What is the legal nature of the banker-customer relationship

The significance of banks in modern market economies cannot be underestimated. Like any other economy, banks have a very crucial role to play in the functioning of the markets in the United Kingdom. The special position held by banks and the size of their activities makes it essential to study the banker-customer relationship under English Law. This paper will aim to ascertain the legal nature of the banker-customer relationship, with emphasis on the United Kingdom. I will begin by looking at the definitions of a bank/banker as used in the UK. The paper follows this up with an explanation of what qualifies an individual as a bank customer. An attempt is made to establish the precise legal relationship that exists between the bank and its customer in England by means of Case Law, Statutory Regulations and Codes. The United Kingdom (UK) Banking Act of 2009 describes a bank as any UK institution which has permission under Part 4 of the Financial Services and Markets Act 2000 to carry on the regulated activity of accepting deposits. However, the bank definition referred to in this instance does not include a building society and any other form of institution excluded by an order made by the Treasury [1] . The main definition of a bank/banker was set out In United Dominion Trust Ltd v Kirkwood [2] . A bank was defined as an institution that accepts money from their customers in the form of deposits and then collects cheques on their behalf, placing those cheques to the customer’s credit. The banks must honour the cheques that are drawn on them or orders drawn on them to pay a third party. To carry on the banking business the institution must maintain current accounts for customers and record debits and credits to the account. Recognizably financial institutions have a distinctive role in the functioning of the modern society. Banks in the U K provide services such as taking deposits and lending. They also provide payment facilities, general financial services, insurance and investment services. More than 90% of matured individuals in the UK maintain a bank account or building society account. The types of Banks in England include Commercial Banks that tend to have high-street branches dealing directly with customers.

There are also merchant/investment banks that specialise in financing capital market transactions. The contemporary form of Universal Banking involves banks that undertake not just the traditional deposit taking business, but also engages in insurance and investment services among others. There are specialist institutions that do not deal directly with the public. The Bank of England exists as Governments Bank, lender of last resort and responsible for the UK’s monetary policy. Under Common law, the customer of a bank will be one who has opened a deposit account with the banking institution. In Commissioners of Taxation v English, Scottish & Australian Bank Ltd [3] , Privy Council, Lord Dunedin delivering the advice of the Privy Council said “a person whose money has been accepted by a bank on the footing that they undertake to honour cheques up to the amount standing to his credit is in the view of their lordships, a customer of the bank in the sense of the statute irrespective of whether the connection is of short or long standing". Customers of the bank may include individuals, firms, organisations and even other banks. It is possible for a bank to become the customer of another bank. Central banks normally tend to perform the function of a bankers bank. The question then is can a person claim to be a customer of a bank if an account has been opened in his name without his/her authority. In Stoney Stanton Supplies (Coventry) Ltd v Midland Bank Ltd [4] Lord Denning MR held that as far as the opening of the account was concerned, it was not taken out by the company but by the forger, who forged all the documents. The company did not authorize it at all. It is quite impossible to hold that there was any banker-customer relationship between this company and the bank. However, an individual may open an account in the name of a nominee and as a result establish a bank- customer relationship.

In Warren Metals Ltd v Colonial Catering Co Ltd (Supreme Court of New Zealand) [5] McMullin J also held that (at 276)… A customer is someone who has an account with a bank or who is in such a relationship with the bank that the relationship of a banker and customer exists… The legal position implies that opening an account is the crucial element in establishing the banker-customer relationship. Nevertheless, it should be noted that modern banks also offer other services to non account holders creating a “relationship". These services may include offering Credit Cards, bank loans or general financial services to a person who does not have a deposit account. In England, banks are required to know their customers under the Money Laundering Regulations 2007. The regulations require a bank to apply ‘customer due diligence measures’ when it establishes a relationship with the customer [6] . The banker-customer relationship in England is governed by the Law of Contracts, Statutory Legislation and Case Law. Given that England is part of the European Union, there are European directives on consumer protection that affect English Laws. It is contractual because the association gives rise to a debtor and creditor obligation. When an account is opened, specific legal rights and obligations come into play. A contract is essentially a promise to perform an action or fail to act. Legal action can be taken if such promises are contravened by either parties to the contract. Banks and their customers are continually entering into various contracts. These may include deposit taking and loan agreements. In loan agreements, the bank gives the money to the customer now in return for the customer’s promise to pay back in the future typically with interest. A customer pays insurance premiums now in exchange for the promise by the insurance provider (Universal Bank) to indemnify the customer in the event of a claim. In view of the distinctive nature of bank deposits, it is essential to consider whether the deposit made with the bank is the customers’ money or the bank’s money. In the landmark case Foley v Hill [7] the court held that "Money placed in the custody of a banker is, to all intents and purposes, the money of the banker, to do with it as he pleases; he is guilty of no breach of trust in employing it; he is not answerable to the principal if he puts it into jeopardy if he engages in a hazardous speculation; he is not bound to keep it or deal with it as the property of the principal; but he is, of course, answerable for the amount, because he has contracted, having received that money, to repay to the principal, when demanded, a sum equivalent to that paid into his hands". This case then infers the existence of a contractual claim by the customer against the bank. Subsequently, the bank will make available adequate funds in anticipation of any customer demands on a given day. The remainder of these deposits is then employed by the bank in profitable ventures like investing and trading.

If a customer instructs his bank to pay money to a third party, the bank merely reduces the debt it owes to the customer on his/her account while the third-party account is credited. In contemporary banking no physical cash changes hands. The bank will adjust balances of either parties account accordingly. Although, the debtor and creditor relationship exists between the bank and its customer, this has been extended to infer a peculiar relationship. Under the general debtor/creditor obligation, the debtor will need to seek out the creditor to make payment. The creditor can also demand the debt to be repaid at any time. However in the case of the bank-customer relationship the bank is not expected to seek out the customer to repay the debt. This position was emphasized in the case of Joachimson v Swiss Bank Corporation [8] where the Court of Appeal held that the obligation of the bank towards the customer is not a ‘debt simple’ but rather a debt for which demand has to be made by the customer at the branch where the account is kept and during normal business hours unless the parties agree otherwise. That said modern payment systems currently operating in England like the rest of the world enable customers to request for payment from their bank anytime of the day. The customer can ask the bank to honour a payment obligation either by a phone request, written request and an internet transfer request. Nevertheless, these transactions are subject to the individual banks rules outlined in the standard terms of the contract. The contractual relationship between the banker and customer entails implied terms as well as express terms. Implied terms are those terms of the contract which are not explicitly mentioned when the contract was entered into. However in the absence of these terms the contract will be meaningless. On the other hand, Express terms are those that are explicitly mentioned when the contract was completed. These terms are approved by all the parties to the contract.

However in the banker-customer relationship express terms are hardly ever negotiated. In Emerald Meats (London) Ltd v AIB Group (UK) LTD [9] Phil LJ decided in the customer’s favour. In so doing he said that “neither an established usage amongst bankers’ nor a ‘universal practice of banks’ to operate a 3 day cycle had been made out. An implied term to that effect could not be established on the basis of the custom and practice of the trade". The judge also held that the bank was not doing ‘anything unlawful in charging the customer interest’ for the third day though I do not understand the reference to ‘unlawful’ to mean anything other than ‘in breach of contract’. The judge held that the bank had not expressly made clear to the customer what its practice was but neither had it misled the customer as to the three day clearance cycle. It is clear from the case that in the absence of an express term the court was hesitant to imply a term into the case. To re affirm the above point the Liu Chong Hing Bank Ltd argued in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [10] that the banker-customer relationship automatically gives rise to a duty on the part of the customer to exercise reasonable care to prevent forged cheques from being presented to the bank, or at least to check their periodic bank statements to uncover any fraudulent or unauthorised activity. The court held that in the absence of an express provision, there was no such duty and the customer were not under the law required to exercise reasonable care in view of avoiding the forgery and subsequent presentation of cheques. The terms in banking contracts tend to be standardized and usually contained in the Terms and Conditions Agreement. These agreements differ depending on the product or service being taken out by the customer. Customers will up to sign these terms prior to an account being opened or loan being offered. These standardized contracts are referred to as contracts of adhesion. This form of contract enables one side to the agreement to create the contract more to their advantage. However, it is standard practice in the English Banking and Finance industry to use such types of contract. As the name implies, the customer is expected to adhere to the terms of the contract. It is worth pointing out at this stage that the terms tend to favour the banks rather than the customer. Subsequently, regulators in the UK tend to invoke and use other laws or regulation relating to unfair contracts terms in other to help protect the rights of the customer. A typical contract of adhesion used by a bank in the UK will stipulate the fees and charges applicable for using the bank’s service. It will essentially include all the services available to the account holder including internet banking and telephone banking facilities. If it is a savings account it will state the amount of interest and whether it is a fixed or variable rate account. In the case of a joint account, it will stipulate whether the two joint account holders’ liability will be “joint and several". England is part of the European Union (EU) and consequently English law has been heavily influenced by EU rules. The financial sector is no exception to this. In 1993, the European Community published the Directive on Unfair Terms in Consumer Contracts (Council Directive 93/13/EEC). This created an obligation on member states to transpose this into National law. Subsequently this directive has been adopted in the UK by means of the Unfair Terms in Consumer Contracts Regulations (UTCCR) 1994, which came into force on 1 July 1995. This is aimed at protecting consumers against unfair standard terms in consumer contracts. An amendment to the regulations in 1999 added a new Schedule 1 to the original. The Office of Fair Trading (OFT) is empowered to take legal action against businesses and organizations that may contravene the rules. The Regulations were further amended in 2001 with the Financial Services Authority (FSA) being added to the list of Qualifying Bodies. The FSA led the enforcement of regulations in areas like investments, pensions, life and general insurance, mortgages and banking. In June 2008, the FSA published a report on Fairness of Terms in Consumer Contracts. This was aimed at reaffirming the need for firms to have fair terms in their standard consumer contracts to meet their legal and regulatory obligations. Firm’s legal obligations include meeting the requirements of the Unfair Terms in Consumer Contracts Regulations 1999. [11] In 2007 the OFT launched an investigation into the fairness of terms which relate to bank accounts. Following this investigation the OFT brought a case against Abbey National Plc and other high street banks in the UK under the Unfair Terms in Consumer Contracts.Office of Fair Trading v Abbey National plc and others [12] . This claim related mainly to unpaid item charges, paid item charges, overdraft excess charges and guaranteed paid item charges (the relevant charges). The OFT wanted to investigate the fairness of the relevant charges under the UTCCR.

The Unfair Terms in Consumer Contracts Regulations 1999 stipulates in Regulation 5 that (1) A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer. (2) A term shall always be regarded as not having been individually negotiated where it has been drafted in advance and the consumer has therefore not been able to influence the substance of the term. Schedule 2 to these Regulations contains an indicative and non-exhaustive list of the terms which may be regarded as unfair [13] . In Director General of Fair Trading v First National Bank Plc [14] the court decided based on the 1994 unfair terms that the requirement of good faith in this context is one of fair and open dealing. Openness requires that the terms should be expressed fully, clearly and legibly, containing no concealed pitfalls or traps. Appropriate prominence should be given to terms which might operate disadvantageously to the customer. Fair dealing requires that a supplier should not, whether deliberately or unconsciously, take advantage of the consumer’s necessity, indigence, lack of experience, and unfamiliarity with the subject matter of the contract, weak bargaining position or any other factor listed in or analogous to those listed in Schedule 2 to the Regulations. Good faith in this context is not artificial or technical….In the same case the court held that a default provision in a loan agreement, which allowed the lender to charge interest at the contract rate until payment, both before and after obtaining judgement against the consumer/borrower was not an unfair term. As mentioned earlier the bank-customer relationship in the UK is not only governed by courts who infer contractual obligations into the contract but also institution and codes set up to help protect customers from the sometimes unfair terms in the contracts. Until the enactment of the Financial Services and Markets Act 2000 creating the FSA, Banks operated a self imposed voluntary banking code. This set the standard for banks building societies and other banking service providers in the UK. As a voluntary code, it allowed competition and market forces to work to encourage higher standards for the benefit of customers. The independent organisation that monitored how well financial institutions were meeting the spirit of the code was the Banking Code Standards Board. The types of financial institution covered by the code included banks, building societies, credit card companies, National Savings & Investments, the Post Office and a number of credit unions.

However, the regulation of deposits and payment products were transferred to the Financial Services Authority on 1st November 2009 when the Banking Code was withdrawn. The Banking Conduct of Business Sourcebook and Payment Services Regulations 2009 were subsequently introduced and enforced by the Financial Services Authority. [15] The Lending Standards Board is the successor organization to the Banking Code Standards Board and began its work on 2 November 2009. The key objectives of the Board are to assist firms in interpreting and meeting the requirements of the Lending Code. The Board also monitors and enforces compliance with the Code and take enforcement action for material breaches. [16] The Financial Services and Markets Act 2000 created the Financial Ombudsman Service (FOS) as an independent adjudicator. Although, they are separate and distinct organizations they are both concerned with the protection of consumers of financial products in the UK. The FSA is the main body responsible for supervision and compliance within the industry. On the other hand, the FOS will investigate individual disputes between financial firms and their customers. The main reason for setting up of FOS was to provide an alternative to the courts in dispute resolution between banks and their customers. Individuals who maybe dissatisfied with services or products received from a regulated financial services provider, can contact the FOS within 6 months of receipt of an unsatisfactory final response to a complaint from the service provider. In case of a dispute, the decision by the FOS is binding on the firm. Nevertheless it becomes binding on the customer only if the decision is accepted. It is worth noting here that the FSA has the authority under FSMA 2000, to take disciplinary actions against companies that are not handling customer complaints properly. In the light of the recent financial crisis in 2007/2008, the new English Government has signalled its desire to do away with the FSA and reassign its functions to the Bank of England. To protect customers in the event of bank insolvency the FSA is charged under section 212/213 of FSMA 2000 to set up an independent scheme as a means of insuring bank deposits, mortgages, insurance etc. Se 213 states the Authority must by rules establish a scheme for compensating persons in cases where relevant persons are unable, or are likely to be unable, to satisfy claims against them. Secondly the rules are to be known as the Financial Services Compensation Scheme [17] .

The Financial Services Authority (FSA) has stated the new deposit compensation limit for the United Kingdom will increase to £85,000 per person, per authorized firm, from 31 December 2010. This is the Sterling equivalent of the €100,000 deposit compensation limit which comes into force in all European Economic Area (EEA) member states at the end of the year [18] . Apart from aligning themselves with other countries in the EEA, this initiative will instill more confidence in the market. Bank deposits have always been a key contributor of banks capital. Until this recent increase, the UK had one of the lowest compensation limits compared with countries like the USA which operates a similar compensation scheme. The compensation offered in the UK covers retail customers and small businesses with an annual turnover of up to £5.6 million. The maximum compensation to be paid out will depend on the form of financial product taken out by the customer. As a result of the contractual elements in the bank-customer relationship, the bank owes an implied duty of confidentiality to the customer. Technological advancement has made it imperative to include the Data Protection Act in any discussion on the bank-customer relationship. The Data Protection Act 1998 is the principal legislation governing the processing of personal information on living persons in the UK. There are eight principles defined by the Act under Schedule 1, part 1, to aid in the statutory protection of customers. This includes but not limited to, data collected must not be disclosed to a third party without the consent of the individual concerned [19] . However, in some cases a bank may be required by the law to disclose information on a customer. Information may be disclosed when a duty is owed to the community to provide such information. Public Policies on disclosure include Crime Prevention (Police and Criminal Evidence Act 1984), Tax evasion (Taxes and Management Act 1970, Income and Corporation Act 1988) and Terrorism (Terrorism Act 2006). There is also the Money Laundering Regulations 2007 which came into force on 15th December 2007, revoking the preceding Money laundering Regulations 2003.

The bank can freeze the account of a customer if it suspects that the account contain proceeds of crime. The Proceeds of Crime Act 2002(POCA) allow for assets including bank deposits to be recovered. In Squirrell Ltd v National Westminster Bank Plc and HM Customs & Excise (Intervenor) [20] , Mr Justice Laddie held there was nothing to justify concluding at that stage that Squirrel’s account contained criminal property, nor had HM Customs & Excise (HMCE), which had intervened in the proceedings, concluded at that point that any offence had been committed, However that NatWest had a relevant suspicion and under s.328 POCA it was obliged to freeze the account. A bank may also be prevented from honoring its customer’s payment request as a result of a third party debt order or a freezing injunction. This is an order granted by the court to a creditor which attaches to funds held by a third party judgment debtor. The rules relating to third party debt order can be found in Part 72 of the Civil Procedure Rules 1998 [21] . The Insolvency Act of 1986 may prevent a bank from honoring the payment instruction of a customer declared bankrupt.

In sum the contractual relationship will generally seize to exist upon the closure of the account. However, it should be noted that some of the obligations may still exist after the account has been closed. As a result of the increase in electronic banking, the legal nature of the bank-customer relationship is constantly changing. English courts and financial regulators have had to strive for a high level of flexibility in order to keep up with the introduction of new systems and products by financial service providers. Banks currently operating in the UK are taking steps to do away with cheques as a result of the introduction of Electronic Funds Transfer at Point of Sale, Faster Payments, Direct Debits and Telegraphic Transfers among others. The use of cheques in the common law definition of a bank will not suffice in a banking environment where cheques are no longer in use. The flexibility of English Law is reflected in the recent Financial Services Act 2010 which has provided for the amendment of the FSMA 2000. Most of the amendments by the Financial Services Act 2010 on consumer protection provisions in the FSMA 2000 have come about as a result of the recent financial crisis. As long as the business of banking keeps changing, the legal nature of the bank-customer relationship will continue to be adapted.

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