There is typically no automatic duty of care within the banker/customer relationship. Therefore, for a common law duty of care to exist, it must be imposed by the courts. In imposing a duty of care a court examines whether it would be just and equitable
to do so. Given that the banking relationship is unequal, with bankers having access to greater technical knowledge and information than the customer, bankers are best placed to provide advice and guidance. However, the courts are reluctant to rely on this
justification in imposing a common law duty of care due to a historic general principle.
The general principle stems from the case of Hedley Byrne v Heller  2 All ER 575. The principle that was established is summarised below with the word ‘reasonable man’ being substituted for ‘banker’:
• when a [banker] knows that he was being trusted, or that his skill or judgment was being relied on; and
• the [banker] chooses to give the information or advice when asked, without clearly stating that he does not accept responsibility; then
• the [banker] accepts a legal duty to exercise such care as the circumstances require in giving advice; and
• Upon a failure to exercise that care, an action for negligence will lie if damage results.
Financial contracts such as investment contracts (including contracts for the sale of
interest rate hedging products) are governed by rules of the Financial Conduct Authority (“FCA”). Some of these rules (Conduct of Business rules (“COB”) and Conduct of Business Sourcebook rules (“COBS”)) apply to contracts for the sale of interest rate
hedging products and certain other complex investment products. The contents of the relevant rules hold banks and bankers to comply with other regulatory duties (in certain circumstances), separate to common law duty of care. A non-exhaustive list of examples
1. a duty to communicate in a manner that is clear, fair and not misleading;
2. a requirement to not disguise the risks to products;
3. an obligation to assess the appropriateness of the relevant investment / interest rate hedging product;
However, breaches of the COB / COBS rules do not give standalone rights of action in a Court except in the limited case of private individuals (i.e. not companies) who can sue under s.138D of the Financial Services and Markets Act 2000 where the breach of
a rule has caused them financial loss and damage.
The overriding (and arguably one of the most important regulatory duty) that governs the banking relationship is contained within Principle 6 of the Principles for Business. The principle imposes the duty to treat (both corporate and individual) customers fairly.
Change to the historic position
The most recent case which considered the historic position and examined the existence and extent of any duty of care owed by a bank was that of Crestsign Limited v National Westminster Bank Plc & Another  EWHC 3043.
As we have seen COB / COBS breaches do not give rise to causes of action to entities other than private individuals. Crestsign outlined the position that companies can still refer to COB / COBS to determine:-
‘the standard of care required of a reasonably careful and skilled adviser, since a reasonably skilled and careful adviser would not fall short of the standard required to meet relevant regulatory requirements’ (para 127 of the judgment).
Despite the finding in Crestsign that the bank’s conduct amounted to a duty to advise and various breaches of COBS had occurred in support of claims for negligence, the principle in Hedley Byrne v Heller still applied. As the Bank provided clear statements
(held to be “basis clauses”) that it was not going to provide advice, even though they were hidden away in lengthy small print, the Court held there could be no reliance upon any advice that was given. This of course was the complete opposite of what happened
in reality i.e. the bank did provide advice.
Perhaps the greatest prompt as to what is required to circumvent the the unmitigated and unfair effects of the Hedley Byrne v Heller principle, was the deputy judge in Crestsign alluding to the need for legislative and parliamentary intervention to plug this
‘it is not the role of the common law and this court to act as a regulator’ (para 177).
Regardless of the findings as to the ‘basis’ clauses, the decision does represent something of a radical change in the way in which the courts will critically examine the evidence of bank employees, and the readiness to find that bank conduct was completely
improper. If the likely appeal to Crestsign goes ahead, succeeds and the decision as to the ‘basis’ clauses is overturned, customers may be placed in the strongest position they have even been in in terms of potential litigation against the banks. As it currently
stands one should not be discouraged by the Crestsign decision. It is important to consider and distinguish cases where :-
– the basis clauses are mentioned only after the trade has taken place;
– the misleading information is given by say the Relationship Manager (i.e the Bank proper) and not their Treasury Division (the Hedging “experts”)- the basis clauses are issued on behalf of the latter division only of the Bank
The decision in Crestsign, dependent on its final outcome, will have implications for contract law generally and is not restricted to the Banking world. It shall be watched with much interest.
For more information about any of the above or for practical advice on this or any other aspect of banking and financial disputes, please contact
Tim Gower of the Berg Banking Litigation Team on 0161 829 2599 or email him at
(The information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Berg or any of its partners or employees. Professional legal advice should
be obtained before taking, or refraining from taking, any action as a result of this article.)