Closing discredited lines of inquiry: Changes to the credit reference system will stop your bankers talking behind your back

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The Independent Online
DID YOU know that anyone you hoped to deal with could make an inquiry to your bank as to your financial ability to carry out the deal - and all without your knowledge?

If you didn't know, you are not alone. Not many personal customers know about the credit reference system.

Decades ago customers were protected from such intrusion, when the system operated in a rather different manner. In a case heard in 1910, the then Master of the Rolls referred to the system as 'that very wholesome and useful habit by which one banker answers in confidence, and answers honestly, to another banker the question being given at the request and with the knowledge of the first banker's customer'.

Over the years, the system evolved into what it is today. The justification was that it worked. But in March it is to be changed again, to protect the customer's privacy, and perhaps that is just as well.

The existing system enabled Bloggs & Co, which wanted to do business for the first time with Mr A, to obtain an opinion about his financial ability to carry out the deal - and this from a source which knew a good deal about him: his bankers.

It was good for Bloggs &Co because, depending on the answer, it could decide to do business with Mr A with confidence, or look elsewhere. It was good for Mr A if the bank's answer was favourable. If it was not, he should probably not have been involved anyway. It was not so good for Mr A's bank, which had to give the opinion, or Bloggs & Co's bank, which asked for it and might have to interpret the answer.

Traditionally, the answer was in bankers' jargon, deliberately obscure because of the risk of an action for defamation or breach of confidence against the bank by Mr A, or an action for negligence by Bloggs & Co if it relied on the opinion but found it faulty.

Bank charges for the service were always small, so it was a high-risk operation for little reward, regarded by banks as a service for customers. Its main disadvantage was that it breached the prime duty of a banker to preserve the confidentiality of a customer's affairs.

The justification - considered essential in 1910 - that the bank's customer should have express knowledge that an inquiry was being made about him through his bank, had lost importance by 1929, when another judge said the system could be justified only on the basis of 'the implied consent of the party being inquired about'.

In other words, it was recognised by then that a customer would rarely, if ever, be asked to comment by his own bank on its disclosure of his financial position. It had to be assumed that he knew about the system and continued his relationship with his bank on the implied agreement that whenever an inquiry was made about him it could be answered freely.

The reality was very different. It might be reasonable to expect that business customers needing to use the system themselves would agree to being the subject of an inquiry, as well as being the instigator of one. But most personal customers, and not a few business ones, had never heard of this system. They could not truthfully be said to have consented to a disclosure of their affairs to a stranger. In practice,they would rarely find out what had happened and would probably be left to wonder why a promising deal had failed to materialise.

The system which comes into effect on 1 March will require banks to secure the customer's authorisation before answering an inquiry. Some banks may charge their customers for the privilege of being investigated.

The inquiry will be sent to the account-holding bank, which will reply direct to the inquirer. The subject of the inquiry will be able to obtain a copy of the answer. No longer will it be possible to say that the system breaks confidentiality.

It has to be remembered that a bank manager is unlikely to have full knowledge of his customer's affairs. He will know the state of the account, whether it has been run in a proper manner, and sometimes quite a bit about the customer as well. He may have seen a copy of the business accounts. It may even be that his customer is trying to keep from him the fact that his business is in difficulty.

For these reasons, a status inquiry should never be relied upon for more than it purports to be - a statement of opinion.

The replies made to a status inquiry will continue to be couched in guarded terms, using expressions such as 'undoubted' (means what it says) at one end of the scale, and 'unable to speak for your inquiry' (do not touch it with a barge-pole) at the other. Each bank is likely to use its own time-honoured phrases and these may still need interpretation by the inquirer's own bank.

The disadvantage of the new system is that not everybody likes to be inquired about. Many will dislike a potential business customer knowing that he finds it necessary to check with his bank before doing business with him. Not every bank will be quite as frank as it used to be when it knows that its customer can obtain a copy of the answer.

Openness must be admired, but obtaining it may be at a price. The information given is likely to be less helpful to the inquirer; so fewer inquiries are likely to be made.

Derek Wheatley QC is banking consultant to Watson, Farley & Williams, and a member of the Banking Law Committee of the Law Society and Bar Council. He was formerly chief legal adviser at Lloyds Bank.

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