Most of us are aware of the duties that accountants and financial advisers owe to their clients. However, the question of what, if any, duties bankers owe to their clients is not as well understood.

Does a banker have duties to the customer?

The relationship between a banker and customer is essentially a contractual one. This is an implied contract, the terms of which arise from:

1. commitments given by the bank under the Code of Banking Practice, which are a set of principles and rules drawn up by the Australian Bankers’ Association; and
2. Unconscionable conduct and consumer protection provisions of the Australian Securities and Investments Commission Act 2001 (Cth). This Act allows ASIC to regulate the financial services industry.

The contractual relationship may be varied by express terms in a contract, though are subject to limitations by statute (consumer protection legislation) and public policy. The banker-customer relationship is not one of the accepted fiduciary relationships.

The contractual duty owed by a bank is to exercise reasonable care in carrying out the bank’s part of the contract. The standard of reasonable care and skill is an objective standard applicable to all bankers. Whether or not it has been achieved in any particular case has to be decided in the light of all the relevant facts.

Code of Banking Practice

The Code of Banking Practice is as a voluntary code, though once adopted by a bank it becomes contractually enforceable. The Australian Big Four banks (National Australia Bank, Commonwealth Bank, Westpac and Australia and New Zealand Banking Group) are all members of the Australian Bankers’ Association Inc. and subscribe to this code. Clause 3.2 of the code states that ‘we will act fairly and reasonably towards you in a consistent and ethical manner. In doing so we will consider your conduct, our conduct and the contract between us.’

There is potential difficulty in including ‘fairness’ and ‘ethical behaviour’ as contractual obligations, as they are highly subjective concepts which are often difficult to define. Similarly worded obligations can be found under statute and in equity, for example section912A(1)(a) of the Corporations Act 2001 (Cth) (CA) provides that a financial services licensee must ‘do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly’. These two requirements from the Code of Banking Practice and the CA run well together, though neither suggests the extent, if any, of the banker’s obligations to advise a customer.

What sort of advice should a banker give a customer?

Financial Advice

Providing financial advice does not fall under the common law duties of a banker. However, when a bank advertises or otherwise holds itself out as giving a particular type of advice, there may be a duty to exercise care in giving such advice.

Gold and Platinum Members read on for the Banker’s duty of care to a borrower when lending money.

Misleading or Deceptive Conduct

Consumer protection provisions such as prohibition on misleading conduct and unconscionable conduct operate independently of the contractual relationship between a banker and customer. Section 18 of the Competition and Consumer Act 2010 (Cth) (Previously Section 52 of the Trade Practices Act 1978 (Cth)) and Section 12DA: Misleading and Deceptive Conduct of the Australian Securities and Investments Commission Act 2001 (Cth) are the relevant provisions for bringing a claim for misleading or deceptive conduct.

Claims of misleading conduct by silence are occasionally brought in place of a claim of breach of fiduciary duty, though again depends on the facts of the case. As stated by Black CJ in Demagogue Pty Limited v Ramensky:‘silence is to be assessed as a circumstance like any other. To say this is certainly not to impose any general duty of disclosure; the question is simply whether, having regard to all the relevant circumstances, there has been conduct that is misleading or deceptive. Failure to disclose a relevant fact to the customer that came to the attention of the banker when there was a ‘reasonable expectation’ that such a fact be disclosed. ’ Currently there is little guidance provided by the case law as to what constitutes a ‘reasonable expectation.’ An objective assessment is required of the banker—customer relationship and must examine both parties' expectations within the contractual relationship.

Should a banker ensure the customer has understood?

In circumstances where the banker is aware that the customer has a fundamental misunderstanding about a material fact, they should take steps to clear the misconception. The banker should have regard to all relevant circumstances and make a determination as to whether a failure to disclose the information may constitute a breach.

In December 2013, the Commerce Commission of NZ announced it intended to take ANZ, ASB and Westpac to court for "misrepresenting" sales of interest rate swap loans to rural customers. Interest rate swaps are derivative contracts which allow borrowers to manage the interest rate risk of their loans, but they are so complex they are typically provided to large corporate and institutional customers who have skilled treasury personnel and risk advisers to help them monitor their exposure.

Gold and Platinum Members read on for more details.

There is an obvious discrepancy between the everyday person’s understanding of banking matters and a financial expert’s. Perhaps bankers should be under an obligation to ensure that customers fully understand the nature of the transactions they are about to enter into, such as loans with fixed interest rates. While there is no legal requirement that bankers provide advice to their customers, should they elect to give advice which the customer then acts upon, a duty will arise and the bank may be liable for losses should the advice be misleading or negligently given.