3â What is a customer?

The interpretation of the phrase ‘customer’ is similar to the definition of a ‘bank’, because it is a very difficult term to define. Why is it important to define the term? Cranston noted that ‘the conventional view is that “customer” has a technical meaning, which leads to lengthy discussions on who is or is not a bank’s customers’.16 One reason advocated by Wadsley and Penn is that ‘the concepts “bank” and “customer” are interdependent, and the one cannot be completely understood without reference to the other’.17 There is no statutory definition of the term ‘customer’, and ‘it is not specifically defined in the Bills of Exchange Act 1882 or the Cheques Act 1957’.18 Cranston added that inconsidering the provisions of both of the Acts ‘the courts have decided that anyone who opens an account, rogue or angel, is a customer for the purposes of statutory protection’.19 Indeed, Andrew noted that ‘the word “customer” is used in the Bills of Exchange Act 1882 and the Cheques Act 1957 but the word is not defined in these statutes. These days therefore when banks invite the public to consult them on a whole range of financial products and services large areas of the public can be drawn into a bank’s customer net.’20 Therefore, although several academics have offered some useful comments on what amounts to a customer, there is no clear all-embracing statutory definition of the term.

An important question that needs to be considered is when does someone become a customer? It has been argued that one of the main circumstances in which a person becomes a customer of a bank is when he or she opens an account.21 Indeed, it has been described as ‘the touchstone of whether a person is a customer of a bank’.22 This was the decision reached by the court in Woods v. Martins Bank Ltd,23 where the plaintiff had been given investment advice by the bank’s manager to invest money in a company, which was heavily in debt to the bank. The plaintiff had not been informed by the bank manager about the level of debt or the bank’s pre-existing contractual arrangements with this company. In this instance, Salmon J stated that the bank manager ‘ought never to have advised the plaintiff at all – certainly not without making a full disclosure to the plaintiff of the conflicting interests between the plaintiff and the defendant bank and the plaintiff and the defendant bank’s other customers’.24 The decision

443 3â What is a customer?

in Woods was approved by the Privy Council in Mutual Life and Citizens’ Assurance Co. Ltd v. Evatt.25 Here, the court ‘succeeded in imposing liability on a bank by holding that the bank owed a fiduciary duty to a non-customer (a prospective customer) who sought investment advice’.26

The court in Commissioners of Taxation v. English, Scottish and Australian Bank offered a useful discussion of when a person becomes a customer.27 Here, the court determined that once the person had opened an account they were deemed to be a customer of the bank. In Great Western Railway v. London and County Banking Co., the House of Lords determined that a rate collector who habitually cashed cheques in the bank, which would pay some of the proceeds to the district council and the remainder to the rate collector, was not a customer. The House of Lords decided that the bank ‘collected money on their own behalf, not for him as a customer’.28 It is possible to argue that a person only becomes a client when a bank ascertains the identity of the prospective client. This is a view advocated by the Wolfsberg Principles, which according to Haynes means that ‘the bank will take reasonable measures to establish the identity of its clients and beneficial owners and will only accept clients when this process has been completed’.29 A similar approach was referred to in Ladbroke v. Todd,30 about which Haynes noted that ‘it was traditionally regarded as necessary for a bank to check both the identity of a new client and to ascertain whether they were a suitable person to hold an account’.31

More recently, the situation has become more complex, and a customer may ‘include persons who receive services from a bank without necessarily holding an account’.32 The FSMA 2000 follows this approach and provides that a customer ‘in relation to an authorised person, means a person who is using, or who is or may be contemplating using, any of the services provided by the authorised person’.33 Further guidance on the term ‘customer’ is offered by the FSA’s Banking: Conduct of Business Sourcebook, which resulted in the adoption in the FSA Handbook of the term ‘banking customer’. This term includes a customer, a micro-enterprise and charities with an annual income of less than £1 million. It has also been argued that ‘banking customers’ include households and small to medium-sized enterprises.34 The Handbook also defines a ‘customer’ as including ‘a client who is not an eligible counterparty for the relevant purposes, a person who is a policyholder, or even a prospective policyholder’.

25[1971] AC 793, 805.

26T. Shea, ‘Liability of banks for erroneous status opinions’ (1986) 1(1) Journal of International Banking Law, 20, 21–2.

27[1920] AC 683, PC.

28[1901] AC 414, as cited in Wadsley and Penn, above n. 1, at 98.

29Emphasis added. A. Haynes, ‘The Wolfsberg Principles: an analysis’ (2004) 7(3) Journal of Money Laundering Control 207, 208.

30(1914) 30 TLR 433.â 31â Haynes, above n. 29, at 208.

32 Ellinger et al., above n. 10, at 110.â 33â FSMA 2000, s.59(11).

34A. Mullineux, ‘The regulation of British retail banking utilities’ (2009) 17(4) Journal of Financial Regulation and Compliance, 453, 464.