[Banking & Insolvency] Financial Institutions Do Not Owe A Duty Of Care To Non-Customers

• Jurisdiction: United States,Federal
• Law Firm: Lee Hishammuddin Allen & Gledhill
• Subject Matter: Finance and Banking, Financial Services
• Author: Sean Yeow Huang-Meng and Andrea Chew Mei Yng
• Published date: 31 July 2023

On 26 July 2023, the Federal Court allowed the appeal against the Court of Appeal's decision in Koperasi Sahabat Amanah Ikhtiar Bhd v RHB Investment Bank Bhd [2022] 6 MLJ 722, where the Court of Appeal had extended the duty of care owed by financial institutions to non-customers.

One of the questions of law posed to the Federal Court was whether a financial institution owes a duty of care to third parties who are not its customers and to whom it had not assumed any responsibility in a case for pure economic loss. The question was answered in the negative.

Factual background

The matter arose from a cheque of RM10 million issued by Koperasi Sahabat Amanah Ikhtiar Bhd ("Koperasi") that was deposited into a pool account of RHB Investment Bank Bhd ("RHBIB") held with Maybank.

Koperasi was defrauded by a fraudster, who had falsely held himself out as an officer of RHBIB, and deceived Koperasi into investing in a non-existent investment said to be offered by RHBIB. Koperasi issued and handed the fraudster a cheque for RM10 million made payable to RHBIB for the purported investment.

The fraudster deposited the cheque into RHBIB's pool account. He then furnished RHBIB with the bank-in slip and deceived RHBIB to believe that the cheque was deposited for the share trading account held by his company with RHBIB.

Accordingly, RHBIB allocated the funds to the account of the fraudster's company based on the bank-in slip. The fraudster/his company subsequently absconded with the funds.

The Court of Appeal found that a duty of care arose the moment when the cheque was deposited into RHBIB's pool account. RHBIB had the duty to make certain enquiries such as verifying who the actual depositor was, whether the depositor was a customer and the depositor's mandate in respect of the funds. By not doing so, RHBIB had breached its duty of care owed to Koperasi.

Issue in the appeal before the Federal Court

The principal issue that arose is an issue of threshold in a negligence claim - whether there was a duty of care. Particularly, whether there was a duty of care owed by financial institutions such as RHBIB to a third party such as Koperasi (who was, i. not a customer of RHBIB, ii. did not have an account with RHBIB; and iii. had no prior dealings or relationship with RHBIB) for pure economic loss.

The Federal Court affirmed the trite position of apex courts that...