It is a matter of conventional wisdom that business and law are closely intertwined. When the scope of business changes, the law also needs to be reformed accordingly so that it corresponds to the new realities. For example, the banking business has gone through the crucible of radical change since its inception centuries ago. Today, banks wield substantial influence over their customers and beyond. Indeed, troubles in the banking sector can spell disaster for industries and, subsequently, for the entire economy. Hence, it is not surprising that the banking law has developed and embraced various means to regulate the bank-customer relationship thrusting a plethora of legal duties on both sides. The duties owed by banks to their customers emanate from common law, statute law, the banking code or specific bank-customer contracts. In any case, they are designed to safeguard the interests of the customers. Focusing on the deposit-taking business, this paper attempts to explain specific legal duties owed by banks to their customers. It also discusses the appropriateness of these legal duties in the current system of banking. The preliminary findings suggest that these legal duties remain as appropriate as they were three decades ago even despite the sea-change that has visited upon banking in between.
Before proceeding with the discussion of the legal duties owed by banks to their customers, it would be reasonable to delineate the province of the deposit-taking business within banks. Thus, in the pre-1979 Banking Act era, the Bank of England subsumed the whole panoply of activities under the category of banking business. However, according to Singh, the more recent and somewhat restricted understanding of the banking business has “been focused on the ‘demand’ side of a bank accepting deposits: the bank being a repository for money upon which an individual can draw cheques”. Singh adds that the fulcrum of the banking business regulation in the UK has shifted towards those institutions “that are accepting deposits rather than those institutions lending money”.
Duties of banks to customers are enshrined in law and arise in relation to the bank’s customers. Basically, this relationship is between a mandatory – that is, the bank, and mandatory – that is, the customer. Simply put, a bank is a financial institution that accepts deposits of money from savers to lend this money to borrowers, thereby earning enough to pay interest to savers and make a profit for its own purposes.
On the other hand, the term “customer of a bank” lacks clear-cut statutory definition in the United Kingdom hence the need to refer to common law. Overall, it is judicially accepted that a person becomes a customer of a bank when he or she concludes a contract with that bank by virtue of opening an account or even when that person starts negotiations with the bank or otherwise commences relations with the bank. A similar view was expressed in the case of Ladbroke vs. Todd:
The relation of banker and customer begins as soon as the first cheque is paid in and accepted for collection. It is not necessary that the person should have drawn on any money or even that he should be in a position to draw any money.
The case of Commissioners of Taxation vs. English, Scottish and Australian Bank Ltd. also serves to reinforce this position further adding that the duration of the bank-customer relationship is not material. In stark contrast, other researchers and as well as legal specialists suggest that a person does not acquire the status of customer of a bank unless he or she opens an account in that bank. The precise definition of customer of a bank is important because banks have legal duties before their customers. If a bank fails to fulfil any of its legal duties, the responsibility for proving that a specific person is a customer of that bank lies on that person.
Despite some inconsistencies and incongruences regarding the definition of the term “customer of a bank”, a common thread from the examined literature and cases suggests that everyone who has opened an account in the bank should be regarded as a customer of that bank. Since the purpose of this paper is to examine legal duties of deposit-taking banks – the practice that invariably presumes the opening of an account – the provided definition of customer of a bank will suffice.
Duty to Accept Deposits
When customers deposit their funds to banks, they effectively allow banks to use these funds for investments, advances and other types of financial operations authorized by customary banking practices and/or by law. At the same time, banks assume a list of responsibilities before customers when they accept their funds. In essence, the relationship between a deposit-taking bank and its customers is akin to the relationship between a debtor and a creditor, with the bank playing the uncomfortable role of a debtor. It is imperative to note at the outset that banks do not hold the funds received from a customer in a fiduciary capacity. These funds are at the disposal of the bank, but that bank must honour cheques of the customer if these cheques do not exceed the amount of credit balance in the customer’s account or the amount of the overdraft allowed by the bank. Capping the relationship between deposit-taking banks and customers, Shekhar notes:
The money paid into the bank is money known by the principal to be placed there for the purpose of being under the control of the banker; it is then the banker’s money; he is known to deal with it as his own, he makes what profit he can, which profit he retains to himself; paying back only the principal, according to the custom of the bankers in some places, or the principal and a small rate of interest, according to the custom of bankers in other places.
In any case, once the bank receives a deposit from the customer, it undertakes to fulfil several duties to that customer. One of the primary legal duties that banks owe to their customers is the duty to accept deposits. Essentially, this duty arises even before money-holding private persons become customers of a bank in the technical interpretation of this word as described in the previous paragraphs. Overall, the bank’s duty to accept deposits implies that it cannot reject deposits made by its customers into their accounts. Apparently, few banks would want to reject deposits because such behaviour goes against the grain of the banking system. Even so, this simple reasoning based on personal perception of the banks’ financial rectitude does not vitiate the legal importance of the given duty. Furthermore, under the given duty, banks must make funds represented by the deposited cheques available to customers. It needs to be noted in an important aside that banks also have a duty to collect payment on any cheques deposited by their customers. This point will be discussed in meticulous detail later in the text.
Judging by the highest standards, debates regarding the appropriateness of the banks’ duty to accept deposits from their customers would be redundant. It appears as something that can be taken for granted that this duty remains as important as it was a decade or even a century ago. However, the duty could be improved by forcing banks to monitor with greater scrutiny the origins of large sums of money deposited by figures with chequered reputation, such as corrupt politicians or dishonest entrepreneurs and their relatives. Currently, even the most respected banks settle into a policy of benign neglect in regard to such issues. Other than that, the duty to accept deposits makes a great deal of sense in the 21st century.
Duty of Confidentiality
Another important legal duty is the bank’s obligation to maintain secrecy of the customer’s account or, simply, the duty of confidentiality. Interestingly, it is not incumbent on any party in an ordinary creditor-debtor relationship to observe the duty of confidentiality. Yet, even though the bank-customer relationship can be compared to the debtor-creditor relationship, the two are legally distinguishable. The relationship between the bank and the customer presumes the bank’s duty of confidentiality. To reinforce the legal stipulation, the well-established banking practice also carefully treasures the secrecy of customer accounts. In fact, it is so well-established that it could be compared to a special doctrine of its own.
The general principles that determine the legal scope of the duty of confidentiality were laid down in the landmark legal case of Tournier vs. National Provincial and Union Bank of England. Thus, it is generally accepted by bankers that the bank should not divulge any information about the customer’s account – including but not limited to titbits about the existence of the customer’s account and the amount of credit – to third parties. Should it fail to cherish this duty, it will be liable for damage, especially if the “credit of the customer has suffered serious injury”. Even when the customer chooses to close his account, the operation of the duty of confidentiality does not end.
However, the case of Tournier vs. National Provincial and Union Bank of England specifies four circumstances, in which the duty of confidentiality could be legitimately breached. Thus, banks can disclose information about customer accounts when they are compelled by law, by public duty, by their own interests, and when clients assent to such disclosure. Shekhar points to another reservation: the habit of bankers to share opinions with one another related to the creditworthiness of customers. Even so, they are allowed to exchange only general information and not the specific details to, which they are privy.
Overall, at the current juncture of history, it seems that the duty of confidentiality is reasonable and even necessary. Just as a century ago, the dissemination of confidential details about the customer’s account by the repository bank has the potential to impair the financial and other interests of the customer. Thus, the duty’s stipulations and reservations all correspond to the current realities of banking.
Duty of Care
Another crucial duty owed by banks to their customers is the duty of care. This hotly contested duty is particularly relevant to investment banking where the customer would need advice. Yet, this duty also applies to deposit-taking banking – at least, to some extent. By and large, as applied to non-investment banking, the duty of care means that the bank has an obligation to assist its customers in choosing the most appropriate products and services that they need. Similarly, this means that the banks must provide its customers with clear information concerning the services it offers. For example, under the duty of care, banks must consult its customers about the rights and responsibilities of joint account holders.
The duty of care can be subdivided into two separate standards: acting in good faith and acting without negligence. Whereas the former requires the bank to faithfully abide by the customer’s mandate, the latter requires the bank to act in such a way as to prevent fraud in respect of the customer’s account. More specifically, the bank-customer relationship necessitates the bank to send updates about the customer’s balance and other account details to that customer at a regular interval.
Even so, the duty of care has limited application in deposit-taking banking. In determining whether the duty of care applies to a particular bank-customer relationship, many different circumstances are usually taken into consideration. Time and time again, cases have confirmed that, absent special circumstances, banks do not owe their customers duty of care. On the other hand, a series of cases have shown that banks owe duty of care to their customers even if this is not specifically implied in the account opening documents or other contract between the parties. The most prominent example, albeit from Singapore, would be the case of Go Dante Yap vs. Bank Austria Creditanstalt AG in 1997. Despite the absence of special circumstances, such as proximity, and, most importantly, despite the absence of an express or even implied obligation in the account opening documents to advise the customer, the court ruled that the bank nonetheless owed a duty of care to the customer.
Judging by the highest standards, the duty of care remains a critical aspect of the bank-customer relationship in the 21st century. First, it requires banks to adhere to the customer’s mandate, which is an essential part of the bank-customer relationship. Second, its potential to prevent fraud is highly valuable in the age when financial fraud is becoming ever more sophisticated.
Duty to Honour Customers’ Cheques
The principal duty that the bank has in respect of its customers is to discharge its debt to those customers – that is, to repay the borrowed money. It is a matter of conventional wisdom that the bank is not legally obliged to repay the customer until that customer makes a demand for repayment or until the time for repayment specifically agreed upon in the contract does not come. Usually, an oral demand from the customer is technically sufficient to be considered a valid demand, but the preferred form of demand is a cheque or a passbook. Logically, an oral demand made by a third party would be insufficient to receive funds. By contrast, a cheque written by the customer against his account and handed to a third party would be sufficient to be deemed a valid demand. This is exactly the reason why such duty of banks is called the duty to honour cheques.
Whenever a bank provides checking services, it assumes the responsibility to honour the cheques drawn by its customers. However, an important condition needs to be fulfilled: to wit the customer’s account must contain sufficient funds to cover each cheque. The availability of funds in the customer’s account will determine the future actions and, potentially, liability of the bank. Thus, when the customer writes out a cheque to a third party, he or she needs to be sure that his or her account has sufficient funds to pay that cheque. If the account does not have sufficient funds, the drawee bank can either dishonour that cheque, thereby opening the way for a civil suit and even criminal procedures against the customer, or pay that cheque, creating an overdraft. If the bank chooses to decline or dishonour a cheque, it holds no liability to the customer. On the other hand, if it chooses to create an overdraft, it has the dutiful right to subtract the amount of the overdraft from the customer’s next deposit as well as to charge the customer a small fee for providing overdraft. However, if the bank violates the specifically drawn-up overdraft protection agreement between it and the customer by refusing to create an overdraft, it automatically acquires a duty to recompense the customer for the associated losses. In this and other instances when the bank wrongfully dishonours the cheque, failing to exercise its duty to honour the customer’s cheques, it may be held liable to that customer for any damage resulting from its actions.
Another situation when the bank does not have a duty to honour its customer’s cheque is when the cheque presented for payment is stale, or more than six months old. When presented with such a cheque, the bank has complete discretion in its decision to pay or not to pay the cheque. A generally accepted banking convention is to consult the customer prior to paying a stale cheque, but this is not mandatory. However, banks have a duty to honour certified cheques even if they are older than six months. Simply put, certified cheques cannot become stale.
The significance of the banks’ duty to honour the cheques of their customers is undeniable in the 21st century just as at any other point in the history of banking. To refuse to honour their cheques without valid legal grounds would be a fundamental violation of the banking code, a deplorable affront to the well-established banking norms and traditions.
Duty to Honour Customers’ Stop-Payment Orders
Banks have a related legal duty not to pay or certify a particular cheque if the customer has specifically requested this through a stop-payment order. In line with the widely recognized banking practice, only the owner of the account, against which a cheque has been drawn, is authorized to make a stop-payment order. Although the bank is obliged to respect the customer’s stop-payment order, this order needs to be based on a valid legal ground. Conversely, the holder of the cheque can sue the account holder for compensation. Herewith, this all is without prejudice to the bank’s duty to honour its customer’s stop-payment order. Additionally, the bank has a legal duty to re-credit the customer’s account if it pays the cheque in defiance of the customer’s stop-payment order.
Not only is this duty appropriate, it is indispensable in the age when fraud and chicanery are commonplace. Indeed, reconsidering it or, worse, abolishing it would be a retrograde step. On the contrary, banks need to have a clear-cut legal duty not to facilitate fraud and combat it with greater efforts.
Duty to Maintain Customer Signature Cards and Terminate the Bank-Customer Relationship at the Request of the Customer
Another important duty owed by banks to their customers is the obligation to maintain customer signature cards and be able to recognize drawers’ signatures. This is necessary to detect forgeries before effecting a payment. It must be said that the bank has a more pronounced interest in preventing forgery because it may be held liable for failing to do it. Again, the importance of this duty in the 21st century when commercial fraud is rife cannot be overstated.
Finally, the last essential duty owed by a bank to its customers that merits special attention is the bank’s obligation to terminate the bank-customer relationship if the customer decides so. Similarly, the bank is legally obliged to pay its customers any credit balance amassed in his or her account. While the termination may be initiated by any party, the bank cannot do so without notifying the customer of a reasonable cause that led to such termination. On the other hand, the customer can terminate the account without explaining his or her reasons for such a decision. Again, the bank is legally obliged to pay the remaining credit balance to the customer.
This paper has shown that banks owe myriad legal duties to their customers. They emanate from common law, statute law, the banking code or specific bank-customer contracts. The most important among these duties are the duty to accept deposits made by customers, the duty of confidentiality, the duty of care, the duty to discharge the debt to the customer and to honour the customer’s cheques, the duty to maintain customer signature cards and to be able to recognize the customer’s signature on cheques, and the duty to terminate the bank-customer relationship at the behest of that particular customer. There are several important reservations about the duty to honour cheques, with the most important requiring and/or entitling banks to create an overdraft, dishonour stale cheques and adhere to the customer’s stop-payment order. By contrast, fiduciary duty seldom applies to the deposit-taking banking. Duty of care also has a limited and often contested application to the deposit-taking banking. However, overall all these duties are critical in the 21st century. Not only are not they a vestige or rudiment of the past, but also they need to be reinforced and supplemented to fight fraudulent activities and protect the rights of the customers.