“If [a banker] undertakes to advise he must exercise reasonable care and skill in giving the advice. He is under no obligation to advise, but if he takes upon himself to do so, he will incur liability if he does so negligently.” ' House of Lords in Banbury v. Bank of Montreal
The issue of legal liability of banks in the provision of negligent advice is one doctrine of law that has evolved through the years. In light of current controversies hounding the UK banking sector, it is not far-fetched nay unthinkable to surmise that such act would again be subjected to closer scrutiny and for the courts to perhaps develop, clarify, and/or expand the doctrine’s reach. At the outset, are banks under a duty to provide advice to their clients on financial matters? If so, what factors must be taken into account for adjudging banks liable should such advice run awry?
This paper shall start by defining the nature of banker-customer relationship and how it arises. It shall be followed by a discussion on the several circumstances whereby banks may be held liable for issuing negligent advice as well as the evolution of such finding of liability. Factors underpinning courts’ decisions vis-à-vis this issue shall also be identified. In the concluding portions, recommendations shall likewise be provided as to how courts should apply this doctrine in order to effectuate its purpose.
II. The Nature of Bank-Customer Relationship: What is the reckoning point? It is essential to identify at what point the banker-customer relationship arises because a duty to exercise reasonable care and skill vis-à-vis customers’ financial matters is owed when a banker-customer relationship begins”. Normally, this relationship commences when a customer opens an account with a bank. However, there are cases where the same relationship is deemed established when a bank agrees to open an account under the customer’s name. Thus, in Woods v. Martins Bank Ltd., the claimant, whom the court regarded to be young and unsophisticated in business, was induced by the defendant-bank’s manager to invest in a certain company. Relying on such advice, the claimant instructed the defendant-bank to collect funds in another financial institution for use in the investment which defendant-bank proposed. The claimant also gave orders to the defendant-bank to use the remaining amount for opening an account in his favour. Subsequently, the investment failed and the claimant sued the bank to recoup his losses. One issue which the court was confronted with, was whether a banker-customer relationship was formed at the time of the issuance of the negligent advice. The court held in the affirmative, ruling that such relationship was extant when the bank manager agreed to open an account under the claimant’s name. Therefore, a banker-customer relationship can be said to exist when a bank accepts a prospective customer’s instruction to open an account in his name. The foregoing analysis is consistent with the nature of a banker-customer relationship which is basically contractual. Succinctly, this contract has both the elements of a creditor-debtor relationship, as well as that of a contract of agency. In cases where it acts as an agent, a bank “owes a duty of loyalty and confidentiality to his principal.” For one, the rules on agency impose on a bank a fiduciary duty, requiring it to disclose any conflict of interest, including the giving of financial advice. Generally speaking, however, there is no fiduciary relationship between a bank and its customer and as jurisprudence would show, the nature of a banker-customer relationship defines the obligation which arises from it. Having the foregoing in mind, a discussion on banks’ liability for negligent advice is in order. III. Circumstances Where Banks May Be Liable for Negligent Advice Historically, banks have adopted a...
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