A Bank’s Duty of Care and the Anglo-American/European Divide

By Professor Cees van Dam 

 

This summer, Hart Publishing published the book ’A Bank’s Duty of Care’ I edited with my colleague Professor Danny Busch from the Radboud University in Nijmegen.

In recent years, an increasing number of customers and investors have filed claims against banks, such as for mis-selling financial products, poor financial advice, and insufficient disclosure of and warning about financial risks. In case law and legislation, the scope of a bank’s duty of care seems to expand, not only to include protection of consumers against unclear risks of complicated financial products but also protection of professional parties against more obvious risks of relatively straightforward products.

The book provides reports of how nine jurisdictions (Germany, Austria, France, Italy, Spain, the Netherlands, England and Wales, Ireland, and the United States of America) deal with these questions and how answers are found or embedded in their national legal systems. The book also contains a chapter on the EU regulatory framework, particularly the MiFID I and II conduct-of-business provisions (Markets in Financial Instruments Directives).

The topic does not have its roots in the financial crisis but the crisis has clearly exacerbated the debate and boosted the case law. In the reported jurisdictions, the topic is at various stages of development and the book provides the first part of what certainly will become a continuing story.

I will refrain from providing too many spoilers for anyone who would like to read the book. Rather, I would like to summarise what I said at the launch of the book in Amsterdam on 15 September 2017, where I made three general remarks on the bank’s duty of care: on private enforcement, on public enforcement, and on remedies.

Private enforcement

The country reports in the book show a considerable difference between Anglo-American and continental-European jurisdictions when it comes to getting redress for damage suffered by a bank’s breach of duty. In Anglo-American contract law, much emphasis is put on the customer and investor’s responsibilities whereas in continental European contract law, banks are more often required to prevent customers from purchasing the wrong financial product or service. In England and Wales, customers and investors may be more successful with claims based on regulatory provisions but these are Fremdkörper born from European Union legislation.

In Anglo-American terms, the customer carries more responsibility for his choices, and the bank’s duty to inform or advise is more easily discharged. It would be wrong to do otherwise as, according to Tony Weir, ‘the progressive socialization of harm diminishes the responsibility, indeed, the autonomy of the individual’ (Tort Law (Oxford: OUP, 2002, p. 6). This illustrates the differences in societal views on freedom and responsibility either side of the North Sea (indeed, in this respect the North Sea is larger than the Atlantic Ocean). The Anglo-American views, on the one hand, can be seen in the light of the culturally individualist society where the freedom to act usually prevails over the duty to protect, by contrast to the culturally more collectivist and less masculine continental European society where care for the other and particularly the weaker party is in higher demand, on the other (Cees van Dam, ‘Who is afraid of diversity?’, King’s Law Journal 2009, p. 281-308).

Public enforcement

The picture of public enforcement emerging from the book is the opposite of that of private enforcement: in Anglo-American countries public enforcement is much stronger than in continental Europe. This was also illustrated in the aftermath of the financial crisis when both regulators and prosecutors in the United States and the United Kingdom showed a strong repressive approach with an emphasis on fines and punishment for financial misconduct. The number of criminal prosecutions and the number and amounts of fines imposed, including for miss-sold financial products and rigged interest rates, is significantly higher in the US and the UK than in continental Europe (vgl. C.C. van Dam, ‘Civielrechtelijke aspecten van Libor en Euribor manipulaties, Ondernemingsrecht 2014, p. 434)

The Anglo-American world is known for its love for the free market. This is, however, not to be confused with a lawless market. The love affair with the free market is underpinned by its response to violation of fundamental principles of the free market, particularly in cases of fraud and deceit. In continental Europe, support for the principle of the free market is more recent and seems fundamentally much weaker. Possibly for this reason, violation of the free market principle is considered to be less severe and serious and therefore less eligible for punishment. This difference in approach may also be linked to a generally more consensual approach in politics and society in continental Europe, and a more adversarial approach in the Anglo-American world. Also this can be linked to deeply rooted cultural differences, and raises the more general question as to the suitability of Anglo-American economic and business models for continental Europe (which I will leave for another discussion).

Remedies

As I mentioned in my remark on private enforcement, remedies through private actions (contract law) can be obtained more easily in continental-Europe than in Anglo-American jurisdictions. Still, these civil law remedies are piecemeal, time consuming and probably only a solution for a small percentage of affected customers. Interestingly, the UK regulator, the Financial Conduct Authority, is vested with powers to force financial institutions to provide redress to customers that have suffered harm because of financial misconduct. This is potentially a very powerful tool that can contribute to a much higher percentage of customers receiving some form of redress.

The soundness of a legal system is very much defined by its power to provide a remedy. If a bank breaches its duty of care, it means the customer’s rights have been infringed. In other words: the bank has committed a wrong. But that conclusion is only a step on the road to justice. Without righting the wrong, injustice remains for the consumer and the investor.

The importance of providing an effective remedy to affected parties can never be underestimated. The remedy of damages is traditionally linked with civil law litigation and when it comes to conduct affecting a considerable number of people in a similar way, group actions are seen as the way ahead. However, the British experience with the powers of the Financial Conduct Authority (powers that are now also cautiously and hesitantly introduced on the European continent) gives food for thought. It shows that there is also a public law way to deal with harm suffered and with providing damages by way of remedy. If these powers are designed and developed properly, they could make customers travel to a remedy with a high-speed train, rather than with the horse and cart of a civil procedure.

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