Banking services

Contributed by Ian Macdonald and Su Mahalingham and current to 1 September 2005

Banking services are provided not only by banks, but by non-bank financial institutions such as credit unions and building societies. In general the legal principles that apply to banks also apply to non-bank financial institutions. Financial institutions typically offer four major categories of banking services:

• credit services such as home loans or credit cards;
• deposit services such as savings accounts or term deposits;
• access to a transaction or payment system such as a cheque account, credit card or electronic payment system; and
• other services such as safe custody services and financial advice.

Some bank products are capable of providing more than one category of service.

For example, a credit card can be used as a method of making payments as well as a form of credit. Similarly, an account with cheque access can be a deposit account (when it is in credit), a form of credit (where an overdraft is allowed) and a payment method.

CREDIT SERVICES

Credit services are covered in CREDIT .

DEPOSIT SERVICES

Opening a bank account

The Financial Transaction Reports Act 1988 (Cth) makes it an offence for a person to open an account with a financial institution in a false name. The consequence is that the account may be blocked or the funds in the account forfeited to the Commonwealth government. The rationale behind this law is to ensure that a person who opens an account can be traced and identified by authorities tracking proceeds of crime or money subject to taxation.

The Act applies to most types of deposit accounts. It applies to accounts with banks, building societies, credit unions, insurers or insurance intermediaries, securities dealers, futures brokers, trustees and bullion dealers and even accounts with bookmakers.

The practical significance of this law is that financial institutions require various kinds of personal identification prior to opening an account. When an account is opened, or a new signatory is added to an existing account, the financial institution must obtain:

• account information: information which identifies the account name, postal address, etc;
• signatory information: information that verifies the signatory of the account; and
• identification reference: a reference from a cash provider that they have sighted a primary identification document, such as a passport, driver’s licence, etc. Each document is given a score. To ensure that a signatory is properly identified, 100 points of identification are required.

Deposit accounts

A deposit account is one where the consumer deposits money with a financial institution.

The basic contractual relationship is one of debtor and creditor. By depositing money the customer “loans” money to the financial institution on certain terms and conditions that include when the money is repayable and the interest rate to be paid.

Deposit accounts are subject to government taxes. These include:

• income tax – interest on accounts is automatically taxed at 48.25% unless the account holder has provided their tax file number. The amounts paid are considered at tax time and refunded if the taxpayer has paid more tax than is due; and
• state debit tax.

Types of deposit account

Examples of deposit accounts include term deposits, savings accounts, including passbook accounts and statement accounts (usually operated with a debit or a credit card), cash management accounts and cheque accounts.

In the past there used to be a clear distinction between accounts that were primarily used for deposit purposes (such as savings accounts) and accounts that were primarily used for transaction or payment purposes (such as cheque accounts). This distinction is no longer useful as financial institutions are now developing accounts with a variety of features for customers to choose from. Accordingly, most deposit accounts can function as transaction accounts because they offer features such as cheque access and direct debit and telephone bill payment capability.

The exceptions are accounts such as term deposits and cash management accounts that are designed to function primarily as deposit accounts. They deter customers from accessing funds by offering higher rates of interest if the customer does not access the money in the account; and they do not offer the range of convenient methods of access available on most other deposit accounts.

Terms and conditions

The relationship between an account holder and the financial institution is a contractual one. Typically, the terms and conditions of this relationship can be found in a variety of different sources:

• terms incorporated from Codes of Practice such as the Banking Code of Practice or the Credit Union Code of Practice;
• terms implied by the conduct of the account holder and the financial institution; and
• terms implied by the law.

COMMON DISPUTES

The most common disputes over deposit accounts arise over unauthorised transactions, high and unexpected fees and charges, incorrect debits and credits and incorrectly calculated interest and fees.

Mistaken payments

As a general rule a financial institution can recover money it has paid by mistake.

However, in the case of deposit accounts the financial institution has a duty to its customer to keep accurate accounts. Thus, if the customer can show that they reasonably believed that the money was rightfully theirs, they may not have to return it if they can show that they would be severely disadvantaged. This might be because they have spent the money or entered into a contract in reliance on the money apparently in their account. The financial institution would be able to recover the money if it discovered the error before the customer had acted in reliance on it.

A bank that mistakenly debits a customer’s account must re-credit it. Any cheques dishonoured between the time of the mistaken debit and the re-crediting are considered wrongfully dishonoured if there would have been sufficient funds in the account to pay them.

Unauthorised transactions

Although it is not absolutely clear who shoulders the legal responsibility if a bank pays out on a forged signature, passed over the counter with a lost or stolen passbook or debit or credit card, it is unlikely that the consumer will be forced to bear the loss. The transaction is clearly not authorised by the customer and so the bank has no authority to pay. However, the terms and conditions of the contract may try to excuse the bank in circumstances where the customer has been negligent in protecting the account, such as if they fail to report a lost card within a reasonable time. An alternative view states the bank need only exercise “due care” when comparing the signature on a withdrawal form with the specimen signature, so if due care has been taken the bank would be entitled to debit the customer’s account. This view is, however, inconsistent with the approach taken when cheques are forged and so is unlikely to be followed.

In practice, once a bank is satisfied that the signature is a forgery and the customer was not working together with the forger they will recredit the account.

Security of deposits

There are various requirements placed on financial institutions relating to provisions for liquidity and reserve funds. These provisions provide security for funds deposited with the institution. The requirements placed on banks are particularly stringent and it is likely that the government would bail out a bank in financial trouble. Other financial institutions such as building societies and credit unions are also subject to liquidity and reserve fund provisions as a result of the legislation regulating those types of institutions.

TRANSACTION OR PAYMENT SERVICES

Today in Australia, cash is the most convenient and popular form of payment for everyday, low-value transactions. The most popular form of non-cash payment is the cheque. However, the use of electronic payment methods such as automatic teller machine transactions, electronic funds transfer at the point of sale, telephone banking and payment services, direct debit authorities, computer banking and stored value smart cards is increasing.

The basic idea behind any payment system is that the customer authorises the financial institution to make a payment using some agreed method. Examples of methods of authorisation include:

• completing a signed withdrawal form;
• using a credit or debit card and PIN number in an ATM or EFTPOS terminal at a retail outlet;
• completing a periodical payment form; or
• signing a cheque.

CHEQUES AND PAYMENT ORDERS

The law of cheques is contained in the Cheques Act 1986 (Cth).

A cheque is a written and signed direction from a customer to their bank ordering the bank to pay a specified sum of money to the bearer of the cheque or the person named on the cheque.

Cheques can only be drawn on banks. However, building societies and credit unions are able to provide their customers with cheque facilities. They can do this through the use of:

• a payment order – a document legally similar to a cheque, but drawn on a building society or credit union. A payment order also looks like a cheque but must have the words ‘payment order’ printed on its face; and
• an agency cheque – a cheque drawn on a non-bank financial institution that has an account with a bank.

Although the non-bank financial institution is the real drawer of an agency cheque, the provisions of the Cheques Act have enabled liability to be transferred to the customer on signing. Once an agency cheque is signed, the customer is treated as the drawer. The non-bank financial institution is then able to debit the customer’s account to pay the bank.

Cheques and payment orders are negotiable instruments. This means that they are transferable and that anyone who receives them in good faith and in exchange for something of value, obtains a good title, despite some defect in their title. In this way cheques and payment orders, in the same way as cash, are an acceptable means of transferring value.

For certain purposes it is necessary to distinguish between order cheques and bearer cheques. An order cheque is one that requires the sum to be paid to a particular person or organisation (the ‘payee’) or to their order. A bearer cheque is one where the payee is not named, or the cheque is made out to ‘pay cash or order’ or to an account number.

The requirements of a valid transfer by negotiation depend upon the form of a cheque.

A bearer cheque is transferred by delivery of the cheque by the holder to the new holder. An order cheque is transferred by being endorsed by the holder and then delivered to the endorsee.

Transferring cheques

A bearer cheque can be transferred by simply handing over the cheque. An order cheque has to be endorsed by the holder of the cheque. If the holder of the cheque simply signs the back of the cheque this converts the cheque from an order cheque to a bearer cheque. However, if the person wishing to transfer the cheque writes on the back of the cheque ‘pay x or order’ followed by their own signature, this will mean that the cheque remains an order cheque with the named endorsee as the new holder.

A person who endorses a cheque also makes promises to later holders. The most important of these promises is that the bank will pay the cheque and, if it does not, the endorser will pay. In effect, the endorser adds their credit to the cheque. Stopping a cheque does not end the drawer’s liability, and the drawer may be sued by any holder of the cheque, or by any later endorser who has been forced to pay.

Duties of the financial institution

A financial institution has a contractual obligation to pay cheques promptly provided that certain conditions are met. These conditions are:

• the cheque must be completed correctly. A financial institution can refuse to pay an incorrect, incomplete or ambiguous cheque;
• there must be sufficient, available funds in the customer’s account, taking into account any overdraft arrangements.

A cheque for $1,000.00 can be dishonoured if there is only $999.00 in the account. Examples of funds that are not available are proceeds from cheques which have not yet been cleared or funds in an account at a different branch or even a different account at the same branch.

It is not always necessary that a cheque be deposited. A cheque may be payable on demand, so that the payee is entitled to be paid immediately (provided none of the restrictions discussed below apply) when a cheque is produced at the paying bank. The bank may take the time to refer to the account or to verify the signature on the cheque, but payment must be made readily and promptly.

There are certain circumstances in which a bank must refuse payment. If the bank pays in any of these circumstances, it will be unable to debit the customer’s account with the amount of the cheque. The most important of these are:

• the customer stops the cheque;
• the bank learns of the customer’s serious mental disorder;
• the cheque is presented more than 10 days after the bank hears of the customer’s death;
• the cheque is stale, that is, it appears to have been drawn more than 15 months before being presented for payment;
• the bank learns that a bankruptcy petition has been presented against the customer.

Wrongful dishonours

If the bank wrongly refuses to pay one of its customer’s cheques, then it is in breach of its contract with the customer and is liable for damages. If the customer suffers loss that is directly and foreseeably a result of the dishonour, these losses may be recovered from the bank. The most common damage is to the customer’s credit. If the customer is a trader, then this damage is considered to be so inevitable that it is not even necessary to prove any actual damage.

Customers who are not traders must prove damage to their credit in the ordinary way, that is, that the dishonour of the cheque resulted in an actual loss to the customer.

There may be damages for defamation as well as for breach of contract. This occurs because it is common for the bank to note on the cheque the reasons for the dishonour.

Many non-trading customers, for example those engaged in other forms of business, clergy or others whose reputation is an essential part of their calling, may obtain substantial damages as a result of defamatory notations on the cheque. ‘Present again’ ‘n.s.f.’ (that is, not sufficient funds) and many other phrases which suggest that the customer has written a cheque on an account without having adequate funds, are nearly always defamatory.

Of course, these damages are only available if the dishonour was wrongful and defamation can be established.

Duties of the customer

The major contractual obligations of the customer are to write the cheque in a manner that does not facilitate fraud and to notify the bank of any known forgeries of cheques.

The customer does not have a legal obligation to take special care of their chequebook, or to examine the periodic statement of account. Prudent customers will, however, do both.

The customer must be careful in drawing the cheque. If the bank is misled into paying a cheque where the customer has not fulfilled their obligations, then the bank may debit the account and the loss will fall on the customer. So, for example, where a customer filled in only the numbers for an amount to be paid and left the writing blank so that it was easy for a fraudulent person to ‘raise’ the cheque from a small amount to a large amount, the bank would be able to debit the account of the customer.

The second major obligation of the customer is to notify the bank of known forgeries. In one example, a man learned his wife was forging his name on cheques, but did not notify the bank after she promised that she would not do it again. She did forge his name on further cheques and he was held liable for the amounts, since the bank would have taken precautionary measures if it had known about the forgery.

This duty extends only to known forgeries. There is no contractual duty to discover cheque forgeries, even if this could be done simply by reading the periodic statement.

Precautions when writing cheques

The following precautions should be taken when writing a cheque or payment order:

• cross it ‘not negotiable’;
• cross out the words ‘or bearer’ which ordinarily appear on the printed form;
• do not leave any space after the name of the payee or after the amount in writing or between the figures in the amount expressed in figures;
• mark it ‘account payee only’;
• whenever possible write the purpose on the face of the cheque (such as electricity payment).

Crossings on cheques

A cheque can easily fall into the wrong hands, so banks and customers have, over the last century developed special markings that communicate particular instructions. These markings are called crossings and are authorised by the Cheques Act.

Some typical crossings would be:

• Two parallel lines drawn across the face of the cheque. Usually the words “not negotiable” will also be included. This instructs the paying bank to pay the specified sum to another bank, not to an individual across the counter. If the bank pays to someone other than another bank, the paying bank will be liable for any loss suffered by its customer.

• The words “account payee only” have no authority from the Act, but have received authority by judicial interpretation. The words direct the amount of the cheque to be paid only into the payee’s bank account. The effect of the words is to put the collecting bank on guard.

• The words “not negotiable” do not stop a cheque from being transferred. Both bearer cheques and order cheques may be transferred from person to person in the same way that cheques without the marking may be transferred. But if the cheque is lost or stolen, the person who lost it or the person from whom it was stolen still retains ownership of the cheque and may raise the fact that it was lost or stolen as a defence against anyone who attempts to claim on the cheque.

BANK CHEQUES

A bank cheque is a cheque that is drawn by a bank on itself. Bank cheques have been widely regarded as being as good as cash. However, legally bank cheques are subject to the same rules as ordinary cheques – which means a bank cheque can be dishonoured.

A bank cheque may be dishonoured where:

• the holder of the bank cheque has not provided value for the cheque;
• the holder of the bank cheque knows that there are insufficient funds to pay the cheque; or
• the person who originally obtained the bank cheque issues a stop payment. This may not always be effective and there are circumstances where the bank may be forced to honour the bank cheque.

There have been a series of forgeries and thefts of blank bank cheque forms. Stolen or forged forms are not of course bank cheques at all, and they certainly will not be honoured by the bank. The only practical protection when offered a bank cheque is to ring the bank which appears to have issued the cheque and seek verification that the cheque has in fact been issued by the bank.

ELECTRONIC PAYMENT SYSTEMS

Electronic Funds Transfer Accounts

Electronic funds transfer (EFT) is a system of sending financial information in an electronic form, in contrast with the traditional paper-based system. It allows for the transfer of funds between bank and customer, or between a customer and a merchant. A customer wanting to use an EFT system is issued with a plastic card encoded with a personal identification number (PIN). The legal rights and duties in an EFT system stem partly from the contract between the customer and the issuer of the card, and partly from the Electronic Funds Transfer Code of Conduct.

The Electronic Funds Transfer Code of Conduct (EFT Code)

The EFT Code began as an industry code formulated by service providers in the field, and was revised under the oversight of the Australian Securities and Investments Commission (ASIC). The EFT Code is on the ASIC website at www.asic.gov.au.

EFT disputes

There are a number of categories of dispute which may arise following the use of an EFT card. The first is transactions which have not been authorised by the customer.

Unauthorised transactions

Rules establishing whether or not the customer is liable for an unauthorised transaction are set out in clause 5 of the EFT Code. These rules seek to establish whether the customer has caused or contributed to the loss. A customer is seen as not contributing to a loss in the following circumstances:

• a loss that follows fraudulent or negligent conduct of the employees of the bank or other companies involved in the EFT network;
• a loss caused by the use of forged, faulty, expired or cancelled cards;
• a loss incurred before the customer received the card and PIN;
• a loss following equipment or processing failure, such as the EFT system failing to complete a transaction, or the same transaction being debited more than once to the account.
• a loss occurring after the customer has notified the bank or other issuer of the card that the card or PIN has been lost, stolen or misused. In any of these circumstances, the customer is not liable for the loss.

If a customer appears to have contributed to the loss, for example if a PIN which should be known only to the customer has been used to access the account, then the customer’s liability is the least of:

• $150;
• the balance of the account, including any pre-arranged credit such as an overdraft or the credit limit on a credit card; or
• the actual loss at the time the bank or other institution is notified of the loss, theft or misuse of the card or PIN.

A customer is seen as causing or contributing to the loss in the following circumstances:

• lending the card to another person and telling them the PIN;
• keeping the PIN number with the card in an unsafe place, such as a wallet or handbag which can be stolen;
• using a PIN comprised of the customer’s date of birth or name.

In these circumstances the customer is liable for transactions which occur up to the time they notify the bank or other institution which issued the card.

Notifying the loss or misuse of cards

A bank or other institution offering EFT accounts is required by the EFT Code to have an effective and convenient means for customers to notify them of loss or theft or unauthorized use of the card or PIN. This is usually a 24 hour, seven day telephone hotline. The white pages telephone directory shows a dedicated telephone number under the heading of most banks and financial institutions issuing EFT cards on which customers can phone to report a lost or stolen card. If the financial institution fails to have such a service available when the customer calls, the customer is not liable for losses occurring until a reasonable time after the notification hotline becomes available again.

Dispute resolution

The EFT Code sets out a dispute resolution process that requires the card issuer to investigate complaints. The issuer is obliged to obtain from a dissatisfied customer all information relevant to the dispute, including the circumstances of the disputed transaction, and must advise them in writing of the outcome of the complaint within 21 or, in some cases, 45 days.

If the card issuer decides that the customer must bear some loss for unauthorised use, certain documents and other evidence must be made available to the customer, including copies of the electronic records relating to the transaction. A customer dissatisfied with the outcome of the complaint or with the way it is handled can make a complaint to the Banking and Financial Services Ombudsman, or the Credit Union Dispute Resolution Centre.

In general, it is helpful to keep in mind the following avenues if a customer’s complaint is in relation to a consumer banking service:

• Internal dispute resolution mechanisms – most financial institutions already have in place a process whereby customer’s complaints can be heard by senior officers within the organisation. The Banking Code of Conduct makes it mandatory for all banks to have this process available for disputes with individual customers.

• External alternative dispute resolution mechanisms – most types of financial institutions are members of an external dispute resolution scheme. The oldest such scheme in Australia is the Banking and Financial Services Ombudsman Scheme, but there are other schemes such as the Credit Union Dispute Resolution Centre. These schemes are usually free and the customer would still be entitled to pursue a dispute in court if they have complained to the appropriate scheme and are unhappy with the decision. They are outlined in the section below.

• The court or tribunal system – if a customer has a legal right (resulting for example from a breach of contract by the bank) they may seek to have it enforced in a court or tribunal. In many instances a customer’s complaint will be dealt with by specific legislation such as the Consumer Credit Code, in which case a specific forum such as the State Administrative Tribunal or a court will be the most appropriate place to have the dispute heard. Alternatively, the newly established jurisdiction of the Consumer-Trader Claims division of the Magistrates Courts (as described on page _ above) would appear to include banking services, although this has yet to be judicially determined.

ALTERNATIVE DISPUTE RESOLUTION SCHEMES

Banking and Financial Services Ombudsman

The Banking Ombudsman Scheme was initially established to deal with complaints between consumers and member banks. Financial Services have now been added, and it is now generally referred to as BFSO. The BFSO is an independent organisation funded by the members and is free of charge to consumers.

Generally, the BFSO encourages customers to initially attempt to resolve their complaints with the institution concerned. If the response to the complaint is not satisfactory, or the institution has not responded to the customer’s complaint in a reasonable time, the complainant should contact the Ombudsman.

The Scheme has some restrictions as to the complaints it will investigate. The BFSO will not act where the financial loss suffered by the customer exceeds $250,000.

The Ombudsman will not deal with matters that relate to an institution’s commercial judgment in decisions about lending or security. The Ombudsman does not have the power to make an award or recommendation that relates to a practice or policy including general interest rate policies that does not directly breach any obligation to the customer.

The Ombudsman decision is binding on the institution. The BFSO has the power to direct it to pay up to $250,000 damages for the loss incurred as a result of the its actions. The Ombudsman cannot order it to compensate for other losses such as pain or suffering or punitive damages to punish the institution.

Once the BFSO has made an order to the institution to pay, it must do so. The customer does not have to accept the offer, or the recommendation or order made by the Ombudsman. When customers accept an offer, or an order of the Ombudsman, they will be asked to sign an agreement not to pursue the matter further.

Contact details for the BFSO are as follows:

The Banking & Financial Services Ombudsman Limited
GPO Box 3
Melbourne VIC 3001
Ph: 1300 780 808 (cost of a local call)
Fax: (03) 9613 7345
www.bsfo.org.au
Email: enquiries@bfso.org.au

Credit Union Dispute Resolution Centre

The Credit Union Dispute Resolution Centre (“CUDRC”) deals with complaints between consumers and credit unions. The CUDRC is an independent organisation funded by the credit unions and is free of charge to complainants.

The CUDRC limits its scope to alleged breaches of the Electronic Funds Transfer (“EFT”) Code of Conduct and Credit Union Code of Practice that occur after 1 November 1996.

The CUDRC assists customers who have unresolved disputes with their Credit Union. Generally, the CUDRC encourages customers to initially attempt to resolve their complaints with the Credit Union’s internal complaints officer.

The CUDRC does not have the power to make determinations regarding complaints brought to it that are binding on the credit union. Its role is to assist the customer in reaching a resolution with the credit union, rather than arbitrating a decision itself.

Complaints can be made to the CUDRC by telephone, facsimile, mail, or e-mail, though if the matter is complicated there may be a requirement that the complaint is put in writing or that background documentation is provided.

Consumers are advised to consider the benefit of making a written complaint at a very early stage in the dispute and insist that the response from the credit union also be in writing. This action ensures there is an accurate record of the dealings between the parties and usually facilitates the speedier resolution of their complaint.

Contact details for the CUDRC are as follows:

Credit Union Dispute Resolution Centre Pty Ltd
GPO Box 3A
Melbourne VIC 3001
Toll-free: 1800 624 241
Fax: (03) 9620 4446
www:cudrc.com.au
Email: info@cudrc.com.au