European Banking Law

The Banker-Customer Relationship

Ross Cranston

• Publisher: Informa Law from Routledge
• Year: 2020
• ISBN:
  9781000288179
• Edition: 2
• Topic: Jura
• Subtopic: Finanzrecht

This text presents a practical analysis of the private law of banking transactions. Rooted in contract, the banker-customer relationship is overlaid with a range of rights and obligations having their derivation in tort, delict, notions of equity, good faith and statute. The book looks at some questions that arise within the banker-customer relationship in various European jurisdictions. What are the nature and consequences of the banker-customer relationship? Is there a duty on banks to advise customers and others about particular dealings and what liability arises if any advice given is wrong? What security can a bank take to protect itself as lender?

CHAPTER 1

INTRODUCTION¹

European banking law is a broad subject. European banking regulation has received some attention,² but little has been written about the European private law of banking transactions. One aspect of the latter is the law governing the banker–customer relationship. Rooted in contract, the relationship is overlaid with a range of rights and obligations having their derivation in tort (delict), notions of equity and good faith, and statute.

THE BASIC BANKER–CUSTOMER RELATIONSHIP

Central to the banker–customer relationship in all European jurisdictions is contract. The banker–customer relationship is rarely reduced to the one document, however, but instead comprises a variety of written forms, supplemented by terms implied by law. Typically, a standard form contract will govern specific aspects of the banker–customer relationship, whether it be the general account, electronic funds transfers or security (including guarantees). In places like Germany, the Netherlands and Switzerland there are general banking conditions, drawn up by associations of banks.³ Exceptionally in Britain banks have not had a standard form contract for the general account and the parameters of the relationship have been set by a series of terms which the courts have implied over the years. British banks have adopted a code of practice for banks dealing with personal customers;⁴ it is not of itself legally binding but the courts may well use it as a base for implying terms into the banker–customer relationship.

There is more scope with the standard form contracts, general banking conditions, and British code for incorporation of the customer viewpoint in their drafting. One approach is that adopted in the Netherlands: there representatives of customers negotiate directly with the banks.⁵ Another approach—at the other end of the spectrum—is regulation: the state acts as a surrogate for the customer and compels banks to meet standards purportedly in the customer interest. By contrast with Europe, the banker–customer relationship in the United States is more heavily infected with regulation.⁶ This is not to say that regulation is unknown in Europe; in Sweden, for example, the Finance Inspection Board has made important rulings relevant to aspects of the basic relationship.⁷ In various jurisdictions regulation of unfair contract terms, now reinforced in the European Community by the Unfair Terms in Consumer Contracts Directive, has a more general impact on the banker—customer relationship.

1. Since commissioning the subsequent chapters, I have moved from the academic to the political world. I should make clear that the views expressed by the contributing authors whose chapters follow do not necessarily reflect my own views as editor.

2. e.g. R. Cranston (ed.), The Single Market and the Law of Banking, 2nd edn (1995); J. Norton (ed.), Bank Regulation and Supervision in the 1990s (1991). See also the series Legislazioni Bancarie Dei Paesi Della Comunità Europea published under the auspices of the Associazione Bancaria Italiana.

3. The German General Business Conditions are reproduced in Appendix 1.

4. See Appendix 2.

Perhaps unsurprisingly, stress has arisen over the same sort of issues in the banker—customer relationship in the different European jurisdictions. Is a bank statement binding on customers if they do not object to its contents within a specified period? May a bank vary the terms of the relationship without agreement and/or without notice to customers? What services is a bank obliged to provide and, generally, what can it charge for its services? How enforceable is a guarantee or security given by a person for the business debts of a spouse or other close relation? The answers to these questions are not uniform across jurisdictions, and in any one jurisdiction subtle rephrasing of the issue may produce a different response.

Banks in many countries adhere to one or more interbank agreements which have implications for the banker–customer relationship. These may not be incorporated directly in the banker–customer contract; indeed, customers may not even be aware of their existence. Typical are the interbank agreements on payment. Of wider import is the Italian interbank agreement, and related codes, which are designed to ensure transparency in the price of banking services and the content of bank statements.⁸ The recent British Banking Code falls into the same category, although it is more ambitious, covering a range of matters from information to be provided to customers to standards of service. Interbank agreements are often binding between the banks themselves, as a matter of contract. But to what extent do they confer or subtract from the rights of customers? In Italy, for example, the interbank agreement is regarded as binding on banks in their relationship with customers because it gives content to the principle of good faith in article 1375 of the Civil Code. There can be no objection to this result when advantages are being conferred on customers, but surely there must be limits on the extent to which interbank arrangements can bind customers to their detriment. Unfortunately, this issue has been given little attention.

5. Below, p. 110.

6. Below, Ch. 9.

7. Below, Ch. 8.

8. Below, p. 89.

CONFIDENTIALITY⁹

All European jurisdictions recognise a form of bank confidentiality, in which banks are legally compelled to keep the financial affairs of their customers secret. Although as a matter of policy bank confidentiality is based on the customer’s right of privacy, conceptually it tends to have other derivations. This discrepancy can lead to privacy being breached with the law’s sanction. An example is the so-called status opinion, where a trader will obtain information about the financial standing of another trader through the banking system. In France this breach of confidentiality is legally acceptable because the banker is said to be giving simply“l’opinion de la place”.¹⁰

Multifunctional banking is one reason why confidentiality is under attack at present: banks distribute information throughout the corporate group so that the whole range of bank services can be marketed to customers, albeit that this may be in breach of the principle. The other, and more defensible, reason that bank confidentiality is currently being undermined is because the banking system has been used for fraudulent and criminal activity. Money laundering is at the top of regulators’ agenda, but other concerns include tax evasion, securities violations and insolvency offences.¹¹ Disclosure of information to regulators from other jurisdictions has given rise to a considerable number of problems, many of which have still to be resolved.

THE MULTIFUNCTIONAL BANK

No European country has yet adequately addressed all the conflicts of interest thrown up by the multifunctional bank, even those countries such as Germany that have long had universal banking. Yet the potential conflicts are legion. For example: a bank recommends to or effects for a customer a purchase of securities, the issue of which is being underwritten by the bank; similarly, where the transaction relates to an issue of securities of a company and the bank is a substantial creditor of the company, or is a financial adviser to the company, or is advising someone who is contemplating a substantial acquisition of securities in the company. The assumption seems to have been that competition will act as the regulator, driving customers from banks abusing their position. Reliance may also have been placed on agency law: an agent must not use his or her position to acquire benefits for himself at the expense of his principal (conflict of interest and duty). Therefore a bank instructed to buy a certain quantity of securities cannot buy on its own account. If it does, it must account for the profits. But agency law is not easily applied to the multifunctional bank. One theoretical problem is knowledge: can the knowledge of its different parts be attributed to the business as a whole, even if one part does not know in fact what another part knows, and especially if there are barriers such as Chinese Walls which have prevented the free flow of information? And there are also problems at the level of practice; for example, it is not always very easy to distinguish the case where a bank acts as agent for its customer from the case where the bank buys securities in its own name and subsequently resells them to the customer.

9. See also D. Campbell (ed.), International Bank Secrecy (1992); F. Neate and R. McCormick (eds), Bank Confidentiality (1990), both of which survey the law of various jurisdictions.

10. Below, p. 42.

11. See e.g., F. Baldwin and R. Munro, International and Domestic Money Laundering, looseleaf.

The ordinary law has sometimes treated disclosure as a solution to the problem of conflicts of interest. Make full disclosure of the conflict to the customer, and the bank is absolved of any wrongdoing. Yet disclosure of a conflict of interest may be in breach of a duty to another customer. The bank advising customer A to invest in the securities of customer B, whose financial health is dubious, should disclose that fact to A—but to do that would be in breach of the duty of confidentiality to B. If, as in this case, disclosure is a breach of duty to another, it may be that the bank must desist completely from acting. In the situation referred to, therefore, the bank would have to inform the client or customer that it was unable to advise or assist. The difficulty arises, of course, if one department of a multifunctional bank does not know that there is a conflict of interest as a result of what another department is doing. A Chinese Wall may be in operation, designed to achieve ignorance on the part of particular parts of a bank as to what the other parts are doing. A strict application of the rule“disclose or desist”, however, means that the existence of a Chinese Wall is not sufficient. The bank must take positive steps to ensure that there is disclosure, where this is permissible, or desist from acting. Such positive steps would include the American restricted list procedure, where the bank would make no recommendations about, and would not deal in, the securities of a company, either on its own account or on a discretionary basis, as soon as it enters into a close business relationship with that company.

Only recently has regulatory law in Europe grappled with conflict of interest problems.¹² The criminalisation of insider dealing is an example, although it misses a great deal of the informational and positional advantages which can give rise to conflicts of interest. Obligations in company legislation on insiders to disclose share holdings and criminal prohibitions on concealing information and creating a false market are also relevant. European countries are now developing an elaborate system of investor protection, in broad outline inspired by the US system of securities regulation. Detailed rules may prescribe acceptable behaviour for a bank engaged in securities activity; breach can be a disciplinary offence and can ultimately lead to a bank’s having its authorisation to engage in such activity withdrawn. Objections may legitimately be raised, however, about the ambit and force of such rules. Generally speaking, Chinese Walls are, for example, treated as an absolute defence when“disclose or desist” may be the better response.

12. See generally K. Hopt,“Inside Information and Conflicts of Interests of Banks and other Financial Intermediaries in European Law”, in K. Hopt and E. Wymeersch (eds), European Insider Dealing (1991).

LIABILITY FOR ADVICE

Advice can be given to customers or to third parties. At one time, liability to third parties—such as those seeking credit assessments of another through their own bank—foundered on the absence of contract. Now tortious (or delictual) liability enables third parties to sue banks for negligent advice, as well as for fraudulent advice. A contractual nexus may still be necessary, however, in the case of innocent misrepresentation.

Conceptually, liability of banks for advice arises in at least three ways—advice mala fide, negligent advice, and the failure to advise when there is a duty to do so. (The failure to advise of a conflict of interest where there is a duty to do so has already been addressed.) The first is uncommon but not unknown. Little need be said about frau...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Contributors
• Table of Cases
• Table of Legislation
• Chapter 1. Introduction
• Chapter 2. England
• Chapter 3. France
• Chapter 4. Germany
• Chapter 5. Italy
• Chapter 6. The Netherlands
• Chapter 7. Spain
• Chapter 8. Sweden
• Chapter 9. A United States Comparison
• Chapter 10. European and Global Harmonisation of the Law of Banking Transactions
• Chapter 11. The Single European Currency
• Appendix 1. General Business Conditions (Germany): Bundesverband Deutscher Banken
• Appendix 2. The Banking Code (United Kingdom): 1998 Revised Edition
• Appendix 3. Glossary of Terms Relating to Economic and Monetary Union (Chapter 11)
• Appendix 4. Council Regulation (EC) No 1103/97 of 17 June 1997 on Certain Provisions Relating to the Introduction of the Euro
• Appendix 5. Council Regulation (EC) No 974/98 of 3 May 1998 on the Introduction of the Euro
• Appendix 6. Council Regulation (EC) No 2866/98 of 31 December 1998 on the Conversion Rates Between the Euro and the Currencies of the Member States Adopting the Euro
• Appendix 7. Commission Recommendation Of 23 April 1998 Concerning Banking Charges for Conversion to the Euro (98/286/EC)
• Index