Finance: Banking Law

Introduction

The history of banking started long ago with the pioneer banks, which gave grain loans to traders and farmers who transported goods from one city to the other. From their inception to now, there have been tremendous changes in the banking systems and management over the years, which has been encouraged by the technological advancements in the world[1].

In the world, the banking sector plays a vital role in the overall economic development. For banks to meet their mandates, customers must be there. Customers encourage the banking system through their roles in using various banking services like saving accounts, checking accounts, business loans, treasury services, merchant services, and debit and credit card services. For the bank to succeed in offering such services to customers, trust becomes essential between the two parties, the banker and the customer, due to its role in encouraging a healthy relationship. Such a relationship comes about as a result of the banker accepting to go on and open an account in the customer’s name.

Definition of terms

A bank is a financial institution licensed to accept deposits and withdrawals by customers and offers loans to their customers. Banks work by encouraging people having excess money to deposit and get interest in return. On the other hand, banks make money available for people in the form of loans which are required to pay back principal amounts together with interest amounts for a certain period as agreed upon between the bank and the borrower[2]. Besides deposits and loans, banks provide services like currency exchange, individual retirement accounts, safe deposit boxes and certificates of deposits.

A banker is a dealer who takes deposit accounts, collect, issue and pay cheques for his customers, and takes current account. Concerning their mandate, bankers are not to disclose any personal information given to them by their customers, are supposed to follow the guidelines given by the customers, and maintain all transactional details conducted by the customer.

A customer is an individual or organization having an account in the bank. Just like a banker, a customer, has duties. Customers are obligated to carefully go through the terms and conditions of a bank before using their services. They are also required to offer authentic information in the bank records, fill in their cheques properly, communicate any issues regarding checking early in advance, and ensure they repay their principal amounts and interests on loans taken.

Rights of the banker and customer

In banking, the customer and the banker are not only entitled to duties but have rights as well. One of the rights enjoyed by a banker is the right of a lien. In this case, a banker can keep the debtor’s goods until they repay their loans. Even though the banker has a right to hold the debtor’s collateral, they are only allowed to sell the collateral upon agreeing with the customer considering their defaulting[3]. Also, the banker has a right to set off. Under this right, the banker is allowed to merge several accounts held by the customer under the same name in the bank, set off the remaining debt balance in one of the accounts, and credit the balance in the other accounts.

Another crucial right the banker enjoys is charging interest and commission on their customers’ loans. Usually, the bankers charge such interest monthly, quarterly, semiannually, and annually depending on the type of loans the customer chooses to take. Lastly, the banker has a right to close the customer’s account upon discovering that their accounts are not operated.

Customers also have rights, and one of their most crucial rights is the right to privacy. Even if banks expects customers to give out their correct personal information, they must respect customer privacy by keeping all their personal information private and confidential. Customers also have a right to fair treatment regardless their differences in sex, gender, religion and color by the bank[4].

Customers also have the right to transparency and fair and honest dealing. It is essential for any contract between the bank and the customer to be easily understood by the commoner. The bank should make sure make sure the customer understands the crucial aspects like interest rates charged on loans and risks involved upon failure to repay their principal amounts and interest charges. Therefore, before the customer signs their agreement, the bank should disclose all information to the customers. Lastly, customers have a right to suitability. In this case, the bank can only sell the customer’s collateral by considering the customer’s needs.

The relationship that exists between a banker and a customer

The relationship between a customer and a banker varies depending on the customer and the service they demand. As a result of this, two major relationships exists entailing a general and a special relationship[5].

General relationship

The general relationship between a banker and the customer comes in different forms, as shown in the table below.

Debtor and creditor relationship

Upon filing and signing an account opening form, the customer automatically enters into a contract with the bank. If the customer after that chooses to deposit money in their opened accounts, they eventually become a creditor, whereas the bank becomes a debtor[6]. Here, the bank can comfortably use that money deposited by the customer without informing them. However, the bank becomes liable to give back the money to the depositors when they demand it back.

One of the common ways banks use depositors’ money is by providing loans. They give out loans to customers who pay back with interest. In such a case, the bank automatically becomes the creditor, whereas the customer becomes the debtor.

Principal and agent relationship

In the principal-agent relationship, an agent is a person employed mainly to perform a duty on behalf of another individual. On the other hand, the person being represented in the act is called the principal. In the banking industry, banks act as agents by carrying payments to several authorities by making payments and collecting cheques and bills on behalf of their customers[7]. The banks also abide by the standing instructions given to them by their customers. In such cases, the bank acts as an agent to their customer, who pays charges for such services in return.

Trustee and beneficiary relationship

Trust is an arrangement where one person takes up the duty of dealing with a property over which they have control for the benefit of their third parties, who are beneficiaries. In banking, the relationship between the customer and the bank is based on trust[8]. For example, when the bank receives a useful asset or a document as collateral for a loan, the bank becomes the trustee, and the customer becomes the beneficiary. Another example rises when a cheque or bill of exchange is deposited with a bank for collection. In this case, the bank becomes the trustee for the bill or cheque until it is collected. Then after the customer collects their cheque and the proceeds are credited to their accounts, the banker becomes the debtor.

In the contract where the banker becomes the trustee for the customer’s property, he is required to deal with the trust property according to the terms and conditions of the property, give a detailed trust property account to the beneficiary and is also banded to hand over any profits and income earned from using the property to the beneficiary of the trust property.

Bailor and bailee’s relationship

A bailment is an agreement existing between the bank and the customer where the customer provides a certain good or asset to the banker for a certain period. In such an agreement, the customer entrusting the asset to the banker is called the bailer and the banker to whom the asset is entrusted is referred to as the bailee. As a bailee, the bank owes various duties and liabilities to the customers, including; safeguarding the safe custody of customer deposits with reasonable care and being liable for any compensation to the customer when they suffer losses upon the bank’s failure to safeguard customers’ deposits reasonably. Lastly, they must hand over the customer’s safe custody deposits upon demand.

Advisor and client relationship

The bank acts as an adviser and the customer becomes the client when a customer invests in securities. When giving investment advice, the banker should be so careful.

Lesser and lessee relationship

In the lessor-lessee relationship, the lessor is the person who transfers the immovable property, and the lessee is the person to whom the property is being transferred. In the relationship, the lessee pays a premium price to the lessor for the immovable property transferred. Banks play the role of providing safe deposit lockers services to customers. When providing such services, the bank gets into an agreement with the customer known as the memorandum of letting. In such an agreement, a relationship between the lessor and lessee is created between the two parties. Banks lease lockers to their customers, give them maximum rights to enjoy the usage of the property for a certain time and pay rental charges in return. If the locker holder defaults in rental payments, the bank has a right to break open the locker.

Pledger (customer) and pledgee (banker) relationship

The pledger and pledgee relationship occurs when the customer pledges some security or assets with the bank for them to get a loan. In such a case, the customer automatically becomes the pledger, and the bank becomes the pledgee. In such an agreement, the security/asset pledged by the customer remains in possession of the bank until the customer owners their obligations of fully repaying back the loan amount.

Special relationship

The special relationship between the banker and the customer entails the duties and instructions of the banker. Some of the elements of the relationship between the customer and the banker entail the following:

The banker’s obligation to honor customers’ cheques. 

Upon opening a current account by the banker in the customer’s name, the banker is obliged to honor the customer’s cheque provided there is enough money in the customer’s account to meet the cheque. The banker’s obligation to honor customer cheques is subject to several conditions like; the banker should have enough money to pay the customer’s cheque demands, the funds should be properly applicable to the cheque payment, and the banker should be fully required to pay the cheque[9].

Even if the banker is obliged to honor his customer’s cheques, he can as well go ahead and dishonor the cheque issued by the customer under certain conditions like irregularity in the cheque, insufficiency of funds in the customer’s account, and presentation of a post-dated cheque before its due date.

Banker’s obligations to maintain the secrecy of the customer’s account. 

The banker should not disclose customers’ personal information relating to their cheques issued and amounts deposited, among other sensitive information, to any outsider. Also, the relationship between the customer and the banker should remain private and confidential as disclosing such private relationship to the outsider may greatly affect the bank’s reputation.

Banker’s obligations to maintain customer records

The bankers must also maintain all deposits, transactions, investments and customer loan records. Such records should always be clear and genuine.

Banker customer relationship termination

Despite opening an account with the bank, it is not always a guarantee that the customer-banker relationship will always last for a long time. The relationship between the two parties can end at any time as a result of; bank liquidation, contract term completion between the customer and the banker, death or bankruptcy of the customer, mental incapacity of the customer, voluntary termination of the relationship by the customer and account closure by the bank upon notice issuance[10].

Conclusion

The banking system is one of the sectors that has experienced changes since its inception, and technological advancements have stimulated these changes. Setting technological advancements aside, the debtor-creditor relationship, principal and agent relationship, trustee and beneficiary relationship, pledger and pledgee relationship, bailor and bailee relationship, advisor and client relationship and the lesser and lessee relationships are some of the customer banking relationships that have existed in the banking sector. Through such relationships, the rights and obligations of each party have made it easy for them to realize their mandates and rights. As days come and go, the banking system will continue to advance its service offering and develop more relationship forms with customers to encourage effective service offerings.

Bibliography

Secondary sources

Books

BAHI HOUSSEMEDDINE, Dual Banking System of the United States of America (GRIN Publishing 2016)

Clark EE, Stuyck J and Terryn E, Commercial and Economic Law in Australia (Kluwer Law International 2015)

Goulding S and Abley R, Relationship Management in Banking: Principles and Practice (KoganPage 2019)

Hartmann P, Huang H and Schoenmaker D, The Changing Fortunes of Central Banking (Cambridge University Press 2018)

Meyerson L and Sweet WJ, Banking Law Institute, 2017 (Practising Law Institute 2017)

Journal

Charles P, “Part C the Banker–Customer Relationship, 16 Cheques” [2015] The Law and Practice of International Banking

Chiu IH-Y and Wilson J, “2. The Banker–Customer Relationship” [2019] Banking Law and Regulation 21

Mouly C and Bloch P, “France” [2020] European Banking Law: The Banker–Customer Relationship 35

Singh K, “Relationship between Banker and Customer” (2019) Volume-3 International Journal of Trend in Scientific Research and Development 1535

Website

Vashisth A, “Customer-Banker Relationship” (Law Times JournalMarch 4, 2020) <https://lawtimesjournal.in/customer-banker-relationship/> accessed February 5, 2023

[1] Hartmann P, Huang H and Schoenmaker D, The Changing Fortunes of Central Banking (Cambridge University Press 2018)

[2] BAHI HOUSSEMEDDINE, Dual Banking System of the United States of America (GRIN Publishing 2016

[3] Clark EE, Stuyck J and Terryn E, Commercial and Economic Law in Australia (Kluwer Law International 2015)

[4] Goulding S and Abley R, Relationship Management in Banking: Principles and Practice (KoganPage 2019)

[5] Chiu IH-Y and Wilson J, “2. The Banker–Customer Relationship” [2019] Banking Law and Regulation 21

[6] Charles P, “Part C the Banker–Customer Relationship, 16 Cheques” [2015] The Law and Practice of International Banking

[7] Singh K, “Relationship between Banker and Customer” (2019) Volume-3 International Journal of Trend in Scientific Research and Development 1535

[8] Mouly C and Bloch P, “France” [2020] European Banking Law: The Banker–Customer Relationship 35

[9] Vashisth A, “Customer-Banker Relationship” (Law Times JournalMarch 4, 2020) <https://lawtimesjournal.in/customer-banker-relationship/> accessed February 5, 2023

[10] Meyerson L and Sweet WJ, Banking Law Institute, 2017 (Practising Law Institute 2017)