Presumably it is human nature that leads persons who suffer financial set backs to blame their banker for their misfortune, even where the banker cannot be reasonably held to have been responsible for the loss. This may be due to the feeling amongst a broad segment of the population that banks are "big, bad" commercial enterprises who treat their customers, or at least their "smaller" customers, more or less onerously. Possibly, it is because of the perception that banks have "deep pockets" and can easily afford to compensate persons who are in fact the victims of their own carelessness or lack of business foresight. Maybe, it is because in recent years, the Courts have on occasion held banks to be in a fiduciary position vis-à-vis some of their customers.
However, it is important to understand that where the Courts have held that a bank has a trustee type duty to its customer, this has almost always been in the situation where the customer is peculiarly vulnerable to being affected by the bank's conduct and where the customer has placed substantial reliance on the bank in conducting the customer's financial and/or business affairs.
In the recent judgment in the Baldwin case (rendered September 27, 2006, hereinafter the "Baldwin Case"), the Ontario Court of Appeal held that in lending funds to customers which the customers then placed in certain investments, acting on the advice of financial advisors (the financial advisors not being connected to the bank), the customers were not entitled to hold the bank responsible for losses sustained in connection with their investments. The customers attempted to claim compensation from the bank both on the basis of the bank's negligence and on the basis that the bank owed a fiduciary duty to the customers (which it breached) to advise them as to the risks inherent in investments and their obtaining of the loans from the bank.
Although not related to each other, the investment advisors and the bank did work together to facilitate a customer's borrowing from the bank and to effect the customer's investments utilizing the bank borrowings. A customer would complete a loan application with the assistance of the financial advisor and the advisor would then submit the application to the bank. Where the bank approved the loan for a particular customer, the bank would (presumably with the authorization of the customer) advance the loan proceeds directly to the customer's advisor who would then utilize same to make the customer's investments. The customers pledged their investments to the bank to secure their loans and consequently, all of the loans had "margin requirements". Thus if a customer's investments fell in value, the bank would require the customer to pay down the loan so as to take into account the then lower value of the bank's security.
Having had to have repaid their loans in whole or substantially in part, the customers claimed variously that:
(i) the bank did not explain the "margin requirement" terms of the loans;
(ii) the customers did not understand the loan documents (the documents having in fact contained clear advice/information as to the "margin requirement" terms);
(iii) the bank had the same duty of care to advise the customers of the risks involved as did their financial advisors (whom the customers also sued); and
(iv) the bank owed the customers a fiduciary duty of care (in addition to any obligation the bank might have had not to be negligent vis-à-vis the customers), presumably, on the basis that the customers were vulnerable and that the bank was in a position to adversely affect the customers by making (and later demanding repayment of) the loans to the customers.
The Courts (at trial and on appeal) noted:
- The loan documents contained "various provisions by which the borrowers (acknowledged) responsibility for the borrowing and investment decisions, and (disclaimed) any responsibility on part the of the lender";
- "There was nothing to suggest to the (bank) that (the bank) ought to (have inferred) that, contrary to what the signed documents said, the (borrowers) had not read the documents;
- While it is true that the losses sustained by the customers would not have occurred if the bank had not made the loans to them, "…the making of (the loans) requires the consents of two parties (in the case of each loan) the lender and the borrower, (and) the lender cannot impose the loan on the borrower";
- The customers "went to the (bank), not for advice, but for loans";
- The customers'financial advisors "…knew the intended investment programs of (the customers) and (the financial advisors) were in a position under the applicable regulatory requirements to develop and recommend and implement those investment programs for (the customers) and to monitor them over time, (and) the bank was not in this position"; and
- While the bank did "promote" the concept of its making loans available to the customers so that they could purchase their investments through the financial advisors, such promotional activity by the bank was made towards the financial advisors, not towards the customers.
Based on the foregoing, the appeal Court held that the bank had no obligation to any of its customers for their investment losses.
Reading the decision in the Baldwin Case, one might ask the question as to what would happen in a similar situation where the bank chooses to conduct "due diligence" as to the viability of the proposed investments to be made by its customers utilizing the funds to be borrowed from the bank, and such "due diligence" reveals one or more substantial "weaknesses" in the contemplated investments? Common sense would suggest that, to protect itself, the bank should not make the loans (or perhaps reduce the size of the loans it was originally asked to make) because the viability of its security (a pledge of the customers'investments) would be in doubt. Additionally, the bank might incur liability to its customers in this situation by failing to warn them of the "weaknesses" which the bank's research has revealed. However, in a situation where the bank did not intend to rely on its security, and instead intended to rely essentially on a customer's promise to repay the loan (no doubt due to the customer's strong creditworthiness), the bank would probably be able to extricate itself from liability by having the customer sign a written acknowledgement in which the bank set forth the results of its "due diligence" and contained a signed acknowledgement by the customer that, notwithstanding the specified "weaknesses" in the contemplated investments, the customer wished to go ahead and make the investments and thus borrow the required funds for same from the bank.