Duty of care of banks

Banks have a duty of care towards customers of financial products and services. The duty of care of banks is laid down by law. A contractor must exercise 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. This duty is an implication of the important social function of banks and aims to protect individuals and entrepreneurs from making rash (financial) decisions.

General and special duty of care for banks

Banks have special expertise in the field of financial services and financial products and are pre-eminently expert service providers. Based on this expertise and important social role, banks must 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 the special duty of care for banks. The banking duty of care applies both in the pre-contractual phase and after the termination of the service.

• General duty of care

Banks are required to collect customer information in order to be able to advise customers properly. In addition, banks are required to provide customers with sufficient information to enable them to make an informed choice. A customer profile is drawn up based on the customer’s income, financial position, experience and ambitions. Services and products must fit within this customer profile.

• Special duty of care

The special duty of care for banks applies in situations where banks must protect consumers and entrepreneurs against the risks of financial products or investments. The special banking duty of care requires banks to investigate the customer’s financial position. How this duty of care is fulfilled depends 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 duty of care for banks. First, a brief distinction must be made between the two forms of duty of care. On the one hand, there is the contractual duty of care (bank towards a client) and, on the other hand, the non-contractual duty of care (bank towards third parties).

Contractual duty of care

The contractual duty of care arises from a number of legal provisions and the bank’s general terms and conditions, drawn up by the Dutch Banking Association. This framework of provisions stipulates that the bank must take its client’s interests into account in its services. Although this may sound like a superfluous rule, case law shows that practice is often more difficult.

The difference between the duty of care of banks and the “normal” duty of care that exists between two parties is that the bank, as a professional and expert contracting party, has an increased or special duty of care, certainly also in view of its social function.

Practical example

A 2003 Supreme Court case concerned 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. The client then filed a claim against the bank for breach of duty of care. The court ultimately concluded that a bank, as a professional and expert service provider, has a special duty of care, partly because such transactions can involve very high risks. In some cases, simply warning of risks may not be sufficient, and the bank may even have to refuse to carry out risky transactions.

This ruling by the Supreme Court means that the bank, as a professional and expert service provider, has a far-reaching duty of care to protect (private) investors from themselves, even if they ignore the bank’s warnings.

Non-contractual duty of care

Banks also have a non-contractual duty of care towards third parties. A bank must also take the interests of third parties into account. The bank may not act in contravention of what is considered proper conduct in society. How this is interpreted in practice varies from situation to situation and depends on the circumstances.

Practical example

The so-called Safe Haven judgment concerned a group of investors who had deposited money into Safe Haven’s account for investment purposes. After the group had suffered considerable losses as a result of risky investments, the investors held the bank liable on the grounds of a wrongful act. An important detail in this case was that Safe Haven did not have a licence to act as an asset manager. The investors accused the bank of failing to take action after it discovered that Safe Haven was operating without a licence.

The major difference with previous case law on the duty of care for banks is that there was no direct relationship between the investors and the bank. The bank only managed Safe Haven’s bank account. However, the court followed the investors’ reasoning. The applicability of the duty of care therefore depends on whether the bank took action. An important indication in this ruling was the fact that there was a specific legal provision (the licence requirement) to protect investors.

Causal link

If damage caused by an event can be traced back to a shortcoming or unlawful act on the part of the bank and the bank can be held liable, the injured party can claim compensation. This requires a causal link to demonstrate that the damage is a direct result of a shortcoming on the part of the bank. If there is causality and the duty of care for banks has been breached, the bank can be held liable for the damage resulting from this event.

Financial Supervision Act (Wft)

The general duty of care for banks is laid down in the Financial Supervision Act (Wft). This Act ensures that services are provided with due care and obliges banks to act in the interests of their customers. During the term of agreements, the bank must inform customers of any changes to the initial advice. Based on the information provided by the bank, the customer 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 have provided customers with certain advice. Violation of this Act may result in civil liability for banks.

Engage a financial law specialist

Would you like more information about the duty of care of banks, do you have a dispute with your bank, or do you believe that your bank has failed to comply with its duty of care? The solicitors at Fruytier Lawyers in Business have extensive experience in recovering damages from banks, financial advisers and asset managers. Feel free to contact one of our specialists in financial law and corporate law.