The relationship between a bank and its customer is based on the fundamental principles of loyalty and trust. However, the very nature of banking activities, which are multiple and sometimes divergent, can lead to situations where the bank's interests conflict with those of its customer. If these conflicts of interest are not properly identified and managed, they can have damaging consequences for the customer and result in liability for the bank. banker's liability. It is therefore essential to understand this phenomenon, to recognise its manifestations and to be aware of the existing prevention and redress mechanisms.
What is a conflict of interest in the banking relationship?
A conflict of interest arises when a bank finds itself torn between several conflicting obligations or interests, potentially preventing it from acting in its customer's best interests. This situation may arise from the very structure of the bank or from the different functions it performs.
Legal definition and issues (loyalty, trust)
Legally, a conflict of interest in the banking sector arises when the bank's own interests interfere with the duty of loyalty it owes to its customers. Customers place their trust in their bankers and expect them to act in their best interests. The duty of loyalty requires the bank not to exploit the relationship to its own advantage to the detriment of the customer.
Banking ethics, although sometimes perceived as 'soft law', emphasise the need to put the customer's interests first. The credibility of the banking system rests largely on respect for this trust. A poorly managed conflict of interest erodes this trust and can justify legal action. The challenge is therefore twofold: to preserve the individual bank-customer relationship and to maintain general confidence in the sector.
Distinction from a dispute between two customers
It is important to distinguish between a conflict of interest between the bank and its customer and one between two customers of the same bank. In the latter case, the bank holds confidential information on two parties with diverging interests (for example, in the case of a merger-acquisition operation between two client companies). The management of these inter-client conflicts is governed by specific rules, particularly in terms of professional secrecy and the establishment of 'Chinese walls'. Bank-client conflicts, on the other hand, directly concern the conflict between the bank's commercial or strategic interests and its duties towards a given client.
Concrete examples of conflicts between the bank and its customer
Conflicts of interest between a bank and its customer can take many forms, often subtle but with potentially significant consequences.
Withdrawal of funding for internal reasons
A bank may decide to stop financing a company, not because of its financial situation, but because of a change in its own commercial policy or an internal analysis of its risks. For example, it may choose to withdraw from a business sector deemed less profitable or more risky. If this withdrawal is abrupt and does not take into account the commitments made or the customer's situation, it may constitute a conflict of interest: the bank is favouring its internal strategy to the detriment of its customer's continued operation. Case law analyses these situations from the point of view of the abusive termination of credit, but the bank's internal motivation may reveal an underlying conflict of interest.
Offering 'in-house' or high commission financial products
A clear conflict of interest arises when the bank encourages its customers to subscribe to complex or structured financial products, not because they are the most suitable for their profile, but because they generate high commissions for the bank. This is the case with so-called 'in-house' products, designed and distributed by the bank or its subsidiaries. The bank may be tempted to favour these products over other options that are potentially more advantageous for the customer but less profitable for the bank. This practice directly contravenes the bank's duty to act in the best interests of its customers, especially if they are not aware of the subtleties and associated risks.
The bank is both lender and shareholder/adviser to the borrower
The situation becomes even more complex when the bank plays several roles in the same company. A bank that is both a lender and a significant shareholder, or even a member of the management bodies, finds itself in a delicate position. Its lending decisions may be influenced by its interests as a shareholder, and vice versa. Similarly, if the bank advises the company on a transaction (merger, acquisition, restructuring) while at the same time being its main financier, a conflict of interest is obvious. Insider information obtained in one capacity may influence decisions taken in the other, potentially to the detriment of the company or other creditors.
Life insurance backed by securities issued by the bank
A frequent case of conflict of interest concerns the marketing of life insurance policies whose units of account are invested in securities (bonds, debt securities) issued by the bank itself or an entity in its group. In this case, the banking group is both judge and judged: it is both the issuer of the security and the distributor of the insurance contract, and sometimes even the organisation that values the underlying security. The ACPR has pointed out the specific risks associated with setting the interest rate at issue and the valuation in the event of early redemption. The bank's interest (investing its own securities and valuing them favourably) may be in direct conflict with the customer's interest (obtaining the best return and a fair valuation in the event of redemption). Clear information on this situation is essential.
How should the bank manage these conflicts?
Faced with the risks inherent in their many activities, banks are subject to strict obligations to prevent and manage risks. banking conflicts of interest. Regulations, particularly in Europe (MiFID), impose a precise framework.
The duty to put the customer's interests first: myth or reality?
The fundamental principle is that the bank should always act in the best interests of its customer. In theory, in the event of a conflict, the customer's interests should take precedence over those of the bank. However, the economic reality and commercial nature of banking sometimes make this principle difficult to apply. The bank remains a business with its own profitability objectives. While the regulations impose mechanisms for managing conflicts, the idea of absolute and systematic primacy of the customer's interest is undoubtedly more of an ethical ideal than a constant and guaranteed practice. The reality is often a search for balance, framed by precise legal and regulatory obligations.
The obligation to provide clear and transparent information (CMF art. L.533-10)
When internal organisational measures (such as Chinese walls) are not sufficient to prevent a conflict of interest, article L. 533-10 of the Monetary and Financial Code imposes an obligation to provide clear and transparent information to customers. The bank must, before to act, inform the customer of the general nature and source of the conflict. This information must be provided on a durable medium and be sufficiently detailed, taking into account the customer's profile (private individual, professional, informed or not), to enable him to make his decision in full knowledge of the facts. Failure to comply with this obligation to provide information constitutes a fault that may give rise to liability. bank liability ISP.
The limits of professional secrecy
The management of conflicts of interest, particularly those between two customers, often comes up against the obligation of professional secrecy (or banking secrecy). Article L. 511-33 of the French Monetary and Financial Code prohibits the bank from disclosing confidential information from one customer to another, even if this information would help the latter to clarify a potential conflict. If the bank is unable to inform a customer of a conflict because of the confidentiality owed to another customer, professional ethics require it to refrain from intervening in the disputed transaction. It may not use confidential information obtained from one customer to the detriment of that customer or to the benefit of another.
The crucial role of internal procedures (Control, Ethics)
To prevent and effectively manage conflicts of interest, banks must implement robust internal procedures. The Order of 3 November 2014 on internal control requires a system to ensure compliance with professional and ethical standards. This involves:
- Putting up Chinese walls to separate potentially conflicting activities (e.g. financial analysis and investment banking).
- Strict rules on the circulation of internal information ("need to know" principle).
- The appointment of a compliance officer responsible for monitoring compliance with the rules, managing identified conflicts and training employees.
- Drawing up and updating a map of the risks of conflicts of interest specific to the establishment.
Internal control and the role of the compliance officer are essential to ensure that the rules are applied effectively and to prevent breaches.
What recourse do customers have if they feel they have been wronged?
When a customer believes that he has suffered prejudice as a result of a conflict of interest that was poorly managed by his bank, there are several avenues of redress open to him.
Seeking the bank's civil liability
The customer may bring a civil liability action against the bank. Depending on the nature of the breach, this action may be based on :
- Contractual liability (article 1231-1 of the Civil Code, formerly 1147) if the breach relates to an obligation arising from the contract (e.g. breach of the duty to provide advice, whether stipulated or implied).
- Extra-contractual liability or liability in tort (article 1240 of the Civil Code, formerly 1382) if the bank's fault causes damage outside a direct contractual relationship or in breach of a general duty of care (e.g. dissemination of misleading information harmful to a third party).
The customer will have to prove that the bank was at fault (breach of an obligation to provide information, warnings, loyalty, poor management of the dispute), that the loss was certain and that there is a direct causal link between the fault and the loss.
Prove the conflict of interest and the harm suffered (loss of opportunity)
The major difficulty for the customer often lies in proving the conflict. Proving the existence of a conflict of interest can be difficult, because the bank's internal mechanisms are opaque. It will be necessary to gather clues and documents (contracts, correspondence, financial analyses where applicable) and, if necessary, to seek judicial investigation measures (expert reports, disclosure of documents) to establish that the bank has favoured its own interests or those of another customer.
The loss resulting from a conflict of interest is often analysed as a loss of opportunity: loss of the chance not to enter into a contract, to enter into a contract on better terms, or to avoid a financial loss. Compensation will therefore correspond to a fraction of the lost gain or loss, proportional to the probability that the lost opportunity would have been realised had the bank acted correctly.
The importance of legal advice
Faced with the complexity of banking and financial rules and evidential difficulties, the assistance of a banking lawyer is strongly recommended. This professional will be able to :
- Analyse the legal situation with regard to the bank's specific obligations.
- Qualify the nature of the conflict of interest and any breaches.
- Helping to gather the necessary evidence.
- Assess the damage suffered, in particular the loss of opportunity.
- Define the best litigation strategy (amicable negotiation, mediation, legal action).
- Represent the client before the competent courts.
The expertise of a lawyer is often decisive in effectively asserting the rights of a client affected by a banking conflict of interest. For an in-depth analysis of your situation and tailored advice, contact our team of lawyers.
Sources
- Monetary and Financial Code, in particular articles L. 511-33, L. 533-10, L. 612-1, L. 612-29-1.
- Civil Code, in particular articles 1231-1 and 1240.
- Order of 3 November 2014 on internal control in companies in the banking sector.
- Directive 2004/39/EC on markets in financial instruments (MiFID).
- Directive 2014/65/EU on markets in financial instruments (MiFID 2).
- Case law cited (Cour de cassation, Cour d'appel de Paris, Tribunal de commerce de Paris).
- Recommendations of the Autorité de Contrôle Prudentiel et de Résolution (ACPR).
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