Duties Not To Facilitate Fraud

Fraud and forgery have always been an issue for banks and customers alike in the transfer of money and these days, with the electronic transfer of money, the risks are even greater. This briefing paper explores what duties banks and their customers owe not to facilitate fraud.

What duties apply to banks and their customers to prevent fraud arising in banking transactions?

With the widespread use of mobile and internet banking, there has been an increased focus on the need to mitigate the possibility of fraudulent activity in private banking transactions, with a duty of care placed on both a bank and its customers. Such duty of care has long been in existence, with statute granting certain protections to banks and numerous cases establishing the obligations owed by each party, particularly in relation to the drawing of cheques.

The extent of the duty of care owed by each party however is predominantly dependent on the terms and conditions of the contract governing the bank account. For those banks which have signed up to the Lending Code, there is a requirement that terms are in compliance with them. In addition, both the Financial Conduct Authority's Banking Conduct of Business Rules and the Unfair Terms in Consumer Contracts Regulations ("UTCCRs"), impose a duty of fairness on the bank to its customer who is a consumer. Terms are regarded as unfair if, contrary to the requirement of good faith, they cause a significant imbalance in the parties' rights and obligations to the detriment of the bank's customer. Accordingly, a bank would be unable to exclude their liability by restricting the duty of care owed to their consumer customers. Common law has supported this approach, reiterating that a duty of care exists on both banks and their customers not to facilitate fraud.

To what extent does a bank owe its customer a duty of care not to facilitate fraud?

Banks are expected to comply strictly with their customer's payment orders, issuing corresponding payment orders that precisely match that of their customer's. There are limited circumstances in which a bank is able to refuse a payment order, and in the case that it does, the bank must inform the customer at the earliest opportunity that it is doing so and, where possible, provide an explanation. In Bank of New South Wales v Laing [1954] AC 135 it was held that there was an obligation on a bank to comply with their customer's payment order so long as the account was in credit. Banks are...