Banking & Finance Law

# Banking & Finance Law — Topic Notes (UK LLB)

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## PART 1: BANKER-CUSTOMER RELATIONSHIP

### 1.1 Nature of the Relationship

The banker-customer relationship is fundamentally one of **debtor and creditor**, not trustee and beneficiary. When a customer deposits money, legal title passes to the bank; the bank owes a personal debt to repay an equivalent sum on demand.

**Foundation authority:**
- **Foley v Hill** [1848] 2 HLC 28 — House of Lords confirmed the depositor-bank relationship is one of debtor and creditor. The bank becomes owner of deposited funds and is merely obliged to repay the equivalent sum. No trust or fiduciary relationship is created by the mere act of deposit.

This principle has significant downstream consequences: on bank insolvency, depositors are unsecured creditors, not beneficiaries with proprietary claims (subject to FSCS protection up to £85,000).

### 1.2 Duty of Confidentiality

A banker owes an implied contractual duty of confidentiality to the customer. The leading case identifies four exceptions where disclosure is permissible.

**Foundation authority:**
- **Tournier v National Provincial and Union Bank of England** [1924] 1 KB 461 — Court of Appeal established that banks owe customers a duty of confidentiality, subject to four exceptions: (1) compulsion of law; (2) public duty; (3) bank's own interests; (4) customer's express or implied consent. The bank improperly disclosed a customer's financial information to a third party.

### 1.3 Guarantees and Third-Party Security — Undue Influence

Where a third party (often a spouse) provides security for another's debt, the bank may be fixed with constructive notice of potential undue influence.

**Barclays Bank v O'Brien [1994] 1 AC 180** (House of Lords):
- **Facts:** Mr O'Brien increased company overdraft; wife signed a charge over the matrimonial home as security. Bank failed to explain the transaction or advise independent legal advice.
- **Held:** Charge set aside. Bank was on constructive notice of potential undue influence and failed to take adequate steps to ensure Mrs O'Brien's informed consent.
- **Ratio:** A bank is put on constructive notice when a non-commercial surety (typically a spouse) provides security for another's debts in a domestic relationship. It must then take reasonable steps — typically advising independent legal advice — or the security is voidable.

**National Westminster Bank v Morgan [1985] AC 686** (House of Lords):
- **Facts:** Mrs Morgan's matrimonial home subject to mortgage arrears; signed a legal charge with NatWest to refinance. Bank manager failed to explain full implications.
- **Held:** No undue influence. The bank's appeal allowed; legal charge valid.
- **Ratio:** Presumed undue influence requires proof of: (1) relationship of trust and confidence, AND (2) a transaction of **manifest disadvantage** to the complainant. The Court of Appeal had erred by finding undue influence without manifest disadvantage.

**Royal Bank of Scotland v Etridge (No 2)** [2001] UKHL 44 — The House of Lords rationalised the O'Brien framework. Banks must ensure that any solicitor advising the surety explains the transaction in a meaningful way. The bank satisfies its duty if it instructs a solicitor to advise the surety independently. (Note: confirmed as the governing authority by Nature Resorts Ltd v First Citizens Bank Ltd [2022] UKPC 10.)

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## PART 2: DERIVATIVES — INTEREST RATE SWAPS AND ULTRA VIRES

### 2.1 Local Authority Capacity to Enter Swaps

**Hazell v Hammersmith and Fulham LBC** [1992] 2 AC 1 — House of Lords held that interest rate swap agreements entered into by the Council were ultra vires as they were not within the statutory borrowing powers of local authorities under the Local Government Act 1972. All swap contracts with counterparty banks were void ab initio.

**Consequence (restitution — Westdeutsche):**
- **Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669** (House of Lords):
  - **Facts:** Bank entered an interest rate swap with Islington LBC (later held ultra vires/void following Hazell). Bank sought to recover money paid under the void agreement and claimed compound interest via a resulting trust argument.
  - **Held:** Bank entitled to personal restitutionary claim for money paid under the void contract, but no resulting trust arose. Restitution limited to net benefit received, not compound interest. Resulting trusts only arise where the transferor retained beneficial interest throughout.
  - **Ratio:** Mere contractual invalidity does not give rise to a resulting trust; conscience of the recipient must be affected at the time of receipt for an equitable proprietary interest to arise.

**Deutsche Bank AG London v Comune di Busto Arsizio [2021] EWHC 2706 (Comm):**
- Confirmed the ultra vires/capacity analysis applies in international contexts; Italian local authority lacked capacity to enter swaps under Italian law. Governed by English law (ISDA) but capacity question answered by law of domicile.

### 2.2 ISDA Master Agreement

The ISDA Master Agreement (1992 and 2002 editions) governs OTC derivative transactions. Key features:
- Single agreement concept: all transactions form one agreement.
- Close-out netting: on default, all transactions are accelerated and netted to a single sum.
- Events of default and termination events trigger the close-out mechanism.

The ultra vires swaps litigation (Hazell, Westdeutsche) exposed systemic risk from netting failure and drove development of the modern close-out netting framework confirmed in legislation.

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## PART 3: LETTERS OF CREDIT AND TRADE FINANCE

### 3.1 Autonomy Principle

Documentary credits are autonomous from the underlying sale contract. The issuing bank's obligation to pay against conforming documents is independent of disputes between buyer and seller.

**Taurus Petroleum Ltd v State Oil Marketing Company of Iraq [2017] UKSC 64:**
- Confirms that letters of credit issued by banks (here Crédit Agricole London, irrevocable LC) create independent payment obligations. The LC was available by deferred payment at the counters of the Central Bank of Iraq. Enforcement of LC obligations, and third-party debt orders over LC proceeds, turn on who holds the credit obligation as a debt.
- Important for the distinction between negotiation credits, deferred payment credits, and the debtor-creditor relationship that arises.

**Celestial Aviation Services Ltd v UniCredit Bank AG (London Branch) [2023] EWHC 663 (Comm):**
- Confirming bank's obligation under standby letters of credit is autonomous; sanctions (Russia 2022) do not automatically discharge obligation to pay where valid demands were made before sanctions came into force. The autonomy principle means the confirming bank cannot look behind conforming documentary demands.

**Sirius International Insurance Co v FAI General Insurance [2004] UKHL 54:**
- House of Lords: construction of a standby letter of credit (incorporating ICC UCP 1993). The undertaking in a side letter modified the parties' entitlement to draw on the LC. Demonstrates that LC terms must be read with strict documentary compliance, and collateral agreements may affect the right to draw.

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## PART 4: SECURITY INTERESTS AND SECURED LENDING

### 4.1 Fixed and Floating Charges — Priority

A floating charge crystallises into a fixed charge on the occurrence of specified events (e.g. appointment of administrator, cessation of business). Priority between competing charges is central to enforcement outcomes.

**McLean v Trustees of Bankruptcy Estate of Dent [2016] EWHC 2650 (Ch):**
- Fixed and floating charge held by Barclays Bank over company assets (all-monies debenture). Third-party charges over farm properties created additional complexity. Marshalling and subrogation doctrines applied to determine priority among creditors after enforcement.
- Confirms: an all-monies fixed and floating charge debenture grants the bank security over the full asset base; the bank as chargee has priority on insolvency.

**Arlington Infrastructure Ltd v Woolrych [2020] EWHC 3123 (Ch):**
- Qualifying floating charge (QFC) holders had priority to appoint administrators over AIL. Junior creditors (SASPC) held floating charges over subsidiaries and first fixed charge over AIL's shares in those subsidiaries. Senior creditors held only a QFC over AIL. Priority analysis governed by Insolvency Act 1986 Schedule B1 and the intercreditor deed.
- Principle: QFC holders with the requisite debenture can appoint administrators, bypassing other creditors.

**Matter of Arboretum Devon (RLH) Ltd, Re [2021] EWHC 1047 (Ch):**
- Dispute over priority between two secured creditors (SSSHL and Shoby) over proceeds from administration sale. Intercreditor deed governed priority. Court held that the intercreditor agreement's terms were clear and displaced equitable rules about simultaneous creation of charges.

### 4.2 Guarantees

**National Westminster Bank Plc v Alfano & Ors [2012] EWHC 1020 (QB):**
- Bank enforced personal guarantees given by directors of an insolvent company (Ciborio Ltd, £100,000 per guarantor). Company went into administration. After realising security, £1.4m remained outstanding. Defendants initially resisted on the basis that guarantees were entered as a result of pressure; claim upheld.
- Principle: personal guarantees by directors are enforceable where freely given; manifest disadvantage and undue influence tests (Morgan/O'Brien) were not met.

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## PART 5: BANKER LIABILITY — NEGLIGENT REFERENCES

**Banca Nazionale del Lavoro SPA v Playboy Club London Ltd [2018] UKSC 43:**
- **Facts:** Bank provided a negligent credit reference to Burlington Street Services Ltd, which acted as undisclosed agent for Playboy Club. Subject defaulted; Club sued bank.
- **Held:** Bank owed no duty of care to the undisclosed principal (Playboy Club). The bank's assumption of responsibility was to the party to whom the reference was addressed (Burlington), not to any undisclosed principal behind it.
- **Ratio:** A Hedley Byrne assumption of responsibility is directed at the specific reliant party; it does not extend to undisclosed principals for whom the addressee was acting.

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## PART 6: BANK REGULATION — FSMA 2000 AND ENFORCEMENT

**Jackson v Ayles & Ors [2021] EWHC 995 (Ch):**
- Loan made by an unlicensed private lender (Mr Pumphrey) secured on a residential property. Trustee-in-bankruptcy sought to have the security declared unenforceable under FSMA 2000 (regulated mortgage contract entered without authorisation).
- Principle: a security interest granted in connection with an unlicensed regulated mortgage contract may be unenforceable under FSMA 2000 s.26. Reinforces the authorisation requirement under FSMA for regulated mortgage activities.

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## PART 7: ANTI-MONEY LAUNDERING

**Stanford Asset Holdings Ltd v AfrAsia Bank Ltd [2023] UKPC 35:**
- Fraudulent payment of US$11.1m from customer's account by employees without authority. Bank's obligations on discovering fraudulent transactions — freezing, reporting, and duty of care to customer. Proceeds of Crime Act 2002 tipping-off obligations interact with the bank's duty of confidentiality and duty to freeze suspicious funds.
- Principle: a bank's duties on discovering suspected fraud extend beyond mere confidentiality; obligations under POCA 2002 MLR regimes create affirmative reporting duties.

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## KEY STATUTORY FRAMEWORK (summary)

| Statute | Key effect |
|---|---|
| FSMA 2000 | Authorisation requirement; regulated activities; FCA/PRA gateway |
| Financial Services and Markets Act 2023 | Edinburgh Reforms; retained EU law divergence post-Brexit |
| POCA 2002 | Money laundering offences; suspicious activity reports (SARs); tipping-off |
| MLR 2017 (SI 2017/692) | AML customer due diligence; risk-based approach |
| Payment Services Regulations 2017 | Payment institution licensing; liability for unauthorised payments |
| Companies Act 2006 | Registration of charges; priority rules |
| Insolvency Act 1986 | Administration; receivership; floating charge crystallisation |
| Banking Act 2009 | Special Resolution Regime; bail-in |

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## EXAM TIPS

1. **Foley v Hill** — always cite when discussing the nature of a bank deposit; it is the bedrock of the debtor-creditor relationship.
2. **O'Brien/Etridge** framework — a two-stage test: (a) is the bank on notice? (b) did it take adequate steps? Both must be addressed.
3. **Morgan manifest disadvantage** — now qualified by Etridge; the requirement survives but courts interpret it contextually.
4. **Hazell + Westdeutsche** — cite together for ultra vires swaps: Hazell = voidness; Westdeutsche = restitutionary consequences and no resulting trust.
5. **Letters of credit** — the autonomy principle (pay against conforming documents, irrespective of underlying dispute) is the dominant rule; fraud is the main exception.
6. **Floating vs fixed charge** — crystallisation, priority, and QFC rights to appoint administrators are high-yield exam topics.