APP Scams And The Bank’s Duty To Compensate
Philipp v Barclays Bank, The Consumer Association intervening (Ct of Appeal, 2022)
Summary
‘Authorised push payment‘ (‘APP’) fraud, as it is known, is the situation where the victim is deceived into transferring money away to an account controlled by a fraudster. It is one of the biggest types of fraud reported by the UK banking and financial services sector.
Various voluntary codes of practice (notably the 2017 BSI Code of Practice and the CRM Code introduced in 2019) have been developed within the financial services industry to compensate customers, albeit subject to their terms and conditions.
Meanwhile, victims of APP fraud should be assisted by the recent case of Philipp v Barclays Bank, in which the Court of Appeal has clarified that the circumstances where customers are owed a legal duty of care are wider than many previously understood. As one of the barristers said in another recent case, it is sound policy that, in the fight to combat fraud, banks with reasonable grounds for believing that a payment instruction is an attempt to misappropriate funds should not sit back and do nothing.
Case note
Mrs Philipp was a music teacher and her husband a retired physician. A fraudster tricked them into believing that they were cooperating with the Financial Conduct Authority, the National Crime Agency and the Fraud Department of HSBC. The fraudster persuaded the couple to transfer in excess of £700,000, being the bulk of their life savings, into Mrs Philipp’s account at Barclays and thence to accounts in the United Arab Emirates. By the time the fraud was discovered, the money had gone.
There was a dispute as to whether the bank had asked any safeguarding questions or given any scam warnings.
Mrs Philipp brought an action against the bank for breach of a duty of care, which duty was to be implied into her contract with the bank under the common law, or pursuant to section 13 of the Supply of Goods and Services Act 1982. The duty was characterised as a duty to observe reasonable care and skill in executing her instructions. Mrs Philipp’s case was that the bank ought to have had in place policies and procedures to detect and prevent potential APP fraud and reclaim monies subject to it.
The bank’s case was that it did not owe such a duty. The bank also took a point on causation, arguing that Mrs Philipp and her husband had been so thoroughly deceived that they did not trust the police or the bank and were lying to the bank about the purpose of the transfer. Thus, even if the bank had delayed the transaction, asked questions to get to the bottom of what was going on, arranged for Dr and Mrs Philipp to meet the police and then given warnings, Mrs Philipp would have gone ahead anyway.
The bank applied for ‘summary judgment’, that is, to strike out Mrs Philipp’s claim on the basis that the court could decide without a trial that there was no duty of care in these circumstances.
The Commercial Court agreed with the bank and struck out the action.
Mrs Philipp appealed. The Consumers’ Association (Which?) was then granted permission to intervene, supporting the appeal and contending that the court should recognise a duty of care in the circumstances.
The leading case in this area of the law is Barclays Bank v Quincecare (1992). In that case, a dishonest company chairman gave payment instructions resulting in the misappropriation of funds from his company. The court held that the bank would be liable to compensate Quincecare if it executed an instruction to pay out funds knowing it to be dishonestly given, or shut its eyes to the obvious fact of the dishonesty, or acted recklessly in failing to make such enquiries as an honest and reasonable bank would make; and the bank should refrain from executing an order if and for so long as it was put on enquiry by having reasonable grounds for believing that the order was an attempt to misappropriate funds. In such cases it is not the original dishonesty, but the bank’s subsequent negligence in dealing with the payment order that is to be regarded as causing the loss.
Applying the duty of care identified in Quincecare to the present case, the Court of Appeal held that the existence of this duty is not confined to ‘internal frauds’ by employees against their company, or to cases where it can be said that in truth the actual customer never gave a payment instruction. The correct analysis is that a bank is under a primary duty to execute orders promptly. However, the bank has another duty which operates in tension with that primary duty, to use reasonable skill and care in executing the customer’s orders. If the bank is actually aware that a payment instruction is an attempt to misappropriate funds, it will very probably be liable if it simply pays out. If the bank’s state of knowledge as to the dishonesty or otherwise of the order is less clear than that, the bank is required to refrain from executing the order if and for so long as the circumstances would put an ordinary prudent banker on enquiry. The circumstances in question would be the existence of reasonable grounds for believing that the order is an attempt to misappropriate funds. The standard of conduct required of the bank is that of the law of negligence.
The Court of Appeal therefore held that a relevant duty of care could arise in the case of customers who are the unwitting victims of APP fraud themselves instructing their bank to make a payment, provided the circumstances are such that the bank is on enquiry that executing the order would result in the customer’s funds being misappropriated.
The court went on to hold that the right occasion to decide whether such a duty arose in the present case was at a trial.
The bank had argued that the duty of care contended for would have been unworkable and onerous in practice. However, the court considered that there was ample evidence that this was not the case and that the proper place to resolve this issue too was at a trial.
Accordingly, the order to strike out which the bank had obtained was set aside. The parties could now pursue the resolution of their dispute on the basis that the law recognises that banks can indeed owe a duty of care to the victims of APP fraud.
For further information, please contact Wendy Miles, Chris Earl or William Sturge at Lovetts.