15/03/2022

Court of Appeal reversal over banks’ fraud prevention duties

In a decision which will be welcomed by victims of financial fraud, the Court of Appeal (Sir Julian Flaux C, Coulson and Birss LJJ) has rejected the submissions of Barclays Bank that it owes its retail customers no general duty to take steps to prevent fraud when executing payment instructions.

The appellant Mrs Philipp had as part of an “authorised push payment” scam been persuaded by a fraudster to instruct Barclays to make a transfer of funds to accounts under the fraudster’s control. Mrs Philipp alleged that Barclays should have realised that the transfers looked suspicious and done more to investigate. Barclays had obtained summary judgment on the basis that it had no such duty.

The bank sought on the appeal to defend the reasoning of HHJ Russen QC at first instance that the so-called “Quincecare” duty (after Barclays Bank v Quincecare [1992] 4 All ER 363) was confined to protecting against the risk to a corporate customer of a fraud by its own directors or agents. Barclays argued that no comparable duty was owed to individual customers who give their instructions to the bank directly.

The Court of Appeal, however, held that the underlying rationale for the Quincecare duty was not so narrow. Rather, the bank’s duty to act upon its customer’s payment instruction operates in tension with a duty to refrain from paying funds away if there are reasonable grounds to believe that the instruction is an attempt to misappropriate those funds. Nothing in the Quincecare line of reasoning depends on the payment instruction having been given by an agent. The duty of care could in principle arise whenever circumstances known to the bank put it on inquiry as to a potential fraud. The bank would then be required to make inquiries and to refrain from acting on a payment instruction in the meantime.

The Court of Appeal has not ruled definitively on the point of law since it was deciding an appeal against summary judgment and it was sufficient that the appellants’ position was merely arguable. Indeed, it was emphasised that both the incidence of the duty and the standard of care are best decided on the basis of actual facts rather than a summary procedure. Nevertheless, the Court of Appeal’s analysis as to the scope and rationale of the Quincecare duty is compelling and was supported by the Consumers’ Association who intervened in the appeal.

Although Barclays had sought to argue that the imposition of a duty would be “onerous and unworkable” this involved a factual inquiry which was inherently unsuitable for summary disposal. The Court noted the appellants’ expert evidence of banking practice in relation to fraud prevention and its overlap with anti-money laundering measures. The Consumers’ Association on their intervention had  also pointed to the training and guidance provided by banks and to decisions of the Financial Ombudsman which had upheld complaints against banks for having unreasonably failed to protect customers’ money. Moreover, the Court of Appeal was careful to emphasise that the standard of conduct to which Barclays would be held was that of an ordinary prudent banker. It is not easy to complain that a legal duty is unduly onerous when the duty is itself calibrated by reference to normal industry practice.

Whether Barclays did fall short of the applicable standard remains to be decided but the facts are certainly striking. The appellant and her husband paid away more than £700,000 of their savings to accounts in the UAE after being “thoroughly deceived” by a fraudster into thinking that such transfers were necessary to protect the funds against fraud. Indeed, Birss LJ (who gave the lead judgment on the appeal) evidently felt that the “transfer of a huge sum of money out of [the appellant’s] account to a payee overseas” was a far cry from a cashier’s routine handling of a customer’s cheques, in relation to which May LJ in Quincecare considered that it would only be in “rare circumstances” that a bank would raise a query.

Given the prevalence of authorised push payment scams, the Court of Appeal’s judgment is important. Even if Barclays now chooses to settle with Mrs Philipp rather than defend her claims to trial, there will no doubt be other victims of similar scams who will wish to invoke the observation of Andrew Burrows QC, now Lord Burrows, as the first instance judge in Nigeria v JP Morgan Chase Bank NA [2019] EWHC 347 (Comm): “in the fight to combat fraud, banks with the relevant grounds for belief should not sit back and do nothing”.

Andrew Fulton QC (who has acted in numerous APP cases).

Read the judgment.