Bank-Customer Relationships; Business Relationships or Special Trust Relationships?
Writer: Erez Ben-David, Attorney.
To open a bank account and receive the bank’s various services, a customer is required to sign many documents at the request of the bank. Few read every word and even fewer even understand everything written within the documents. The prevailing feeling among most customers is that the banks act only for their benefit, without considering the customer and his needs.
The relationship between the banks and customers is even more complex, beyond the contractual level, since many legal provisions impose obligations on the bank in favor of their customers. Legal rulings have created a “duty of trust” between the bank and its customers, and thus the banks are required to act in the best interest of the customer, regarding the management of the their funds, and not in consideration of the bank’s profits.
Thus, for example, the Court’s ruling in Civil Appeal, 122/84 Manzour v State of Israel:
“The Bank and its officials are supposed to act on all matters relating to the funds of customers that they hold, guided by consideration of the best interests of the customer. The relationship between the banks and the customer is based on the customer’s dependence on the bank. This and more, the “double loyalty,” which may arise in the balance of interests in favor of the customer’s interest, on the one hand, and the profitability of the bank, on the other hand, requires a significant degree of morality, integrity, and fairness. Because of the accumulation of information held by bank officials, and because of the customer’s dependence on the advice of the bank’s officials and the services they provide, there could be a potential opening for corruption.
The banks and their customers have mutual loyal relationships, and customers are guided in the management of their funds by employees of the banks, whose conduct requires a high level of integrity and the avoidance of being subject to improper influences in the performance of their duties towards each individual, which constitutes the customer population and the public as a whole”.
However, as the Court ruled, there are limits to the obligations of the bank. The bank acts for profit, and therefore it is understood that the bank will not be able to place the customer’s interest before its own interest in any situation. There are areas where it is not possible to for the banks to fully apply the “duty of trust”, since this may lead to an impairment of their operations, in the absence of the ability to earn a profit from the customer. This is the case, for example, regarding bank fees or interest rates. If these are too low, the bank will refrain from offering its services. Bank fees and interest rates are supposedly regulated by a competitive banking market, by supply and demand, and where it fails, by supervision and regulation – and not by imposing an excessive “duty of trust” that will impair banking operations. Therefore, the interest of the customer to pay less does not override the interest of the bank to make a profit.
The law does not impose an obligation on the banks to extend credit to their customers. Any extension of credit is at the discretion of the bank, which considers and examines, inter alia, the purpose for which the credit is required, the amount of credit requested, the collateral offered, and the economic ability of the applicant to repay the credit plus the interest to the bank. The bank has the legitimate business discretion, whether to grant credit or not. A developed credit market allows customers to consider the offers of various other credit providers, while sometimes the business consideration of one credit provider may differ from another credit provider.
However, along with the business considerations of providing credit, the banks still have certain obligations towards their customers. For example, according to the guidelines of the Bank of Israel, prior to granting any credit, the bank must conduct a documented analysis of the customer’s credit needs and set up an agreed credit framework. Any deviation from the framework will be made only under special circumstances, as detailed in said guidelines.
There is also the beginning of a trend in case law, of expanding the bank’s “duty of trust” to the customer, when granting credit. This is a welcoming trend, which expresses the understanding that there are gaps in information and positions of strength between banks and their customers in this complicated field of credit and loans. In many cases, the credit is needed precisely during an economic or cash flow problem of the customer. Especially with the bank approving the credit, it would be appropriate to expand the banks’ trust obligations when granting credit, so as not to exploit the customer’s distress solely for their own needs.
*This article is not meant to constitute legal advice for a particular client, for which consultation with a qualified attorney is required.