Duty of care of banks

Banks have a banking duty of care towards buyers of financial products and services. The duty of care of banks is laid down by law. A contractor must realise the care of a good contractor when performing work. In practice, this means that the contractor must act as a reasonably competent and reasonably acting professional would have acted. The duty is an implication of the important social function of banks and aims to protect individuals and entrepreneurs from frivolous (financial) decisions.

General and special duty of care of banks

Banks have special expertise in the field of financial services and financial products and are expert service providers par excellence. Based on this expertise and important social role, banks should comply with the duty of care for banks. Within the civil law duty of care, a distinction can be made between two forms of banking duty of care: the general duty of care and special duty of care for banks. The banking duty of care applies both in the pre-contractual phase and after the service is terminated.

– General duty of care

Banks are obliged to collect customer information to properly advise a customer. In addition, banks are obliged to provide the customer with sufficient information to enable the customer to make an informed choice. A customer profile is drawn up on the basis of the customer’s income, financial position, experience and ambitions. Services and products must fit this customer profile.

– Special duty of care

The special duty of care for banks applies in situations where banks need to protect consumers and entrepreneurs against the risks of financial products or investments. The special banking duty of care requires banks to investigate the financial position of the customer. How this duty of care is fulfilled does depend on relevant circumstances, such as the risks and complexity of a financial product.

Two forms of duty of care for banks

There are two forms of banks’ duty of care. First, a brief distinction should be made between the two forms of duty of care. One is the contractual duty of care (bank towards a client) and the other is the non-contractual duty of care (bank towards third parties).

Contractual duty of care: The contractual duty of care arises from a number of statutory provisions and the bank’s general terms and conditions, drawn up by the Dutch Banking Association. It emerges from this framework of provisions that the bank must take into account its client’s interests in its services. Although this sounds like an unnecessary rule, case law shows that practice is often more recalcitrant.

The difference between banks’ duty of care and the ‘normal’ duty of care that exists between two parties is that the bank, as a professional and expert contracting party, has a heightened or special duty of care, especially given its social function.

Case study

A 2003 Supreme Court case involved a private investor who continued to invest in risky products despite warnings from the bank. When large deficits arose, the bank liquidated the client’s securities account. Following this, the client brought a claim against the bank for breach of duty of care. The court ultimately came to the conclusion that, as a professional and expert service provider, a bank is bound by a special duty of care, partly because such transactions can involve very high risks. In some cases, even just warning about risks may not be enough, but the bank must even refuse to carry out risky transactions. The essence of this Supreme Court ruling is that the bank, as a professional and expert service provider to be considered, has a far-reaching duty of care to protect the (private) investor from himself, even if he disregards the bank’s warnings.

Non-contractual duty of care

There is also a non-contractual duty of care owed by banks to third parties. A bank must also consider the interests of third parties. The bank may not act contrary to what is customary in society if it acts contrary to unwritten law. How this is interpreted in practice differs from one situation to another and depends on the circumstances.

The so-called Safe Haven judgment concerned a group of investors who had deposited money in Safe Haven’s account to invest. After the group suffered significant losses due to risky investments, the investors held the bank liable in tort. An important detail in this case was that Safe Haven was not licensed to act as an asset manager. The investors blamed the bank for failing to take action after discovering that Safe Haven was acting without a licence.

The major difference with previous case law on banks’ duty of care is that there was no direct relationship between the investors and the bank. The bank merely handled Safe Haven’s bank account. However, the court followed the investors’ reasoning. Thus, what matters for the applicability of the duty of care is whether the bank took action. An important clue in this ruling was the fact that there was a specific statutory provision present (the duty of authorisation) to protect investors.

Causal link

If damage caused by an event can be traced to a shortcoming or wrongful act of the bank and the bank can be held liable, the injured party can claim compensation. This requires causality to show that the damage is a direct consequence of a shortcoming by the bank. If causality exists and the banks duty of care was breached, then the bank can be held liable for the damage as a result of this event.

Financial Supervision Act (Wft)

The general duty of care for banks is laid down in the Financial Supervision Act (Wft). This act oversees careful service provision and obliges banks to act in the customer’s interest. During the term of agreements, the bank must inform customers of changes from the initial advice. Based on information provided by the bank, customers must always be able to properly assess financial products and financial services. In addition, under the Financial Supervision Act, banks must be able to justify why they gave customers particular advice. Violating this law can lead to civil liability of banks.

Engage a financial law specialist

Would you like more information on banks’ duty of care, do you have a dispute with your bank or are you of the opinion that your bank has failed to comply with the banking duty of care? The lawyers at Fruytier Lawyers in Business have extensive experience in recovering damages suffered by banks, financial advisers and asset managers. Contact one of our specialists in financial law and business law without any obligation.