On July 12, the Supreme Court delivered its judgment in Philipp v Barclays Bank UK PLC, addressing circumstances in which a bank can be held liable for failing to prevent a customer from being defrauded.
The judgment provided some much-needed clarity on the nature of the Quincecare duty and the obligations that banks owe to their customers when executing fund transfers.
While the judgment will have given some initial relief to many in the financial services industry – ruling that in a wide variety of circumstances banks do not need to consider the risks of their customers’ payment decisions – it has certainly opened the industry’s eyes to the risks of poor customer due diligence.
How does the Quincecare duty affect banks?
At the time of the hearing in Philipp, the Quincecare duty was widely understood as a duty requiring a bank to refrain from executing a payment order where the bank is put on inquiry that the order is an attempt to misappropriate the customer’s funds – usually where the customer is a company and the instructions to the bank were given by one of the company’s directors.
The claimant in Philipp was a victim of authorised push payment (APP) fraud who had instructed her bank to make payments to accounts in the UAE, and claimed that the bank should have identified the risk and not processed the payments.
The key question that the court needed to consider was whether the Quincecare duty was available to her at all, given that she was an individual who had provided direct instructions to the bank to make payments, rather than a company that had given instructions to the bank through an agent such as a director.
The judgment in Philipp emphasises that the Quincecare duty is not a special rule of law, but is simply an application of the bank’s general duty of care to act in accordance with its customers’ instructions.
In some circumstances, this may require the bank to refrain from executing its customers’ instructions without first making inquiries to verify that a payment instruction has actually been authorised by the customer. The Supreme Court confirmed that these principles are not limited to corporate customers.
the Supreme Court held that a bank is not under a duty to verify a customer’s instructions
But on the facts of Philipp, where the customer is a victim of APP fraud and has given clear instructions personally to the bank, the Supreme Court held that a bank is not under a duty to verify a customer’s instructions.
For banks dealing with a very high volume of individual customers directly and without substantial interaction, this judgment is touted by many as a welcome indication that they can process payment orders without conducting in-depth inquiries into the validity of those instructions.
As pointed out by the Supreme Court, where such payments are domestic and the result of a fraud, certain customers will be protected by the mandatory reimbursement scheme provided for by the Financial Services and Markets Act 2023.
Banks still need to remain vigilant
However, banks dealing closely with a smaller client pool should remain cautious when processing payments for at least three reasons.
First, the Supreme Court confirmed that principles governing banks’ duties to customers can apply to individual as well as corporate customers, giving as an example where one person is authorised to give payment instructions on behalf of another.
Second, on the facts of Philipp, the fraudster was distant from the instruction-giving process, and the Supreme Court was impressed with the adamant force and clarity of Ms Philipp’s instructions to the bank. There may, however, be circumstances in which, even if written instructions are signed by the customer, it could not be said that such instructions are forceful or clear.
Third, the Supreme Court noted the possibility of an implied limitation that a bank should refrain from executing a payment order if they are aware of circumstances unknown to the customer which would be likely to affect the customer’s instructions.
Corporate banks must remain vigilant to the risk that instructions they receive from an agent of their corporate customer may be an attempt to defraud the customer, and, in those circumstances, to refrain from processing those payments until they have verified that the instructions have actually been authorised by the customer.
Finally, it is also important to note that the Supreme Court preserved Ms Philipp’s alternative claim that the bank was in breach of duty after the fraud had been discovered in not taking adequate steps to seek to recover the money which had been transferred to the UAE. It was not possible to determine this claim on a summary basis, and so Ms Philipp may now proceed to trial against the bank on that claim.
For these reasons, banks should still satisfy themselves as to the quality of the instructions that they receive from their customers before processing payment orders, and be alert to the risks that a payment is and will be a fraud on their client.
George Pizzey is an associate at law firm Peters & Peters.
