Nature of Account
A bank account is a category of asset known as a chose in action. It is effectively a debt. It is not a piece of property. Ultimately, it may be asserted only in a legal action. If a bank fails to repay the monies deposited, the claim is for breach of contract and not for the monies itself in any proprietary sense. It is an implied term of a loan account/agreement that the principal will be repaid together with simple interest and normal bank charges. This applies in the absence of a specific provision to the contrary.
A Current account is a basic operating account between the customer and the bank. Ownership of the funds passes to the bank when monies are lodged and on clearance of cheques. As a bank account is a debt, the Statute of Limitations applies. The general position is that the Statute of Limitation commences, only when the bank monies are demanded by the customer.
A joint account is held in the name of two persons. Where an account is held jointly, it may be that the equitable entitlement is held differently from the legal ownership as appears on the account. The courts look at the intention of the parties and attempt to ascertain what contract was agreed, in order to determine entitlement.
Relationship Between Bank and Customer
The opening of an account will make a person a customer of a bank or other lending institution. A person may be a customer if some service has been provided for him, but this may not necessarily be so. Most of the bank’s duties are owed to customers. It is possible, however, under the law of civil liability to undertake a duty to a third party who is not a customer. This might would occur, for example when that person relies on the bank’s advice.
A very fundamental feature of banking is that when money is lodged with a bank or other credit institution, it becomes the property of the credit institution. The customer’s right to the money is a right to sue for a contractual right. The money is not held on trust. If the lending institution was to become insolvent, the depositor would be an unsecured creditor. Therefore, various deposit guarantees have existed and were increased in level and enhanced in 2008.
The implication of the money belonging to the bank is that the bank may itself may lend it out and recover it against a customer as a creditor. It is not in any way acting as an agent. The bank acts as an intermediary in transforming the credit maturity requirements. Although the money is due as a debt, the time to claim it does not commence unless and until a demand is made for the purpose of the Statute of Limitations.
A customer is a creditor of the bank. If the account goes into overdraft, the bank becomes the creditor of the customer. The Statute of Limitations will usually apply in a similar manner to a loan. It does not generally run until demand for repayment has been made.
Broadly speaking, the relationship of the customer and bank is governed by the terms of the contract between them together with the law of the tort, implications arising from common law and industry regulation, such as the Consumer Protection Code.
A customer’s rights against the bank will be primarily contractual, but may also arise from the law of negligence. The bank will owe a duty of care to the customer in its dealings.
Security / Lien
A bank has a lien over stocks and other securities which it holds which belong to the consumer. It is a lien for the customer’s net indebtedness. It carries the right of sale and it arises by operation of law. The lien extends to cheques, proceeds of cheques, insurance policies, share certificates and other instruments.
It depends on the circumstances as to whether the securities are lodged for safekeeping or by security. Documents held by way of safekeeping may be within the subject within the lien.
A banker has a right of setoff on accounts with the customer. A set-off or combination arises from the fact that loans are monies owed to the bank, while deposits are monies owed to the customer. The bank is generally entitled to combine them so that the net position as between customer and bank applies. Letters of set-off commonly provide that various balances between group companies may be setoff and combined by the bank.
Banks usually provide for an express right of set-off in their terms and conditions. The right would generally be implied. The terms of the contract, might however expressly or imply the contrary. The accounts must relate to the same customer and be beneficially owned and owed money. Where one person is a trustee or holds money on behalf of another, the account may not be subject to set-off.
Both the loan and the account monies must be immediately due. Therefore monies in a current account may not be set off against guaranteed monies. The guaranteed monies are not owed until the principal debt is in default and the guaranteed amount is demanded. The bank will not generally combine a balance on a current account with the loan, unless and until the loan must demand.
Interest is the monies paid either on a loan, by the customer, or by the bank to a depositor. Interest payable on a loan due to default may be an invalid penalty, if it is excessive. However, there is relatively wide latitude allowed to a bank.
Formally, the charging of compound interest was frowned upon. Usuary statutes determined the maximum rates of interest. Partly by reason of this, loan contracts commenced to provide for a notional settlement date or rests throughout the life loan. The effect is that outstanding interest is added and thereby compounded.
Compound interest must be provided for by the term of a contract if it is to apply. It must be express or implied.
In proceedings where a court orders payment of monies including damages or s liquated sum, the judge may order interest at an annual rate. This is to apply from the date of commencement of the action to judgment. The rate is specified by law from time to time. It does not appear to allow compound interest. The provisions do not apply where express provisions is made.
The courts of equity may require the payment of compound interest. Where a person holds money long-term in a fiduciary capacity, courts may require him to account for compound interest.
End of Relationship
The relationship of banker and customer comes to an end when the account is closed. If the bank closes the account, reasonable notice must be given. The length of notice required will depend on the circumstances. When an account is overdrawn, it may be closed without reasonable notice. If an overdraft is repayable on demand it most likely cannot be closed without giving the customer the opportunity to make other banking arrangements.
The death of the customer terminates the relationship. Death terminates the authority of the bank to pay money. If the drawer of a cheque dies and the cheque has not been cashed, it should be returned Monies may not generally be paid, until Letters of Administration or Grant of Probate are produced. There are certain exemptions applicable, to certain institutions for accounts less than certain values.
The loss of mental capacity on the part of a customer means he no longer has the capacity to deal with the institution. Upon receipt of notice of mental incapacity, the credit institution’s mandate to pay will generally terminate. Payments for the satisfaction of previously incurred debts are allowed, where the person is no longer capable of managing his affairs.
The insolvency or winding up of a customer vests his or its assets in the official assignee or liquidator, as the case may be. Once the bank has notice of the insolvency, it is not authorised to make payments, save as specifically authorised. If the customer is a debtor the lender bank may claim in the bankruptcy as an unsecured creditor. If it holds security, it has certain options. See the section on the options with security on insolvency.
In insolvency the bank may combine its accounts and set off deposit and current accounts against loan accounts.
Where a transaction on an account, has not taken place for over 15 years or such other period as may be prescribed, the dormant account procedure may apply. The bank may write to the account holder confirming to the account holder, that it will be treated as a dormant account. Where the amount is less than €100 euro or the account holder may not be contacted, the credit institution may advertise in a daily newspaper and indicate that if the institution is not contacted, the funds will be dealt with in accordance with the Act.
Dormant accounts are transferred to a special State special account from which funds can be dispersed for matters of public interest. The monies can be reclaimed if the dormant account holder returns to reclaim them.
Regulation of Relationship
A range of general legislation applies to banking. The unfair contract terms regulations will apply to consumer loan agreements, as bank lending terms and conditions will be presented in a prescribed standard form. Data protection legislation is of immense practical importance. Anti-discrimination legislation will apply to banks in their dealings with customers.
The Bank Charter for small business customers, 1995, Bank Charter for Personal Customers, 1997 were published and promoted by the Irish Bankers Federation (IBF). Many of these provisions have now been incorporated in Consumer Protection Code. The Charter governing lending to small businesses undertakes that banks will provide details of their lending policies and advance reasons for rejection of applications for credit
Member banks subscribe to the code of best practice of the European banking industry Charter on card-based payment systems. The Charter expands duties in relation to references, including a commitment that the bank will not to respond, without first obtaining consent.
The legal relationship between banks and customers is enhanced by the financial services legislation. References may be made to Financial Services Ombudsman on grounds of legality and on broader grounds.
Consumer Protection Code
The Consumer Protection Code was adopted in 2006 and became fully operable in 2007. It covers customers and consumers. Most duties are owed to consumers who include most businesses, with a turnover of less than €3,000,000 annually.
All bank customers are covered by very general duties. However, consumers are protected by a host of detailed regulations A consumer under the Consumer Protection Code includes a private person acting outside their business but also businesses whether individuals or companies whose annual turnover as a group does not exceed €3,000,000.
The Code provides broadly similar obligations across a range of financial services providers and financial services. It covers banks and other credit institutions. It applies to insurance, investment advice and the sale of investment products.
The Code is not a legal provision as such. However, its provisions are enforced by way of complaints to the Financial Services Ombudsman and by regulatory investigations and enforcement action, taken by the Central Bank. Businesses with annual turnover less than €3,000,000. also have access to the Financial Services and Pensions Ombudsman.
The Code applies to credit institutions, insurance businesses, mortgage intermediaries, investment business firms, insurance intermediaries. Many investment services and activities are covered by the Markets in the Financial Investment Directive, which provides a similar level of protection.
The Consumer Protection Code provides the following general principles when any regulated entity including a bank provides services to customers:
- Must act honestly fairly and professionally in the best interests of the customer;
- Must act with due skill, care and diligence in the best interests of the customer;
- must not recklessly, negligently or deliberately mislead a customer as to the real perceived advantages or disadvantages of a product or service;
- Must use affect the resources and procedure systems and controls that are necessary to ensure compliance with the Code;
- Must seek information from the customer relevant to the product of service provided;
- Must make full disclosure of all information including charges in a way that informs the consumer;
- Must avoid conflicts of interest;
- Must correct errors and handle complaints speedily, efficiently and fairly;
- Must not exert undue pressure or influence on the customer
- Must not prevent basic access to financial services consumer;
- Must comply with both the spirit and letter of the code.