📖[PDF] Banking law and practice by | Perle (2023)

Learning objectives

After studying this chapter, you should be able to do it:

1Describe the nature of the relationship between the banker and the client and the key legal and regulatory issues regarding the terms of the contract between them

2Understand legal issues related to maintaining bank accounts, including instructions, powers of attorney, statute of limitations, misappropriation of payments, deductions and bank liens

3Explain the concept of a banker's duty of confidentiality and how it relates to the provisions of the General Data Protection (Privacy) Regulation, including the six data protection principles

4Discuss recommended banking practices related to statement or passbook, illegal defamation of checks and exclusionary clauses

Many legal problems arise in everyday banking activities. Bankers therefore need to understand and act on these issues to protect their businesses and themselves from liability. In this chapter, we present an overview of the relationship between the bank and its customers from a legal and regulatory point of view. We discuss the implied terms of the banker-client relationship related to the banker's duty of confidentiality and explain detailed legal issues related to the terms of the contract and the respective rights and obligations of the bank and the customer.

Reference is made to common law, Hong Kong law, guidance from the Hong Kong Monetary Authority and the Banking Code. We also discuss the importance of the General Data Protection Regulation and the six data protection principles for protecting and enabling the correct use of customers' personal data in everyday banking. We end the discussion with an analysis of a number of issues that commonly affect the functioning of bank accounts.

There is actually no statutory definition of who is a bank customer in Hong Kong, so we have to refer to court rulings to discover the rules that determine whether a person is a bank customer.

In common law, which is a body of law developed through court decisions rather than statutes passed by the legislature, the customer is the person who holds the bank account. "There must be some type of account, deposit, current or similar relationship for a person to become a client of a banker," a UK court ruledGreat Western Railway Co. against London & Country Banking Co. The judge ruled that while a person may routinely contact a bank, for example, to purchase gift certificates, this does not mean that he or she is a customer of that bank.

Common law also states that a relationship between a banker and a customer does not arise until both parties intend to enter into it. However, the relationship can be considered to have started even before the actual opening of the account. INLadbroke & Co. against Todd, the court ruled that it was not necessary for a person to "collect money or even be able to collect money" before becoming a customer. The banker-customer relationship is established immediately after the bank accepts an individual offer to open an account with that bank.

Why does a banking specialist need to know who is a customer and who is not, from a legal point of view? One reason is to avoid contractual liability that may arise when we provide investment advice in error, for example in believing that there is no contractual relationship. If both parties intend to enter into a relationship, that person can already be considered a client and could theoretically sue the banker for negligent advice.

Another reason is that they are protected under Art. 86 of the Exchanges Regulation, which states that bankers who receive a payment for a customer or credit a customer's account will not be treated as negligent if it is shown that the customer has no title or defective title to that payment. If a banker receives a payment or makes a money transfer by check, to give two examples, in the case of a person who is legally not a customer, then he is not protected under s. 86.

Legally, the relationship between a banker and a customer is essentially contractual in nature, meaning that each party has express and implied obligations. A breach of these obligations may be grounds for appeal. The nature of the relationship may take various forms, resulting from the type of services provided by the bank:

• Banker and client.
• Debtor and creditor.
• Supervisor and agent.
• Bailer i Bailee.

Banker and client

In recent years, many banks have tried to define the terms of the agreement between the banker and the client in writing as precisely as possible. Customers are provided with individual, uniform regulations and asked to sign an application for opening an account, which contains a reference to the regulations and confirmation of its acceptance. The application is usually in the form of an instruction given to the bank by the customer and the terms and conditions are incorporated into the application by reference.

However, in most cases there is no formal agreement that states that the banker must maintain strict confidentiality with respect to their clients' accounts or that the client must exercise caution when writing checks to prevent amounts being fraudulently altered.

Of course, when opening most accounts, e.g. current and savings accounts, an order is executed that gives the bank clear instructions and/or rules regarding the operation of the account. Even in these cases, however, no attempt is made to draw up an exhaustive list of the respective rights and obligations of the banker and the client. This may be due to the fact that it is impossible to list all the conditions taken into account, and banks are also looking at the impact on banking marketing.

The contractual relationship between the banker and the client is based on the customs and trading habits of the bankers. To the extent that customs and commercial practices have been recognized by Hong Kong courts, they should be regarded as implied terms of a contract between the banker and the customer. Implied terms are therefore essential in banking law and practice.

The Banking Code requires banks to make the written terms and conditions of each banking product or banking service readily available to customers or potential customers, and to advise customers to read and understand them. The Regulations should meet the following criteria:

• Provide a reliable and balanced description of the relationship between the bank and the client.
• Generally available in Chinese and English.
• Use plain language and avoid legal and technical language unless necessary.
• Highlight any commissions, fees, penalties, and related rates (or basis for pricing), and the customer's responsibilities and liabilities when using the service.
• Consistency with the provisions of the Code and being audited to ensure consistency;
• Please give due consideration to Hong Kong laws, in particular consumer protection laws.

Debtor and creditor

Depositing money in a bank makes the bank a debtor and the depositor a creditor. As such, the bank is required to return to the depositor any amount deposited (except in certain cases such as banker's law and set-off). These roles reverse when a bank lends money to a customer.

Installed inFoley kontra Hillthat the established relationship of debtor and creditor precludes any element or suggestion of a fiduciary or fiduciary relationship with a banker with respect to a current account. The House of Lords held that the relationship between a banker and his customer, who deposits money into the bank, was the usual debtor-creditor relationship, with the added obligation of the bankers' habit of honoring the customer's checks.

Director and Agent

When a banker performs certain duties, he often acts as an agent. For example, a banker often collects check proceeds as an agent for his clients. In writing and paying checks, the relationship between the customer and the banker is similar to that of the principal and the agent. In addition, the banker acts as an agent when he takes instructions from clients to buy and sell stocks and shares.

However, if a banker is instructed by a client to place an order with the broker to buy shares on behalf of the client, a principal and agent relationship is established between the client and the broker when the broker accepts the order. there is no such relationship between the client and the banker.

Bailor and Bailee

In the case of handing over the item to the bank for safekeeping, the agreement between the bank (as the pledgee) and the customer (as the pledgee) is a promise agreement, which involves the transfer of possession, not ownership. The Bank is not entitled to use the items while in possession of them. The customer may request the return of the item at any time.

An example of a fiduciary service is the custody of title deeds after a customer's mortgage has been paid off.

In Hong Kong, the sources of law and practice governing the bank-customer relationship are as follows:

• Rightly
• Legislative sources
• Non-statutory rules
• Code of Banking Practice

Rightly

Although China has regained its sovereignty, Hong Kong still adheres to the English common law legal system. As stipulated in the Basic Law of the Hong Kong Special Administrative Region, formerly Hong Kong rules (common law), equity, regulations, secondary legislation and common law shall be maintained unless inconsistent with the Basic Law. However, common law is subject to change by the Hong Kong legislature, which has begun adopting measures that deviate from this law.

The doctrine of legal precedent has also been retained in Hong Kong, although the court of last resort is the Hong Kong Court of Final Appeal, not the Privy Council in England. All cases decided in Commonwealth countries will be equally dealt with by a Hong Kong court, which may also refer to the precedents of other common law jurisdictions. The same applies to the Banking Law.

Legislative sources

The two most important sources of legislation in Hong Kong are the Banking Regulation (Chapter 155) and the Stock Exchange Regulation (Chapter 19).

The Banking Ordinance is the law that governs banking activities and deposit-taking in Hong Kong. It defines the term "banking" and refers to a three-tier financial system in which licensed banks, licensed limited liability banks, and deposit-taking companies are collectively referred to as "authorised institutions". The Bills of Exchange Regulation, on the other hand, governs the law on negotiable instruments, which include bills of exchange, checks and promissory notes.

The Hong Kong Bank Association Regulation (Chapter 364), the Stock Exchange Regulation (Chapter 66) and the Investor Protection Regulation (Chapter 335) are other important sources of banking law. The Companies Regulation (Chapter 32), the Partnerships Regulation (Chapter 38), the Insolvency Regulation (Chapter 6) and the Transfer of Property and Assets Regulation (Chapter 219) are also relevant to the banking sector.

Supplementary legislation enacted under the Banking Ordinance and the aforementioned ordinances is also relevant and bankers should take these provisions into account.

Given the growing importance of securities-related services among the core business of banks, the Securities and Futures Regulation (Chapter 571) is also an important legislative source.

Anti-Money Laundering and Countering the Financing of Terrorism Regulation (Cap. 615) was enacted which codifies due diligence and record keeping requirements for financial institutions and provides for supervisory and criminal penalties for violations of statutory requirements in June 2011 with effect from April 1, 2012 .

Statutory and non-statutory guidelines

The Banking Ordinance authorizes the Hong Kong Monetary Authority (HKMA) to issue guidelines on the internal operation of authorized institutions to ensure that adequate banking standards are maintained. There are two broad categories of guidance: statutory and non-statutory.

HKMA's statutory guidance is issued under the Banking Ordinance, which sets out the minimum standards that authorized institutions should adhere to in order to meet the requirements of the Banking Ordinance. Statutory guidelines have no legal force. Non-statutory guidelines are usually issued to set out HKMA's recommendations to AI regarding the standards they should achieve or to clarify HKMA's interpretation of regulatory and reporting matters. Any failure to comply with any of these guidelines, statutory or non-statutory, may call into question whether the relevant AI continues to meet the minimum authorization criteria under the Banking Regulation. In addition, if such failure relates to any statutory guidance, it may constitute a breach of the relevant provisions or requirements of the Banking Ordinance.

Code of Banking Practice

The Code of Banking Conduct is jointly issued by the Hong Kong Banking Association (HKAB) and the DTC Association (an industry group of licensed banks and deposit-taking companies) and is endorsed by the HKMA. While it specifically covers banking services such as current accounts, deposits and other deposit accounts, loans and overdrafts, and card services, its principles apply to the general relationship between institutions and their customers. The Code does not retroactively apply to transactions completed prior to its issuance.

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