Law Of Banking, Commerce And Investment Assessed Essay; 2nd Semester

Topic: To what extent has reform of the rights and duties arising in the typical banker-customer relationship become necessary or desirable

Course Lecturer: Simon Norton
Date: March 30, 2001


"Reform" Is Not Only Desirable But Also Necessary

The Basic relationship between banker and customer is one of creditor and debtor, a relationship of principal and agent coexists with it, for purposes of customer's instructions to his banker to carry out particular transactions on his account. This typical relationship is including four parts: the customer's rights and duties, the banker's rights and duties1. There are also four exceptions in the case the judge examined the bank's duty of secrecy. They are a).Where disclosure is under compulsion by 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.

The duty and the stated qualifications are seen as still broadly relevant to present day circumstances. However, There is also wide concern that they are not enough defined for today's conditions, especially, as internet banking is becoming more and more popular, the four exceptions seem to open to abuse potentially. So "reforming" is becoming necessary and desirable.

First let's see why these four exceptions are becoming ambiguous or not enough to define today's circumstances. It is convenient to group the four exceptions in pairs: a) and b), c) and d) to discuss.

Today is a very different picture. Bankers allowed to disclosure confidential information to the public interest in a wide range of specified situations. The Prevention of Terrorism Bill will require banks to disclose, on suspicion, confidential information concerning the location of funds which might be used for, or derived from, possible terrorist offences a d also the Criminal Justice Act 1988 permits banks to disclose confidential information simply on suspicion of customer's involvement in a long list of specified offences. These directly overrode that the giving of information to the police in regard to a customer suspected of a crime would be unwarranted. In some specific circumstances, statutes are required(in most cases) or permitted(occasionally). Indeed, these statutory interventions in customer confidentiality are, in each individual case, justified by the public interests at stake. But they amount to a formidable burden on bankers, not made easier to bear when there is some uncertainty as to the precise nature of the obligations imposed by the law.

In C v Barclays Bank case, it was hold, dismissing the appeal, that BB was not subject to an implied duty of confidentiality not to disclose the relevant information, and any express instructions would only create an obligation on BB if it had agreed to comply with them, or if they furthered some right existing as a result of the customer relationship. Furthermore, BB's discretion to deal with ore respond to adverse claims to the property should be left unfettered and there was no duty on BB to accept instructions which attempted to fetter that discretion. The fact that the caution had been cancelled was information of which the original cautioner would have had notice. It was neither necessary nor sensible to impose a duty on BB not to disclose information to which a person was entitled under a statutory code.

The big change in the significance of exception a) puts a new complexion on exception b). If banks are already under so many specific obligations to disclose in the public interest, disclosure on the generalised basis of exception b) will require a very special justification.

Exception c) and d) did not explain in what circumstances can a bank's interests be taken to justify disclosure of confidential information without customer consent in some form. They were presumably offered few problems of interpretation in the simpler world of the 1920's. However, today there are two major areas of concern, which were unknown in the time of Tournier.

The first area of concern arises from the growing perception by some banks; at least, they are entitled to release confidential information about customers, without those customers' express consent, to other companies within their own group.

In Christofi v Barclays Bank PLC case, it was held that allowing the appeal, the limits of the duty of confidentiality within the banker customer relationship had to be determined by reference to common sense. Banks had various dealings with persons other than account holders and, in dealing with a trustee was in receipt of a statutory notice informing him that his caution had been warned off. Whilst a bank's duty of confidentiality extended beyond secret information, it did not cover information already imparted to the recipient pursuant to statutory provisions, irrespective of the fact that the bank d received the information in confidence during the normal banker customer relationship. From this case, it shows that banks believe that a free flow of information is important to protect themselves and feel customer default is a much more serious problem than formerly. Certainly, the practice of banks in this regard is highly controversial.

The second major area of concern relates to the growth of credit reference agencies, and the possible disclosure of confidential information to them by banks. Banks are in the position of drawing information from, but not contributing information to, the agencies. They have however come under pressure from the Government to contribute credit information themselves. It would seem that public policy, concerned at the spread of default by uncreditworthy borrowers, would wish to extend the scope of the credit information exchanged through the medium of the agencies. According to the Data Protection Registrar offered in 1988 as a trial period of one year, it still not clear whether those explicitly in favour of disclosing "white"2 information to agencies without customers' express consent would seek to justify doing so under the Tournier exception b) (duty to the public), c) (interest of the bank), or d) (by the ... implied consent of the customer). The courts might be expected to take on any of these propositions. The application of the common law is unclear, since the world has changed and is still changing.

There is one further respect in which the world has changed since Tournier within the field covered by exceptions d). It concerns the new rights he has secured under the Data Protection Act 1984, which is not about confidentiality, it simply regulates the use of computerised data about individuals.

There is a further, and fast-growing, threat to the protection a customer requires for his personal financial affairs, again unforeseen at the time of Tournier, and in this case unrelated to any of the four exceptions. It is the whole range of privacy problem consequent on the spread of automated banking.

Since the world has changed and is still changing, the danger is to customer confidence in the banking system. "Duty to the public" disclosure provision has uncertainty of application; the disclosure involved is "in the interest of' the bank that is to be sold, since its interests as a separate legal entity do not necessarily coincide with those of either its existing parent company or its prospective purchaser; it is insufficiently clear what, in present-day conditions, the contract should be taken to imply; the "white" information made available by banks to credit reference agencies gave the massive erosion of the principle of confidentiality. Reforming seems to be necessary.

There are some other features which are central to the banker-customer relationship, which govern the basic relationship well and are much of less reform.

In the respect of the bankers' duties, the relationship between banker and customer is contractual. There is nothing in such a contract, express or implied, which could require a banker to consider the commercial wisdom or otherwise of the particular transaction. The customer, too, is subject to certain duties of care imposed by the common law. In Suriya & Douglas v Midland Bank PLC 1999 case, it was held, dismissing the appeal, that the judge had not erred in concluding that there was no basis for incorporating such an implied term into the contract between MB and SD. The burden of informing each customer about new accounts would be onerous for a bank and there was no general legal duty of disclosure. Whilst a bank could adopt a policy of informing clients about new accounts, failure to give such information would not afford a right of action to a customer.

Finally, the conditions under which banks give opinions on customers, in response to status enquiries, should be seen as a special aspect of the banker's duty of confidentiality discussed above. The bank traditionally gives its opinion "in the ordinary course of business", taking care not to disclose precise details of the state of the account or transactions that have passed through it. Sometimes an industry jargon has involved, on the face of that, vague and inconclusive and only fully understood by bankers. So it would be desirable for the use of coded language to be discontinued and for the system to be more open, and customer will be better informed about the system works. So before the next case it can be concluded that as the world is changing, these basic elements of the contract do not appear to be clarified, much less of reform.

In Verity v Lloyds Bank PLC 1995 case, It was held, awarding V and S damages, that( 1) V and S had specifically sought the manager's advice on the prudence of the transaction and were advised to proceed with it. If bankers gave such advice they were subject to the same duty of care as other professionals. No careful advisor would have advised V and S to proceed with the project. If the manager had advised V and S correctly, they would never have entered into the transaction; (2) the fall in the equitable value of the property would be included in the loss on a "no transaction" basis; (3) damages for loss of earnings were not allowed insofar as the claim was based on the damaging effect of stress and strain, but in principle there was a claim for work lost as a result of furthering the project. No damages were possible for emotional stress.

In the last part of this essay, I want to have a look at the future of the bank-customer relationship or financial services. Internet banking and Electronic funds transfer are becoming the hot topic these few years. Many banks and other financial institutions have identified the Internet as an important new medium for marketing and providing a wide range of retail banking services. But while the Internet has delivered a major new business channel for banks, it has also exposed them to new and damaging forms of security risk. (Demeo J 2000) So an appropriate legal and liability framework for addressing security failures seems very necessary and important, and following this "difficult issues of jurisdiction and the rules regarding the conflict of laws will clearly arise because of the Internet."(Sabalot A. Deborah, 1995) However, the Internet is not a legal person. It cannot use or be sued. It is not resident in any specific location but, at the same time, aspects of the Internet may be considered as being resident in any jurisdiction where there is computer access to it. (Tunkel Daniel, 1997) Issues arise, however, where those services are accessible on a transactional basis and where those services are or would be regulated in the jurisdiction where the customer or potential customer resides. That is not the end. Forwarding and copying of E-mails to pre-prescribed groups can also cause employees to mistakenly pass on confidential information to a third party. Recent research conducted by Integrals found that 32% of FTSE- 1000 companies had spotted an intentional breach of confidential information via E-mail from a disgruntled employee during the last year. More than half admitted to a breach occurring by accident over the same period.(Walters R, 2001) Even though the world is still changing. Recently e-cash has already been used on the Internet for trading, Electronic order book has been used in London Stock Exchange as operational tool(Broad Chris, 1997). Both of these bring great changes and significant benefits for people.

From above we can conclude that no matter from current point of view or looking forward, significant changes of our world make our law vaguely. It also shows that under the new technology soundness statute protection becomes extremely important and our law reforming should keep up the same speed as new technology developing, so that it could provide a good circumstance or further technology developing. Reforming also becomes desirable and necessary.


1 The Customer's Rights: 1.Right to repayment, 2.Right to draw cheques 3.Right to interest The Customer's Duties: 1.Duty of reasonable care in drawing cheques, 2.Duty to disclose forgeries The Banker's Rights: 1 .Right to commission, 2.Right to interest, 2.Right to set-off The Banker's Duty: 1 Duty to receive money for a customer's account, 2.Duty to honour its customer's cheques, 3.Duty of Secrecy

2 "black" information means credit information about customers who are in default, as distinct from "white" information about customer who are not.


Appendix:

  1. Against C's husband transferred the matrimonial home into C's sole name prior to his impending bankruptcy and C obtained a loan from BB which was secured by a second charge over the property. Four years after the bankruptcy, the trustee in bankruptcy registered a caution dealing in respect of the property, which was subsequently warned off and cancelled under the provisions of the Land Registration Act 1925 s. 55. C's husband, acting on C's behalf, gave explicit instructions to BB not to disclose to the trustee information relating to the caution. C's claim for loss and damage arising from the alleged breach of an implied duty of confidentiality was struck out as disclosing no cause of action. C's appeal against that decision was dismissed and she appealed, contending that BB had acted against her express instructions, causing consequential loss and damage.
  2. C brought an action against B, claiming that the bank had informed her husband's trustee in bankruptcy that a caution on the matrimonial home registered in his favour had been warned off, which prompted the trustee to reregister his interest. She alleged that B, in imparting the information, was in breach of express instructions and its implied duty of confidentiality and that the resulting actions of the trustee caused C to sustain loss and damage. B appealed against the refusal to strike out C's claim as disclosing no cause of action, arguing that the duty of confidentiality did not extend to information already supplied to the recipient further to his statutory rights. C contended that B had a duty to protect any information expressed to be imparted in confidence, even if not secret or unobtainable from another source.
  3. SD, a firm of solicitors, appealed against a decision dismissing its claim for damages of GBP 32,690.55 for loss of interest during a period of four years while its client account funds were held in an account on which no interest was payable. SD claimed that MB had breached an implied term of the contract between them by failing to inform SD of a new type of interest bearing account with a cheque book facility, suitable for use as a solicitor's operating account. SD contended that all customers would rather earn interest on their accounts and that it was not open to MB to select which customers it was going to inform about the introduction of a new account.
  4. V and S borrowed money from L for the purpose of buying a house for renovation as a business venture in 1988. The investment failed and the losses were aggravated by falling house prices. The questions for determination were whether the bank owed a duty of care to advise as to the prudence of purchasing the house as a business investment; whether the bank was in breach of that duty, if it arose; whether V and S relied on that advice and whether the loss caused by that reliance was foreseeable.

Reference:

  1. R.B.Jack CBE, Banking Service: Law And Practice Report By the Review Committee, Feb, 1989
  2. Christofi v Barclays Bank PLC [2000], L.S.G. 29 Times, July, 1, 1999
  3. Christofi v Barclays Bank PLC [1999], L.S.G. 33 Times, March 29, 1999
  4. Suriya & Douglas v Midland Bank PLC [1999], L.S.G. 33 Times, March 29, 1999
  5. Verity Lloyds Bank PLC [1995], N.P.C. 148 Independent, Sep 19, 1995
  6. DeMeo. J (2000) 'B-commerce and Internet Security', Banking Strategies, Chicago, Spring 2000
  7. Walters. R (2001) 'Internet Law Cyberliability-the dangers and how to combat them', Computer Law & Security Report, Vol 17(1):2-72
  8. Tunkel. D (1997) 'The Internet And The People Problem: how to prepare for the age in which financial services will be provided by computers', Butterworths Journal Of International Banking And Financial Law, Vol 12(11):509-552
  9. Sabalot.A.Deborah (1995) 'Financial Services On The Internet', Butterworths Journal Of International Banking And Financial Law, October, 1995
  10. Broad. C (1997) 'Sets: The London Stock Exchange's Electronic Trading Service', Butterworhs Journal Of International Banking And Financial Law, November, 1997
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