Banks are increasingly being co-opted to front line roles in the fight against crime, unscrupulous investment schemes and climate change, and have become natural targets for climate activists and other forms of litigation.
In the last decade, the banking sector has had new regulatory obligations placed upon it in the service of a range of government policy objectives and been party to several cases looking to expand banks’ duties at common law, including:
- The prevention of money laundering (the Anti-Money Laundering and Countering the Financing of Terrorism Act);
- Protecting borrowers against taking on loans they can’t afford (the Responsible Lending Code and the Credit Contracts and Consumer Finance Act (CCCFA));
- Protecting customers against scams – the UK courts have considered several cases to expand the Quincecare duty to require banks to protect customers from the consequences of their own misguided payment instructions; and
- The imposition of sanctions in relation to the Russian war on Ukraine.
These policies rely on banks to act as an arm of the regulator, monitoring transactions and protecting consumers, in the course of which they must often interpret principles-based laws and guidelines - and do so quickly and, potentially, many times a day.
Banks – and their directors – will be expected to devote increasing resource to meeting their regulatory and other responsibilities, with the potential threat of enforcement action for any breaches.
They are facing a progressively stronger enforcement regime, through the expanded remit and resources of their regulators – the RBNZ, the Financial Markets Authority (FMA), and the Commerce Commission – and the new regulator’ powers conferred under the Financial Markets Conduct Act, the Fair Trading Act, the Commerce Act, and the CCCFA, and proposed in the Deposit Takers Bill.
The Quincecare duty
The Quincecare duty directs that financial institutions must not implement a customer’s instructions where they have reasonable grounds to believe that this might facilitate a fraud against that customer. It has often arisen in cases where it is alleged that the bank should have been on notice that an agent, such as an employee, of a corporate customer has misdirected company funds for their own benefit.
In New Zealand, the courts have been more reserved, requiring a claimant to show that the bank dishonestly assisted the fraud. However the topic is open to fresh debate in light of developing UK case law.
The UK Supreme Court is soon to rule on whether the duty also extends to individual customers that have been deceived. Philipp vs Barclays Bank UK PLC concerns a claim by Mrs Philipp, who was tricked by a fraudster into transferring £700,000 from her Barclays account to two accounts in the United Arab Emirates, that Barclays should:
- Not have executed her instructions until satisfied that there was no attempt to misappropriate funds; and
- Taken steps to recover the money once the fraud was discovered.
Should the Court uphold the appeal, the scope of Quincecare will be substantially expanded and substantially slow payments. While an expanded Quincecare duty may reduce the impact of fraud, it also reduces the efficiency of the payments system and impinges on the autonomy of banking customers. As the New Zealand courts have recognised, requiring banks to investigate the bases on which payments are made can result in significant financial loss where legitimate transactions are delayed.
Climate activism against banks can take the form of regulatory enforcement by the FMA, advertising standards claims brought by NGOs or competitors, shareholder activism preliminary to private law action, or litigation brought by NGOs or investors alleging misleading or unsubstantiated statements. So far no legal challenges have been made by climate activists against banks in New Zealand but it can only be a matter of time, judging from the Australian and UK experience.
The FMA has greenwashing clearly in its sights, with updated guidance and wide sweeps of advertising claims on a sector by sector basis. We expect the FMA to take more formal enforcement action this year.
Advertising standards claims
Climate-focused NGOs are increasingly active pursuing greenwashing claims. Lawyers for Climate Action NZ Incorporated (LCANZI) has already made greenwashing complaints against New Zealand corporates to the Commerce Commission and Advertising Standards Agency and we anticipate further complaints being brought by LCANZI and other climate-focussed NGOs based on overseas experience.
In the UK, two HSBC advertisements promoting the bank’s investments in sustainable finance and tree-planting were banned last year by the UK Advertising Standards Authority. While the advertisements were factually true, they were held to give a misleading impression of HSBC’s climate impact because they did not disclose HSBC’s continued financing of fossil fuel exploitation and links to deforestation. The HSBC may represent a high-water mark, but New Zealand regulators are also keen to emphasise that it is the overall impression of the advertising that counts.
- In Australia, there are increasing examples of shareholders using corporate governance processes to demand environmental accountability. For example:
Shareholders may seek to exercise their right to inspect company records for the purpose of assessing greenwashing (such as whether internal company documents align with public environmental commitments and claims). In Abrahams v CBA, Federal Court of Australia made orders by consent requiring the Commonwealth Bank of Australia to permit a shareholder to inspect documents detailing decisions to finance oil and gas developments and relating to the bank’s emissions reductions target; and
- Market Forces, the Australian shareholder activist group, filed multiple ordinary resolutions at the December 2022 AGMs of Australian banks, requesting that they disclose how their financing would not be used for the purposes of new or expanded fossil fuel projects. Although the resolutions were voted down by shareholders, they dominated the discussion at the respective meetings and the accompanying press coverage.
New Zealand’s informal class action regime continues to develop. While the proposed statutory class action scheme recommended by the Law Commission may now have been put on the Government’s back-burner, the existing de facto regime gives sufficient basis for claims against banks when used effectively. Both ANZ and ASB are currently defending a class action alleging breaches of the CCCFA and litigation funders are actively looking for further claims to support.