Banks’ Duty Of Care To Customers APP Scams And Other Dishonesty


‘Authorised push payment’ (‘APP’) fraud, as it is known, is the situation where individuals or businesses are manipulated, through impersonation, into making payments to fraudsters.  It is one of the biggest types of fraud reported by the UK banking and financial services sector.

Compensation schemes – Various voluntary codes of practice (notably the CRM Code, introduced in 2019) have been developed within the financial services industry to compensate customers.  These codes operate subject to their terms and conditions.  They do not cover international payments and not all UK banks have signed up.

Under the Financial Services and Markets Act 2023, a mandatory reimbursement scheme is to be introduced by the Payment Services Regulator.  This will oblige payment service providers to reimburse customers in respect of payment instructions executed subsequent to fraud or dishonesty.  The intention is to protect consumers, charities and micro-enterprises in respect of payment orders executed over the Faster Payments Scheme.  The regulator is aiming to have the scheme operating in 2024.

The legal principles applying where the scheme will not apply – Where it applies, the scheme will overlay the existing legal principles determining when banks must pay out compensation. 

In April 2022, we circulated a briefing note, reporting on a judgment of the Court of Appeal relating to the duty of banks to compensate customers who had been victims of APP fraud.  The Supreme Court has recently allowed an appeal in the same case, making very different findings as to the extent of the banks’ duties, as follows.

The facts in Philipp v Barclays Bank

Mrs Philipp is 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.

Mrs Philipp claimed that the bank was responsible for this loss.  She brought proceedings, contending that the bank owed her a duty under its contract with her or at common law not to carry out her payment instructions if the bank had reasonable grounds for believing that she was being defrauded.

The bank’s case was that, as a matter of law, 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 lied to the bank about the purpose of the transfers.  Thus, even if the bank had delayed the transaction and asked questions, 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 such duty. 

Supreme Court’s judgment as to the duties owed by the bank

Terms of the contract – The Supreme Court held that it would be possible for a bank to agree as an express term of the contract with a customer that it would not comply with a payment instruction if it had reasonable grounds for believing that the customer had been tricked into authorising the payment.  That was not the case in Mrs Philipp’s contract.

No duty of care implied by law – In the absence of such an express term, no obligation of this kind can be implied.  To the contrary, the terms on which a bank is authorised and undertakes to carry out its customer’s instructions are generally referred to as the bank’s mandate.  Unless otherwise agreed, the bank’s duty to comply with its mandate is strict and must be complied with, subject to certain special situations such as where the payment would be unlawful, or to prevent money laundering.

Term implied under the Supply of Goods and Services Act 1982 – The bank is under an implied term to supply its services with reasonable care and skill. However, this relates only to the manner of providing the services and would not go so far as to support Mrs Philipp’s claim.  It is not possible to derive a duty not to do something from a duty to do something carefully.  Thus the implied term does not create a tension with the bank’s duty to comply strictly with the mandate. 

Where the customer has appointed signatories – Payment instructions given by an agent of the customer, for example on behalf of a company or for joint account holders, where the authorised signatory is acting dishonestly or fraudulently, are in a separate category.  The Supreme Court held that the decision in Barclays Bank v Quincecare  (1992) was correct only to the extent that a signatory, being an agent, can never have actual authority to defraud their principal (unless the principal had specifically extended the actual authority to include such a situation, which would not be likely).

Therefore, the act of the fraudulent signatory will only bind the customer if, in their capacity as agent of the customer, the signatory had apparent authority.  The relevant legal principle is therefore that the bank will not be entitled to rely on the apparent authority of a signatory if it fails to make the enquiries that a reasonable person would make in all the circumstances to verify that the signatory has actual authority to give the instruction.  Examples of circumstances giving rise to the need to enquire would be where the agent signatory could be seen to be using his principal’s funds to buy himself a Rolls Royce or pay off his own debts. Giving effect to the agent’s instructions without making inquiry whilst being on notice of such circumstances would be outside the mandate. 

However, that did not assist Mrs Philipp, who was the customer in her own right and had actual authority to give the payment instructions.  Her instructions were valid and her intention clear.  The fact that she would not have given the instructions if she had not been lied to  by the fraudster did not negative her intention in giving the instructions. Therefore she had no basis for claiming from the bank.

Limit of the duty to execute valid instructions –  The Court acknowledged the possibility of a further implied term, as  identified in the Australian case of Ryan v Bank of NSW (1978).  The analysis there was that a carrier carrying goods under contract and ordered to deliver them to a particular unloading bay at a factory would act unreasonably in complying with this order if, on arrival, the factory was on fire.  A paymaster, ordered by his employer to bring the employees’ cash wages to the pay office would act unreasonably in complying if, on the way, he learned that the pay office was occupied by armed robbers.  These examples showed that even provisions in a contract expressed in unqualified language will be interpreted as subject to an implied qualification preventing them from applying in particular circumstances.

This suggested that there may be an implied term that a bank should not comply with a payment instruction if a reasonable banker, properly applying his mind to the situation, would know that the customer would not wish their instructions to be carried out in the circumstances.

The Supreme Court expressed no firm view on this but acknowledged that, if a bank received reliable information suggesting that a payment instruction had been procured by fraud, it might be right to refrain from complying with the instruction without first alerting the customer.  However, that was not the present case, as the information which might have led the bank to refrain from making the payment was known to Mrs Philipp and therefore the bank had no reason to doubt her instructions.

The Court therefore struck out Mrs Philipp’s claim insofar as it was based on the allegation that the bank owed her a duty not to execute her payment instruction.  The Court did, however, allow Mrs Philipp’s fallback argument, that the bank had failed in a duty to attempt to recover the funds, to proceed to trial.

Lovetts’ comment

The Supreme Court’s analysis is restrictive and represents a substantial departure from previous cases.  It is unlikely to be the last word on the issue of a bank’s duty not to execute payment instructions in certain circumstances.

For more information, please contact Wendy Miles, Chris Earl or William Sturge at Lovetts.

31 July 2023