De-banking - a bank's obligations and duties to its customer

In brief: In this Financial Services Insight we continue our analysis of the decision in Human Appeal International Australia v Beyond Bank Australia Ltd (No 2) (De-banking Case) to consider the obligations and duties that a bank may owe its customer when exercising a right to close their account. 

Background

In our first article Why was I de-banked? [10 November 2023] we highlighted the following fundamental legal principles applying to de-banking which emerged from the case, being:

• How the January 2018 version of the Customer Owned Banking Code of Practice (Code) was expressly incorporated into the Bank’s terms and conditions and introduced a contractual obligation of good faith and reasonableness (or at least which arise from the express terms of the contract rather than by way of stand-alone implication).

• That the obligation was picked up by the Bank’s acknowledgment in clause 8 of its trading terms and conditions to the effect that the relevant provisions of the Code “apply” to all of its products and services.

• A decision to de-bank must have a commercial basis, the Bank must "act honestly" and "fairly and reasonably" towards its customer and was obliged to give reasons for its decision.

• The banker and customer relationship is a relationship based on contract, but, as the Code of Banking Practice provided, it is founded on trust and good faith in a commercial sense. (ASIC v Australia and New Zealand Banking Corporation Ltd (No 3) [2020] FCA 1421)

Therefore, as observed by the Court clause 4.2 of the 2018 Code:

• Provided that the Bank's standard terms and conditions must:

  • be consistent with the Code; and
  • ​strike a 'fair balance' between the customer's legitimate needs and interests and the Bank's interests and obligations, including the Bank's prudential obligations.

• Formed part of the contract between the Bank and its customer, and obliges the Bank, if the existing terms and conditions do not reflect a “fair balance” of the parties’ interests, to adopt revised terms and conditions which do.

We note that the new Customer Owned Banking Code of Practice 2022 (effective from 28 October 2023) imports the same obligation to strike a fair balance, with clarification that it includes consideration of the bank's prudential as well as regulatory obligations.

Implied Duty of Good Faith and Reasonableness

 Importantly, the case also raises a legal question as to whether:

• Under the Bank’s contractual obligations to its customer, there was an implied duty of co-operation and good faith.

• In the circumstances having regard to that duty, the Bank had no entitlement to terminate the account except on reasonable grounds.

In essence, the judgment begs the broader question as to whether such an obligation of good faith or reasonableness is always to be implied in respect of a bank’s right to terminate a customer's bank account. 

Parker J did not go so far as to indicate that there was a general implied duty in all cases, however, based on the factual scenario:

• Imported those obligations via the Bank's particular terms and conditions and application of the Code to be "fair and ethical in dealings" and to treat customers "fairly and reasonably in all dealings".

• Concluded that the Bank did not provide evidence of a valid reason to terminate and therefore it should be inferred that no reasonable grounds existed. 

Accordingly, whilst the case did not find an overall implied duty of good faith and reasonableness will apply to a de-banking decision in all circumstances, it is difficult to envisage that, where the Code applies to a bank, the obligations imposed on a bank's decision would not of necessity include:

• To act in good faith and reasonably; 

• To take into account the Code and reflect a "fair balance" of the parties' interests, namely between the customer's legitimate needs and interests, and the bank's interests and obligations, including prudential and regulatory obligations;

• A valid commercial reason (however noting in such circumstances that the customer bears the legal onus of proving that the bank acted without a valid commercial reason).

Despite section 25 of the Bank's account terms which gave the Bank a right:

• at any time, close any of accounts by giving 20 days written notice; and

• not have to specify the reasons for the closure;

by applying the Code to those terms and conditions, Parker J held that the terms and conditions did not strike a 'fair balance' between the parties.
 
That is, ultimately the question of implied duties was not addressed and in making a decision to close a customer’s account, the interpretation of a bank's trading terms and conditions was affected by the Code.

As previously mentioned in our earlier Financial Services Insight Why was I de-banked? [10 November 2023] we noted that the customer's legal counsel submitted to the Court that the relationship of banker and customer, while not fiduciary, was of itself a relationship of 'good faith'. However this was not addressed or analysed further by the Court and the legal status of a separate duty and its scope, remains unanswered by this decision.

Regulatory Framework

The importation of the obligation to provide reasons for de-banking is further signalled in the advice on potential policy responses to de-banking provided to the Treasurer by the Council of Financial Regulators (CFR) in August 2022.

Whilst the Government has acknowledged that banks are commercial enterprises and must manage their own risks and resources, the Government has otherwise indicated its recognition of the seriousness of de-banking and in this regard has agreed in principle to ensure that Recommendation 2 of the CFR Recommendations regarding: 'Transparency and fairness' measures is implemented "to the greatest extent possible" as follows:

"That all banks implement five related measures to improve transparency and fairness in relation to de banking. These measures would apply to all instances of de-banking.
The five measures proposed are: 
Measure 1: That banks document reasons for de banking a customer; 
Measure 2: That banks provide a customer with reasons for being de-banked;
Measure 3: That banks ensure a de-banked customer who is an individual or small business has access to their                         Internal Dispute Resolution procedures; 
Measure 4: That banks provide a minimum of 30 days’ notice before closing existing core banking services                                 of a customer. This account closure notice should also inform the customer that they                                                 may access the bank’s Internal Dispute Resolution procedures; and 
Measure 5: That banks self-certify adherence to measures 1–4."

This recommendation together with the effect of the judgment in the De-Banking Case reinforces that if a bank:

• does not document and have valid reasons for de-banking a customer; and 

• does not provide a customer with reasons for being de-banked,

then termination of those banking facilities is likely to be unlawful. 

The flip-side of this conclusion is that if those criteria, including if relevant, notice and dispute resolution processes are satisfied, then, subject to the particular contractual terms and customer status and rights, a bank may lawfully de-bank a customer. 

However, in the context of the current law a bank, in making a decision to de-bank, must act in good faith and reasonably, its decision should reflect a "fair balance of the parties'  interests" and it should be commercially valid, particularly if the Code has been expressly incorporated into the bank's trading terms. 

Banks are well advised to revisit their trading terms and conditions to assess the impact implications of the Code in light of the Court's decision.