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Western EuropeFebruary 3 2023

The Quincecare duty: 35 years on, the debate has only just begun

The anti-fraud duty has gained recent prominence as upcoming legal challenges threaten to increase banks’ responsibilities in the context of increasingly sophisticated fraud. Analysis by Paul Johnson and David Fitzpatrick of law firm Peters & Peters.
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The Quincecare duty: 35 years on, the debate has only just begun“In most cases it no longer appears to be sufficient for banks simply to refrain from making payments.” Image: Getty Images

The Quincecare duty, named after the case in which it was established, requires financial institutions to refrain from executing customers’ orders if they are put on notice that the orders are part of a fraud. The last few years have brought a flurry of disputes over the duty to the country’s highest courts. 

Quincecare has long been contentious, not least because of the obvious challenge it presents to financial institutions when considered alongside their duty to comply promptly with their customers’ instructions so as to avoid causing them financial loss.

Given the attention that Quincecare is currently garnering, it can be easy to forget that it has existed for 35 years. Following its establishment, there was something of a hiatus in Quincecare cases until the 2019 landmark Supreme Court decision in Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd, the first case in which a bank was held liable in damages for breaching the duty. 

Since then, Quincecare has witnessed a revival. The Singularis decision may have motivated other fraud victims to bring claims of their own to recover their losses. As levels of fraud continue to rise exponentially, it seems likely that Quincecare will be in the spotlight for some time to come.

The Stanford case

The 2022 Supreme Court case of Stanford International Bank Ltd v HSBC Bank Plc is the latest high-profile Quincecare dispute to receive judicial attention. The dispute arose from a multi-billion-pound international Ponzi scheme run by Robert Allen Stanford through an Antiguan bank, Stanford International. Since early 2012, Mr Stanford has been serving a 110-year prison sentence in the US for his part in the fraud.

In the case, Stanford alleged that HSBC, which operated as a correspondent bank, breached the Quincecare duty by failing to heed various warning signs that it was a vehicle used to perpetrate fraud. 

Stanford argued that HSBC ought to have frozen payments from various accounts (which were made on Mr Stanford’s instructions) earlier than it did, so that a further £116m would have remained available to creditors when Stanford eventually entered liquidation. Stanford argued that this caused it to lose the chance to discharge its debts at a few pence in the pound, rather than at full value prior to the liquidation.

By a majority of four to one, the Supreme Court rejected this argument, based on Stanford’s net asset position. Although Stanford would have had a further £116m to its credit on liquidation if the payments had been prevented, a commensurate amount in debt would have remained undischarged. The net asset position therefore balanced out such that Stanford ultimately suffered no recoverable loss.

What next for Quincecare?

The Supreme Court in Stanford was not asked to consider whether HSBC, in fact, owed the duty and, if so, whether it had been breached; rather, its focus was on the question of recoverable loss in the insolvency context, on the hypothetical basis that the duty was in place. 

While the scope of Quincecare therefore remains unaffected following the Stanford judgment, some recent developments suggest that it won’t be long before its boundaries are tested once again. Indeed, this week the Supreme Court heard an appeal of the Court of Appeal’s decision in Philipp v Barclays Bank UK plc, a case involving authorised push payment (APP) fraud.

In Philipp, the Court of Appeal ruled that the duty is not limited to circumstances in which banks are instructed by a customer’s agent (the classic example being the misappropriation of a company’s funds by a rogue director) but is capable of arising in situations where the customers themselves give the instructions and are the victims of the fraud.

The question of what is enough to put a bank on notice has always been something of a grey area. In most cases it no longer appears to be sufficient for banks simply to refrain from making payments, so what positive steps should they take to alleviate their concerns?

The courts have thus far taken the approach that what will be required will depend on the facts of each case. However, recent case law has tended to arise from applications by banks to strike out Quincecare claims before there has been an opportunity for the particular facts underlying the frauds in question to be explored at trial. Judicial guidance therefore remains limited.

Evolving with technology

The problem becomes more acute both as the banking industry continues to evolve and as methods of fraud become increasingly sophisticated. Quincecare was established in the late 1980s, in the context of instructions given directly to a banker. The typical case is now likely to involve automatically processed electronic payments with no human intervention whatsoever. 

In many cases, such as in Stanford, hundreds of thousands of such payments are made internationally. Potential claimants may now look to build cases around the adequacy of banks’ systems and controls to prevent the payments being made in the first place rather than by focusing only on what the banks did (or failed to do) once on notice of the potential fraud. 

The nature of claims will also evolve as new ways of investing continue to emerge. Last year, the High Court heard an argument that bitcoin networks could be equated with financial institutions such that a duty analogous to Quincecare should be imposed on those who operate them. The point was ultimately rejected, but it is not difficult to envisage further claims of this nature in the cryptocurrency sphere.

Legislators may also have a say in the matter. The industry-wide Contingent Reimbursement Model Code was introduced in May 2019 to reduce APP fraud and reimburse victims, though it is voluntary and does not apply to international payments. And in September 2022, the Payment Systems Regulator confirmed its intentions to press ahead with a mandatory reimbursement scheme for the victims of this kind of fraud. Further details are awaited.

Thirty-five years on, the direction that Quincecare will end up taking remains unclear.  As the Supreme Court itself acknowledged in Stanford, it is “not intuitively obvious why a bank should be liable for carrying out its customer’s instructions”. This statement underpins the challenges the duty presents, and lies at the heart of the debate to come.

 

Paul Johnson is of counsel and David Fitzpatrick is a senior associate at law firm Peters & Peters.

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