-taking bank is
discussed and whether they are appropriate in the 21 st century follows.
The sources of these duties are varied. Following the Financial Crisis of 2007 and
its aftermath new regulations and regulators were created but the general theme
within the UK banking sector has been to ward off the threat of greater
regulatory control of banking activities, especially in the retail
arose. Deposit-taking10 falls within this and is defined within the Regulated
Activities Order11:
(1) Accepting deposits is a specified kind of activity if
(a) money received by way of deposit is lent to others; or
(b) any other activity of the person accepting the deposit
is financed wholly, or to a material extent, out of the
capital of or interest on money received by way of
deposit.12
This activity is restricted to being in the course of business 13 and within the
United Kingdom.
In order to determine to whom a bank owes duties, it is necessary to ascertain
who its customers are. From this duties will be either be implied, such as with the
Sale of Goods and Services Act s.13, or will arise as a consequence of the
contract to provide banking services. Further there may also be equitable duties,
depending on the nature of the transactions between the bank and customer.
This contract, or mandate, has become ever more detailed as banking has
developed and it is from this that the bulk of the duties owed by the bank arise.
Ellinger states that there is no comprehensive statutory definition of the term
10 s. 5 FSMA
11 FSMA 2000 (Regulated Activities) Order 2001 (SI 2001/544) Part II
12 Ibid. s.5(1)
13 SCF Finance Co. Ltd v Masri (No 2) [1987] QB 1007
customer14 but the common law authorities remain useful. If a person, bona
fide, opens an account in their own name 15 with a bank or has one opened for
them16, then they will become a customer of the bank it must be noted though
that the mere fact an account has been opened in someones name does not
make them a customer, it must have been bona fide or with good authority for
this relationship to arise.17 The agreement will generally be an account mandate
that is signed, according to modern practice 18 when the customer opens an
account.19 This mandate will contain express provisions governing most
eventualities and duties relating to the account (other duties may be implied).
The customer will be protected from contracting away their rights in this
mandate if they are deemed to be unreasonable under the Unfair Contract Terms
Act 1977 (UCTA 1977) and the Unfair Terms in Contract Regulations 1999
(UCTRs 1999).
Despite arising from a model of goldsmith-bailors who protected items left on
bailment,20 the modern relationship between the bank and its customer is more
similar to that of agent-principal, based on their agreement. It has been
characterised as that of creditor and debtor. 21 When depositing money into an
account, the depositor does not expect the precise bills to be returned, as stated
14 Supra fn.3, 115
15 Lacave & Co v Crdit Lyonnais [1887] 1 QB 148
16 Ladbroke & Co v Todd (1914) 30 TLR
17 Rowlandson v National Westminster Bank Ltd [1978] 1 WLR
18 Supra fn.6, 14.17
19 Supra fn.5, 34-257
20 Supra fn.3, 119
with the banks duty to its customer on collecting. There may be statutory relief
32
An integral33 part of a banks relationship with its customer is the duty that it will
provide an up to date record of any transactions and a balance. Traditionally
passbooks or paper statements were the primary means of accounting for the
level of credit attached to a customers account but computerisation has led to
their replacement by up to date snapshots of an account whether on the
internet or via ATM machines. It can now be said that as a result [b]anking is
now no longer the exclusive realm in which customers and bank employees meet
face to face in order to check an account or make a transfer. It is also no longer
possible to think in terms of paper based payment instructions and settlement
processes.34 The weight of an accurate reflection of an accounts balance was
recognised by Abbott CJ in Skyring v Greenwood and Cox: [i]t is of great
importance to any man [] Every prudent man accommodates his mode of living
to what he supposes to be his income. 35
The duty to provide up to date information on the status of the account is
problematic because at law, the statement of an account balance is not
conclusive evidence of the state of the account; it is merely prima facie. 36 This
leaves the scenario envisaged by Abbott CJ as a possibility the customer could
act in accordance with the information available. The law is inconclusive on this
32 Cheques Act 1957 s.4(1)
33 Supra fn.1, 252
34 A. Azzouni Internet Banking and the Law J.I.B.L.R. 2003, 18(9), 351-362
35 (1925) 4 B & C 281, 289
36 Supra fn.1, 253
point. In Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd 37 banks sought to
shield themselves from liability relating to incorrect statements and the onus was
placed upon the customer to check their statement and report to the bank any
inconsistencies any failure to do so would absolve the bank of liability. It was
held in Tai Hing that the terms were too loosely worded to have the effect the
banks wished. Nonetheless, Anora supports 38 the position in Arrow Transfer Co
Ltd. V Royal Bank of Canada,39 in which a verification of account clause on the
customer was upheld. This is a welcome approach since the greater access to
account details via technology brings with it a greater onus on the customer
subject to any clause being reasonable under UCTA 1977 and UCTRs 1999.
The duty of confidentiality arises from the fact that that a banks relationship
with its customer comprises elements of an agency relationship. 40 The Court of
Appeal decision in Tournier v National Provincial and Union Bank of England 41 is
generally taken as the starting-point of the history of the bankers duty of
confidentiality.42 The Jack Report considered whether, as in some jurisdictions, 43
this duty should be codified. Currently it remains outside the ambit of legislation
37 [1986] AC 80
38 Supra fn.1, 258
39 (1972) 27 DLR (3d.) 81
40 Supra fn.1, 171
41 [1924] 1 KB 461
42 Banking Services: Law and Practice, Report by the Review Committee,
London, 1989, Cm. 622 (Jack Report), 5.01
43 Switzerland and Singapore both have express statutory protections of
confidentiality, reflecting the nature of the banking industries in their respective
jurisdictions.
and is implied into the contract. Banks themselves reinforce this concept within
the Lending Code: [p]ersonal information will be treated as private and
confidential, and subscribers will provide secure and reliable banking and
payment systems.44 The duty was elucidated further in Parry Jones v Law
Society.45 The banker-customer relationship was compared to other agency
relationships such as solicitor and client, doctor and patient and accountant and
customer. However, the bankers duty is qualified and four exceptions were set
out in Tournier:
(a) where disclosure is under compulsion of law; (b) where there is a duty to the
public to disclose; (c) where the interests of the bank require disclosure; (d)
where the disclosure is made by the express or implied consent of the
customer.46
Diplock LJ in Parry expounded the first qualification [s]uch a duty of confidence
is subject to, and overridden by, the duty of any party to that contract to comply
with the law of the land.47 The impact of the law of the land has grown and
[r]ecent years have seen significant inroads to the duty of confidentiality as a
result of statutory and judicial intervention. 48 Disclosure forms an important part
of the civil and criminal procedure and there are, according to Anora 49, over 21
statutory provisions in existence currently that override confidentiality. She
44 Lending Code (October 2014), 7
45 [1969] 1 Ch. 1, 9
46 Supra fn.41, 473
47 Supra fn.45, 9
48 Supra fn.1, 263
49 Ibid
10
submits that this situation has so eroded [the duty of confidentiality] that the
obligation now is to make disclosure and [it] only exists as an exception. 50 This
qualification will also, in certain circumstances, apply to foreign laws and
represents the most significant inroad into the bankers duty of confidentiality.
The second qualification, that a bank may breach the provision of confidentiality
if the information released is in the interest of the public, is largely obsolete as
there are a number of statutes relating to the myriad situations when this
exception might have been relevant in the past. 51 It has been labelled the most
difficult52 qualification and attempts having been made to abolish it. The third
qualification is when disclosure is in the banks interest and the fourth represents
a consensual release of information that the customer has already approved.
The duty of care owed by a banker to its customer arises from both common law
and the Sale of Goods and Services Act 1982 (SGSA 1982). The duty to
exercise reasonable care and skill is an implied contractual term in any contract
for the provision of services53 and this same duty may also arise in tort.54This
permits the customer two potential routes of redress: they can take advantage of
differences in limitation periods, remoteness of damage and contributory
negligence55 to help any action they may bring. There are scenarios where the
50 Ibid
51 P. Latimer, Bank secrecy in Australia: terrorism legislation as the new exception to
the Tournier rule, Journal of Money Laundering Control, (2004) (8) 1, 56-65
11
basis of liability may be larger in tort than in contract 56 but as shown in Tai Hing,
courts will not impose a duty in tort that is inconsistent with the terms of the
contract.57
The standard of service that a banker will be held to was elucidated by UngoedThomas J, in Selangor United Rubber Estates v Cradock (No 3): [t]he standard of
reasonable care and skill is an objective standard applicable to bankers. 58 Lipkin
Gorman v Karpnale & Co59 reinforced this and went further: engaging in ordinary
types of banking transaction or providing everyday banking or account services
to customer [] will not usually involve a bank in a breach of its duty of care to
those customers.60 This protects a bank that carries out its activities bona fides.
Todays banking customer inhabits a complex, fast-paced, technology-driven
environment61 and is not the customer of a decade ago. 62 As a result they will
have different expectations in the level of service that their bank will provide.
Following the financial systems heart-attack 63 in 2007, there was a reaction
56 Holt v Payne Skillington and De Groot Collis (1995) 77 BLR 51
57 Supra fn.1, 283
58 [1968] 1 WLR 1555, 1608
59 [1989] 1 WLR 1340 (CA)
60 Supra fn.3, 158
61 Deloitte Looking ahead top trends in retail banking 2014
http://www2.deloitte.com/content/dam/Deloitte/ca/Documents/insights-andissues/ca-en-insights-issues-looking-ahead.pdf Accessed 19 December 2014, [3]
62 Ibid
63 C. Goodhart, The Regulatory Response to the Financial Crisis (1st, Edward
Elgar Publishing , Cheltenham 2009), 1
12
against the banking and financial systems and a move towards regulation that
would protect depositors from the riskier elements of banking activity. Schemes
such as the Financial Services Compensation Scheme were expanded to cover
more of a depositors money in response to the collapse of institutions such as
Northern Rock. Technological advances continue apace and new innovations are
constantly applied as banks strive to keep up with customers needs. These
changes will impact the duties owed by a deposit-taking bank in the 21 st century.
Turning first to the duty of care owed by a bank to its customer, due to the
flexible nature of the standard of care an objective test determined by the
reasonable conduct of the day this will continue to remain appropriate. As the
needs or practices change, the standard can be reformulated.
Many banks are embracing new payment technology which means the collection
of instruments is becoming faster and easier to process. The rush to use
technologies such as near-field communication and digital wallets 64 is paving the
way for a new era of collecting on behalf of customers. It is estimated that
consumers will be making up to 195 billion mobile payments each year by
2019.65Modern technology has changed the standard expected of banks in
collecting instruments and this means that an immediate credit to the
customers account would not be unreasonable. 66 The modernisation of clearing
systems presents a difficulty in deciding when funds should become available to
be drawn upon by the customer. There is authority in Capital and Counties Bank
64 K. Flinders Two-thirds of banks prioritise payment technology modernisation
(Computerweekly.com 2014)
http://www.computerweekly.com/news/2240235939/Two-thirds-of-banksprioritise-payment-technology-modernisation accessed 19 December 2014
65 Ibid
66 Supra fn.1, 251
13
Ltd v Gordon67 for banks to present customers with funds before the instrument
has cleared. As clearing systems become ever faster through automation this
practice will presumably become more common. The question remains with
regard to instruments such as cheques, which must be cleared, as to whether
immediate recognition of a transfer will be possible and what the legal position of
such clearances should be. The immediate creation of funds on receipt of money
transfers is understandable but the position regarding of cheques remains
difficult. The Payments Council has announced that cheque-usage will end by 31
October 2018 and therefore it will not present a problem after that date. Prior to
that, it has been proposed that payment 68 of an instrument by electronic means
is acceptable and therefore the sending of a photograph of a cheque will now be
possible.69. This is a welcome move but it remains to be seen whether or not it
will be a viable option. Further, the acceptance of pictorial Internet evidence may
impose greater duties on banks in relation to fraudulent instruments.
By 2018, 214 million people in Europe will bank using mobile devices 70 and
together with the growth of online payments and 24-hour transactions, this will
result in a greater onus on banks to provide accurate account information.
Nonetheless the duty to furnish accurate accounts, as formulated in Tai Hing,
remains appropriate. Due to the customers ability to inspect the balance of an
account for free at any time of the day, it is submitted that it would not be
unreasonable to impose, in the customers mandate, a duty to make-known any
67 [1903] AC 249
68 s.89A Small Business, Enterprise and Employment Bill 2014
69 T. Edmonds, Department for Business and Transport The demise of the
cheque (9 December 2014), 15
70 Supra fn.64
14
faults in the account, within a reasonable amount of time: the situation in Arrow
Transfer. This area would benefit from, in the absence of statute, a judicial
decision based on a contemporary set of facts to cement it.
The importance of confidentiality is widely accepted, with some asserting that
the duty must be protected71 and the Jack Report stating its roots go deeper
than the business of banking: it has to do with the kind of society in which we
want to live.72 After the European Convention on Human Rights was given
domestic footing in the Human Rights Act 1998, it was given codified protection.
However, it seems that the inroads into it have been more significant than the
increased protections it afforded. The Proceeds Of Crime Act 2002 gives law
enforcement officers a wide range of powers to target criminality and infringe
upon the confidentiality of bank customers. It remains clear that in conjunction
with a growth in international initiatives such as the Financial Action Task Force,
any likely reform in this area will only lead to further inroads into confidentiality.
In relation to private law matters, the development of big data has made it
possible for banks to generate large, potentially valuable, tracts of data relating
to their customers spending and saving habits. This is of particular relevance to
Credit Reference Agencies, an area lacking a sufficiently detailed regime.
Concerns exist that banks may [] facilitate the exchange of information with
credit reference agencies for their own marketing purposes without taking
customers interests into account 73 they could justify this by disclosing white
15
16
Bibliography
Books
London 2013)
Goodhart, The Regulatory Response to the Financial Crisis (1st, Edward
Elgar Publishing , Cheltenham 2009)
Reports
Articles
79 S. Abdulah, 'The Bank's Duty of Confidentiality, Disclosure Versus Credit Reference Agencies;
Further Steps For Consumer Protection: 'Approval Model'', (2013) 19(4) Web JCLI, 13
17
http://www.theguardian.com/news/datablog/2013/apr/12/data-protection
2014
K. Flinders Two-thirds of banks prioritise payment technology
modernisation (Computerweekly.com 2014)
http://www.computerweekly.com/news/2240235939/Two-thirds-of-banksprioritise-payment-technology-modernisation accessed 19 December 2014
Academic Journals
A Azzouni Internet Banking and the Law J.I.B.L.R. 2003, 18(9), 351-362
P. Latimer, Bank secrecy in Australia: terrorism legislation as the new
exception to the Tournier rule, Journal of Money Laundering Control,
Table of Cases
18
19