Legal Relationship between Bank and Customer

There are numerous kinds of relationship between the bank and the customer. The relationship between a banker and a customer depends on the type of transaction; products or services offered by bank to its customers. The legal relationship between a bank and its customer differs in several important respects from the relationships between most other service providers. In order to answer the question, the essay will begin by describing and analysing the legal relationship between a bank and its customer. After that, it will goes on to compare that between other service providers and their customer.

The general legal relationship between bank and its customer

The general legal relationship of bank and customer is contractual relationship, started from the date of opening an account. [1] When customer deposits money into his bank account, the bank becomes a debtor of the customer. [2] No new contract is created every time there is a new deposit as the account is continuing in nature. [3] The banker is not, in the general case, the custodian of money. The money paid into a bank account becomes the property of the bank and bank has a right to use the money as it likes. The bank is not bound to inform the depositor the manner of utilization of funds deposited by him. Bank does not give any security to the debtor (depositor). The bank has borrowed money but does not pay money on its own, as banker is to repay the money upon payment being demanded. [4] Thus, bank’s position is quite different from normal debtors. On the other hand, when the bank lends money to his customer, the relationship between the bank and customer is reversed. Then the bank takes the position as a creditor of the customer and the customer becomes a debtor of the bank. Borrower executes documents and offer security to the bank before utilizing the credit facility. Therefore, the general relationship between bank and its customer is that of a debtor and a creditor.

On the other hand, the relationship between the customer and the banker can be that of principal and agent. Agent can be defined as a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done or who is so represented is called “the principal”. In acting on instructions to make periodical payment or transfer money from customer’s account to others, to collect cheques or bills, the bank acted as agent of its customer. Prima facie every agent for reward is bound to exercise reasonable skill and care in carrying out the instructions of his principal. The standard of care expected is one of an ordinary and prudent banker and not that of a detective.

Building society vs. Bank

Building societies, like bank, are deposit-taking institution. Generally speaking, the relationship between building society and its customer is that of a debtor and a creditor. This is the similarity between bank and building society. But specifically building societies are differs from banks as building societies are owned by their customers, this simply means that those who have a savings account, or mortgage, are members and have certain rights to vote and receive information, as well as to attend and speak at meetings. Each member has one vote, regardless of how much money they have invested or borrowed or how many accounts they may have. Each building society has a board of directors who run the society and who are responsible for setting its strategy. In contrast, banks are normally companies listed on the stock market and are therefore owned by, and run for, their shareholders.

Investment Company [5] vs. Bank

The relationship between the investment company and its customer is fiduciary in character. As such, an investment adviser stands in a special relationship of trust and confidence with its clients. As a fiduciary, an investment adviser has an affirmative duty of care, loyalty, honesty, and good faith to act in the best interests of its clients. The parameters of an investment adviser’s fiduciary duty depend on the scope of the advisory relationship and generally include the duties to make reasonable basis investment advice, to seek best execution for client securities transactions where the adviser directs such transactions and to make full and fair disclosure to clients of all material facts about the advisory relationship, particularly regarding conflicts of interest.

As a result, the legal rights and duties of an investment manager also differ from that of bank. An investment company will owe to his client both a common law duty of care in tort and fiduciary duties. Generally, a bank does not have a duty to advise its customer on the suitability of a transaction; nor does it has a duty to protect the customer from imprudent transactions. [6] The relationship between a bank and its customer is not fiduciary in character. [7] As noted by Lord Justice Dunn, “Banks are not charitable institution”. [8] Moreover, bank is not under an implied duty to bring to the attention of the customer a new type of banking facility which may reasonably be capable of being applied to or being utilised by customer in the known circumstances of its business and banking requirements. [9]

Nonetheless, it must be borne in mind that the limits of a banker’s business cannot be defined as a matter of law. [10] If a banker undertakes to advice, he must exercise reasonable care and skill in giving the advice. [11] Furthermore, under the Hedley Byrne principle, a bank which assumes responsibility towards a customer for advising on investments or on the commercial merits of a proposed transaction owes a duty of care even if the advice is gratuitous. [12] Prior to the case of Hedley Byrne v Heller, [13] the court in Woods v Martins Bank Ltd [14] held that it is possible for a bank to owe fiduciary duties to its customer. This is largely because the bank agreed to a request from a customer to manage his financial affairs. Indeed, the bank manager knew the customer relied on his advice and there were conflicts of interest because the advice was to invest in a company that was also in debt to the bank.

However, it has been argued that Salmon J was forced to rely on the fiduciary principle to impose liability on the bank since there was no remedy in tort for a negligent misstatement at that time. [15] Thus, it is very unlike the court will resort to the device of a fiduciary relationship if it happens again. [16]

Insurance Company vs. Bank

Similarly, insurance company are different from bank because there is a “special relationship” between the insurance company and the policyholder. The special relationship consists of a combination of elements such as the fiduciary duties insurance companies owe to its policyholders and the duty of good faith and fair dealing inherent in every insurance policy between an insurance company and its policyholder. Among an insurer’s fiduciary responsibilities is the duty of disclosure. [17]

Insurance companies’ duty of disclosure requires that they provide certain information to their prospective and current policyholders, such as the scope and limitations of the insurance coverage being agreed to, the consequences of various events, the responsibilities of the insurance company and all other terms of the insurance policy. When an insurance company failed to meet its duty of disclosure, it is considered an act of bad faith that gives actionable cause to the policyholder to seek relief for any resulting losses. In contrast, the bank is only required to supply the customer with relevant information such as APR calculation, copy of agreement, balance and etc. [18]

Trust Company vs. Bank

A trust company is a corporation organized to perform the fiduciary of trusts and agencies. The “trust” name refers to the ability of the institution’s trust department to act as a trustee, who administers financial assets on behalf of customer (settlor). The assets are typically held in the form of a trust, a legal instrument that spells out the beneficiaries and what the money can be spent for. A trustee’s power to dispose of the trust property or to arrange the property is subject to the wishes of the customer (settlor). In contrast, the receipt of money on deposit account constitutes the banker a debtor to the depositor [19] but not a trustee of the customer. [20] Therefore, the customer has no right to inquire into, or question the use of, the money by the banker. [21] A trust involves the administration of assets on behalf of an individual whether he is living or dead. Therefore, the trust arrangement will still be going on after the death of the customer (settlor). However, the relationship between a bank and a customer ceases on the death, insolvency, lunacy of the customer.

However, the position is otherwise if the banker assumes the office of trustee [22] . Moreover, a banker is affected by the existence of a trust where an account is opened by a customer acting in the capacity of trustee15, or where the banker is on notice that a payment into or out of the account is in breach of trust16, or where money is paid to a banker for a particular purpose in circumstances such as to impress the payment with a trust17.

Duty of Confidentiality

One of the similarities between bank and other service providers is that the legal relationship between them and their customers will give rise to a duty of confidentiality. They are disallowed to disclose the information about their customer to third party even when the person is no longer their customer. However, the decision of the Court of Appeal in Tournier v. National Provincial and Union Bank of England enunciated four exceptional cases in which disclosure is justified:(1) Where disclosure is under compulsion of law (2) Where there is a duty to the public to make the information known (3) Where the interests of the bank require disclosure (4) Where the disclosure is made by the express or implied consent of the customer. Other than that, banker and all other service providers are under duty to disclose when it involves in cases of money laundering. [23] Currently, there are two statutes of primary importance in governing the duty of confidentiality: Data Protection Act 1998 and the Human Right Act 1998. The Data Protection Act 1998 gives effect to European Council Directive 95/46 on the protection of personal information. On the other hand, Article 8 of the Human Rights Act 1998 enshrines the right to respect for private and family life.

Undue Influence

The relationship between banker and customer will not generally give rise to a presumption of undue influence. In the ordinary course of banking commerce, a banker is allowed to explain the nature of a proposed transaction without laying himself open to a charge of undue influence [24] . However, comparing with other service providers, the relationship between investment advisors and investor, insurance company and policy holder, trustee and beneficiary, all of them will give rise to a presumption of undue influence. [25] This is because there is certain degree of trust and confidence between them and their customers. It has been regarded as a norm.

Conclusion

The legal relationship between the banker and his customer has varied over the centuries. Unquestionably, the core banking activities of deposit-taking and lending are not fiduciary in character. [26] Thus, the legal relationship between a bank and its customers can be distinguished from that between other service providers and their customers is that of fiduciary relationship. Nevertheless, due to the complexities of business and banking, the relationship between bankers and customers goes beyond the primary relationship of creditor and debtor. Some other activities that modern multifunctional banks frequently engage in are more obviously fiduciary in character, e.g. where the bank manages its customer’s investment portfolio or provides its customer with corporate finance services. Therefore, it is possible that a banker act as an agent or trustee of the customer like any other service providers.