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Does a bank owe a duty to its customers?

SzulcIt is a well-known fact that many people face very serious problems with their loan agreements, bank accounts, deposits and the like. As a consequence, they become parties in a judicial dispute after banks initiate a legal claim against them in order to gain back ‘their’ money. The outcome is very obvious; being in favour of the banks. But what do banks have to do in order to protect their interests and also their clients? Do they owe a duty to them?

Without a doubt, the relationship between banks and customers is one of contractual nature. Thus, banks should be guided, at first, by the principles of contract law. In a contractual relationship, there is a fiduciary duty between the parties; this means that each party must act bona fide towards the other. This fiduciary duty exists not only to banks’ customers when they ask for financial assistance and particularly loan agreements, but also to third parties, such as guarantors. Banks should inform their customers about the risks they may face in the future in relation to their loans. This duty extends to guarantors, as third parties to the contractual relationship between the bank and the customer. Guarantors have to be informed in case where the customers, whose loans guaranteed, do not comply with their obligations and/or debts.

Moreover, one may say that banks most certainly do owe a duty to their customers concerning fraud which may be committed by someone in chief – making a payment order on behalf of the customer. Special duty of care may arise when a client intends to make an investment. In this case the bank must give its opinion and/or all necessary information about the investment products. According to the Directive for the Professional Conduct of Banks 558/2007 of the Central Bank of Cyprus, Cyprus Banks should adopt specific practices and follow certain rules in accordance with the provision of investment or ancillary services and the performance of investment activities.

In addition, the Association of Cyprus Banks established a Code of Conduct for all banks, aimed to promote their good practice standards and the trust that needs to exist in every relationship between the bank and a customer. Furthermore, this Code established certain rules and practices that banks have to follow in order to ensure a fair ‘deal’ with the client. The Code does comply with Cyprus banking regulations, European and International standards. Unfortunately, it applies only to natural persons and not to legal entities.

The question is whether banks follow these deontology rules since they clearly owe a duty to their customers, and if it is possible, a duty to legal entities too – and if they don’t, what are the consequences? There is no clear answer as yet; meanwhile there are lot of pending legal procedures dealing with this matter and hopefully the outcome will be discovered within the following years.