Banking duty of care

Banks play a pivotal role in society.

They facilitate checking accounts and (international) payment transactions, raise and then deploy funds, provide a variety of financial services and offer a number of financial products.

Banks are expected to be pre-eminent experts in financial services and financial products.

Partly because of their social position and special expertise, banks have a duty of care under the law and case law not only towards the buyers of their financial products and services (their clients), but also towards third parties. This duty of care (towards customers) is included in banks' general terms and conditions.

In principle, when the bank breaches its banking duty of care, the bank can be held liable for damages suffered by customers and/or third parties.

For example, you might think of damages resulting from an unauthorized termination of credit or a banking relationship, overcrediting, not rightly charging all kinds of fees, or failing to warn about the risks of certain financial products.

In upcoming articles, we will discuss banks' duty of care in more detail. Our expectation is that this topic will receive considerable attention in the coming years due to an increase in loan cancellations, transfers to Special Management and bankruptcies as a result of the Corona crisis and accumulated debt.

In this first article, we discuss exactly what duties of care are because the word "banking duty of care" is a generic term for several categories of duties of care.

For example, a distinction must be made between the general and special duty of care, between the contractual duty of care (towards the client) and non-contractual duty of care (towards a third party), and between the civil and public law duty of care.

Here we note that this distinction is not always clear, also because the duties of care overlap with some frequency.

General duty of care

The general duty of care for banks is laid down in Section 4:24a of the Financial Supervision Act (Wft).

The Wft codifies duties of care for prudent service provision. These require banks to act in the best interests of their customers.

The Wft has both concrete duty of care obligations (know your client (KYC), information obligations, cost transparency, etc.), as well as more general obligations.

When the bank violates the Wft, the bank is acting in violation of the law and thus in violation of its banking duty of care. Violating this law can lead to civil liability of banks towards its customers because the rules of the Wft are designed to protect the customer.

The Wft is also intended as an "enforcement law" for the regulator (usually the Financial Markets Authority). The latter can take measures against banks when they violate the duty of care provisions within the Wft. For example, regulators can impose fines or investigate banks' policies. If the bank commits major violations, the supervisors may even withdraw the banking license or attach stricter conditions to it.

The fact that the supervisor has the ability to take enforcement action does not affect a customer's ability to turn to the civil courts. However, a customer of a bank can use a sanction imposed by the supervisor, to the extent it is already known, in support of his or her claim.

Conversely, the civil court's ruling may be grounds for the regulator to take enforcement action.

In this sense, then, the public law and private law duty of care are with some frequency communicating and mutually reinforcing vessels.

Special duty of care

Banks have - in addition to the general duty of care mentioned above - a special duty of care towards private investors. This special duty of care was first adopted by the Supreme Court in the late 1990s and subsequently confirmed in several judgments.

The reason for the special duty of care is partly because the bank is an eminently expert service provider and partly because the private investor needs protection in the eyes of the Supreme Court.

The special duty of care seeks to protect retail investors from the danger of their own levity and/or lack of judgment.

The extent of the special duty of care depends on the circumstances of the case, including, for example, the risks and complexity of the financial product/ service, the client's income and asset position, and any expertise he may have.

The special duty of care may include:

1. An information obligation: prior to the agreement, the bank must provide the customer with sufficient information so that the customer can make an informed choice, and during the term of the agreement with the bank, the bank must keep the customer informed of material changes.
2. An obligation to research: the bank must research the customer's income and asset position, expertise and objectives (know-your-client or KYC rules).
3. A duty to advise: if the customer's income position is not sufficient, the bank may have an obligation to advise against purchasing the service or product;
4. A duty to warn: the customer should be intrusively warned of the risks associated with the service or product;

When interpreting the special duty of care, civil courts are guided, among other things, by the public law rules of conduct contained in the Wft.

Contractual duty of care

A bank's contractual duty of care with its customers is mainly laid down in Article 2 of the General Banking Conditions and also in a variety of additional, product-specific agreements and general conditions.

Article 2 provides in the first paragraph that the bank shall be diligent in its provision of services and shall take into account the interests of the customer to the best of its ability and in a manner appropriate to the nature of the service.

However, the duty of care applies both ways, so also from the Customer towards the Bank. Indeed, Article 2 stipulates in the second paragraph that the Customer must also be careful towards the Customer and take the Bank's best interests into account.

However, the care to which the bank is bound toward clients clearly goes beyond the care that contracting parties must exercise toward each other under normal circumstances because of the bank's special position and expertise.

Under special circumstances, this duty of care (as explained above) goes so far as to require the bank to protect private clients from themselves.

Article 2's contractual duty of care is thus colored by the specific circumstances of the case.

Extra-contractual duty of care

The bank's duty of care is not limited to the care it must exercise toward its customers, but under circumstances also extends to care it must exercise toward third parties.

This extra-contractual duty of care relates to the interests of third parties whose interests the bank should take into account on the basis of social care. The bank's special (trust) function in society entails this.

Consider, for example, investments involving minors' assets by warning the legal representative that orders given are contrary to the principle that minors' assets should not be invested in a speculative manner, or investments of private investors who have deposited money in an account of an asset manager acting in violation of financial laws by further investigating that asset manager or closing that account.

How this extra-contractual duty of care is fulfilled in practice varies from situation to situation and depends on the circumstances.

Civil law duty of care vs. public law duty of care

In addition to the distinction between the general and special duty of care and the contractual and extra-contractual duty of care, another distinction can be made between the civil law duty of care and the public law duty of care.

By this we mean the duty of care as it follows from civil law regulations (such as the Civil Code) and public law regulations (such as the Wft).

Regarding the civil law duty of care, we note that the civil law relationship between a bank and its customer is usually legally qualified as a contract of assignment.

Every contractor - including the bank - must exercise the care of a good contractor toward the client (the customer) in its work.

Whether the duty of care has been met depends on whether the contractor acted as a reasonably competent and reasonably acting professional would have acted. This criterion is fleshed out in case law and depends on the circumstances.

In addition, as mentioned above, the civil duty of care is enshrined in the bank's general terms and conditions, the bottom line being that the bank must behave with care toward a customer and put the customer's interests first.

Finally, the "special duty of care" developed in case law also falls under the civil duty of care.

The public-law duty of care is enshrined in the Wft. In principle, therefore, this law is there primarily for the Supervisor (AFM) to enforce, but as mentioned above, clients can also rely on it to substantiate a breach of the duty of care in civil court.

Duty of care bank

A bank's various duties of care toward its customers and, under circumstances, even toward third parties were discussed.

However, there is no such thing as a single duty of care that applies in all cases, and there is no defined standard of review on the basis of which it can be judged in every situation whether the bank has adequately fulfilled its duty of care.

The nature and extent of the duty of care to be observed by the bank depends on all the circumstances of the case.

Relevant circumstances include:

• The complexity of the financial product;
• the risks and financial implications that the product may entail;
• The knowledge, skill and (financial) experience of the client;
• the client's financial position.

If the bank breaches its duty of care, then it is liable to its customers or third parties for the resulting damage.