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Bank's Duty of Care

Does a bank owe a duty of care to borrowers, depositors and investors. What is the extent of this duty? BS, Dublin 22.

Firstly, to borrowers.  It depends on whether or not the borrower is a commercial customer of the bank or a domestic customer and if the latter, the provisions of the Consumer Credit Act must be complied with by the bank so as to ensure that they fully understand what they are doing.  The Consumer Credit Act may also include borrowings in relation to the family home and may also include commercial transactions, borrowings in respect of which are secured on the family home.  The bank has to realise that they may be dealing with consumers and therefore have to take care that not only is the Act complied with but also that the borrowers are properly and independently advised.  A High Court judge recently described this requirement as the parties having “equality of arms” – in other words, that a bank with all its expertise and professional advisors is equally matched by the quality of advice being given to the borrowers.


For purely commercial transactions not involving anything covered by the Consumer Credit Act – in other words, borrowing for investment purely for business purposes – the Consumer Credit Act may not apply but the bank is still under an obligation to ensure that the “equality of arms” rule does apply or at the very least that the borrowers have the opportunity of taking the necessary advice and securing the required independent representation necessary to ensure what they are doing.


In the case of Allied Irish Banks plc v. James Mansfield junior, the defendant pleaded that he didn’t understand the documentation he was signing as he had a certified reading age of six.  Evidence was given that Mr Mansfield jnr. had, in the course of his other business transactions, signed off on accounts, returns to the Companies’ Office, and other statutory and commercial documentation all on the advice of his accountancy and legal representatives.  This being the case, it proved that whilst he might plead he didn’t know what he was signing, he was comprehensively advised on the risks he was getting into and knew or reasonably ought to have known what the importance of the documents was.  The court ruled against him and entered judgment in favour of Allied Irish Banks plc.  This is an example of the “equality of arms” rule operating.


In conclusion, therefore, in terms of the duty of care owed to borrowers, a borrower classified as a consumer has a special entitlement to a duty of care under the Consumer Credit Act and other legislation applicable.  In relation to the “arm’s length” borrower that appears to the bank to be properly and comprehensively advised and represented and to which the Consumer Credit Act does not apply, then the bank’s duty ( with a number of minor exceptions) is not to mislead the borrower in any material way about the particular transaction.


Secondly, depositors.  The bank has a duty of care to depositors simple to return the money on demand or at the expiration of a notice period (if it is a notice account) together with interest.  If they cannot do this, they have to close their doors. 


Thirdly, investors.  The duty of care which a bank owes to investors depends on the nature of the investment.  In relation to shares, this is governed by the normal rules of the market-place and indeed the relationship which a broker has with the customer.  A bank cannot conceal any material fact from its statutory accounts or mislead the public in any significant way in its annual report.  There are, however, other types of investors such as bondholders and these are usually entitled to invest money based on a prospectus or proposal that is issued.  Ordinary commercial contract law will apply and again the investor should have his or her own advisors to go through the contract and guide them in this regard.  The bank owes a strong duty to ensure that the prospectus is accurate and truthful and that all material facts are properly disclosed.


Any member of the public who is financially distressed through disappointed dealings with a bank should initially consult a specialist commercial solicitor who will advise them on what evidence will be required to prove breach of duty of care (which in most cases is in fact breach if contract).  That proof may consist of having a forensic accountant examine the accounts, an independent investment analyst examine the prospectus or such other financial expert that has specialist knowledge in the particular type of product under dispute with the bank. 


Disputes in this area, particularly with borrowings and investment, can be extremely complex and subject not just to nation but also EU law and international banking practice and regulation.  In addition to this, every dispute is different and one tiny item of detail could win or lose a case.  All documentation should be presented to the solicitor on first consultation so that he or she is fully armed with all the information necessary.


Footnote: The term “Bank’s Duty of Care” when referring to depositors usually relates to contract law and when referring to investors, in the case of bondholders normally relates also to contract law and of share investors likely relates to the Law of Tort (civil wrongs e.g. negligence, including negligent misstatement, civil fraud and so on).


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