Banking Law

Posted: December 21st, 2022

Student’s Name

Professor’s Name

Course Title

Date

Coursework Assignment – Banking Law

Question One – Problems that arise when Banks Give Credit References for the Buyers

Credit or loan is part of a person’s financial strength. It enables one to get the things they require immediately, like a mortgage to purchase a house, depending on the borrower’s promise and commitment to repay within an agreed time. Individuals and organizations may be compelled to take loans and credits for different reasons. Individuals take personal loans for different reasons, including settling debts, making large purchases, and settling emergency among other needs. Corporations also take and use credit with the objective of funding their everyday operations. Many firms require funding to settle start-up costs, to pay for services and other supplies, or to maintain cash flow. Hence, small businesses or start-ups use credit as short-term financing. However, recurrent borrowing has prompted the need for a bank or credit reference, which enable a lender to understand the probability of their borrowers repaying the money. A bank or credit reference in this instance refers to a written opinion composed by a bank manager describing a client’s credit standing or history of repaying credit. In other words, credit reference can be a documented note or credit report from a former moneylender, business acquaintance, or personal acquaintance. However, the process of issuing credit references by banks usually encounter some problems, which form the basis for this study. Some of the identified concerns include absence of key information in credit references and cases of dishonesty. The analysis further reveals that the law has provisions for dealing with these problems. The key argument is that besides adhering to existing legislations, banks should include the key elements in their credit references and avoid dishonest dealings as much as possible.

One of the complications that emerge when financial institutions are asked to give credit references for their clients is that some institutions may not give enough information that could persuade another lender to provide credit to a previous customer. Financers sometimes deny credit or loans when customers have inadequate credit references, which means that there is not adequate information in one’s credit report for a lender to make an informed choice about a borrower’s creditworthiness (Mungiria and Ondabu 75). Various factors could result in being denies credit or loan due to insufficient bank references. One of the common reasons is having a thin credit file that has few credit accounts. Mungiria and Ondabu (75) assert that a significant portion of people have thin credit file, and therefore have restrained access to loans and credits. One might have a thin credit file if they have never owned a credit account, several years have passed since the last credit account was terminated, or if one has created a credit account within the past half a year. Another reason that could lead a lender to turn down an offer for credit is if the bank reference miss other vital information as a result of negligence or omission on the part of the previous banker (Mungiria and Ondabu 76). However, it is essential to acknowledge that different lenders and creditors have different directives for what they need before approving an application. For example, whereas some lenders may approve credit for an applicant with thin credit file, others recommend a broad history or borrowing and repaying. Therefore, bankers need to ensure they include all the relevant information in the credit reference to avoid possible denial by the next lender.

Thus, both lenders and borrowers need to understand the main constituents of a credit reference to ensure the report has all the needed information that would compel a lender to give funding. An effective credit report should have four primary areas – personal or identifying information, credit accounts, credit analyses, and data from public records (Hagen). The identifying information section should contain things like the applicant’s name, their former names if they had changed, present and past addresses, social security number, date of birth, and employer. The information in this section helps lenders and credit bureaus to verify a borrower’s identity. The second section, credit accounts, is the core component of the credit reference (Hagen). The section includes the records of each loan and credit in the account holder’s name. For each credit account, the reference should list the type of credit account such as car loan, mortgage, or credit card, the date the account was opened, the financier a client have the account with, loan or credit limit, account balance, and payment history. Much of the details a lender uses to calculate a customer’s credit score comes from the details in this section. Subsequent lenders often consider payment history as the most crucial determining factor for credit score, and even one prolonged payment could affect a customer’s score (Hagen). A credit reference also include information on both soft and hard inquiries. Hard inquires could affect one’s credit score, but the effect could be insignificant. The credit reference should also contain information from public recordings like bankruptcies, auctions, and repossessions. An applicant would not want to have any report in this section of the credit reference because most of the content that appear here is bad and can adversely affect a client’s credit score (Hagen). Therefore, a bank manager or any other officer preparing a credit reference for their customer should include all these relevant information to minimize the likelihood that a subsequent lender would turn down the document for missing essential elements.

The other problem that arises when banks are requested to provide credit references for their clients revolves around ethical violation. For example, increasing concerns emerge regarding the issuing of crafted credit reference reports by banks sometimes in collaboration with their clients. Kwama informs that some financial institutions could be presenting imprecise information about their consumers’ credit value and worthiness to subsequent lenders and credit reference bureaus (CRBs). The report further reveals that sometimes banks give imprecise information about their clients, which largely immobilizes those settling huge loans from shifting to rival financial institutions will to buy out such credits (Kwama). There are also concerns over the preciseness of some information in the custody of CRBs after emerging that many clients do not spare time to review records issued by banks concerning their credit worthiness (Kwama). Several eligible clients have been denied loans and credit based on such misinformed reports.

Various legislations exist to guide the creation and use of credit references in accessing credit. In Saudi Arabia, the Capital Market Authority is responsible for setting regulations that determine the production and acceptance of credit reference. Article 28 (Professional Ethics) of the Credit Rating Agencies Regulations call on authorised credit agencies to conduct all their practices ethically while striving to achieve compliance at all times (Capital Market Authority). Other developed nations have made significant strides towards developing regulations that guide practices such as issuance and acceptance of credit references. For example, Fair Credit Reporting Act (FCRA) in the U.S. helps to achieve preciseness, privacy, and fairness of the information in customers’ credit files (Sickler 21). The legislation further regulates how credit reporting firms can gather, reach, utilize, and disseminate the information they gather from consumer reports (Sickler 21). The existence of such regulations affirm that bank references are essential documents that require effective legal oversight to avoid the identified issues that occur when banks are asked to produce a credit reference for their clients.   

Question Two – Overriding the Banker’s Duty of Confidentiality to his Client

It is trite law that a financial institution such as a bank owes its clients an obligation to uphold secrecy and confidentiality about the customers’ banking affairs. This obligation is entrenched by law in many jurisdictions across the globe. One particular regulations that abide organisations worldwide is the General Data Protection Regulation (GDPR). Though the regulation was created and passed in the EU, it enacts obligations onto firms across the globe, so long as they gather or target information related to people residing in the EU (ICO). In the Kingdom of Saudi Arabia (KSA), data privacy is extensively safeguarded by privacy principles of the Sharia. The KSA law, like other regulations across the globe, requires bankers to practice data minimisation by only accessing and using specific data to serve a particular purpose. Regulations guiding bankers’ obligation to uphold their clients’ confidentiality advocate for lawfulness, transparency, and fairness by having a valid reason for accessing personal data while ensuring that the information is not put into unlawful practices (ICO). Moreover, the requirement require bankers to use personal information in a way that is fair. This implies that one cannot process the data in a manner that is evidently misleading, harmful, or unexpected to the parties concerned (ICO). Each banker must observe the principle of purpose limitation, which directs service providers to be clear about their purpose for processing data from the start. Moreover, this obligation requires that bankers only use personal data for a new goal if it is related to the initial goal. Besides, bankers should practice accuracy while handling personal information as well practice appropriate storage, which entails keeping data longer than it is needed (ICO). More fundamentally, bankers should adhere to the principle of accountability that requires a banker to take charge of what they do with personal data and how they adhere with other regulations (ICO). Bankers have the obligation to abide by the principles unless it is inevitable that they act contrary.

Whereas banks have the responsibility to safeguard their clients’ personal and banking-related data, there are scenarios in which it can use or issue the information. One particular example where the law overrides a banker’s obligation of confidentiality to their client is if the information is needed by law. For example, the government may compel a banker to retrieve the personal information of a particular client without their consent in case of a criminal investigation backed by either a court order or official communication (Coucounis). A good scenario in which the law can override a banker’s obligation to their clients’ confidentiality is when looking into a case of terrorism or money laundering. The banker in such cases are required to disclose personal information to find out if there are convincing evidence to confirm that a client is affiliated in only one of a number of identified malpractices or upon suspicion of such indulgence. The law may also compel a banker to violate a client confidentiality by accessing personal information in case of other investigations such as tax or loan evasion (Coucounis). Another scenario where the law overrides the banker’s obligation to their clients’ confidentiality is when the bank is party to or engaged in civil litigation. This is because a court of law may ask the bank to provide particular evidence that may compel it to access customers’ personal data without their consent. Moreover, the law overrides the banker’s obligation to observe clients’ confidentiality in scenarios where there is a duty to the public to reveal personal data. Coucounis informs that where the bank is faced with a scenario where the public in concerned with data within its custody in relation to a client, the banker is under a duty to disclose such data. However, accessing and using clients’ personal data without their consent or under circumstances that do not fall under the identified exemptions could have adverse repercussions as provided for in law.  

Still, the scenarios where the law overrides a banker obligation to observe their clients’ confidentiality could present significant problem to the employee or institution. For example, in scenarios where the bank accesses their clients’ personal data as evidence in legal proceedings without the customers’ consent could cause dissatisfaction on the clients’ side (Coucounis). The customer may press charges against a particular banker or the entire firm because the law provides that one can sue for compensation after disclosure or for a court order to avert disclosure or a recurrence of a past disclosure. Issues of trust could also emerge in scenarios where customers become aware of a disclosure of their data (Coucounis). Consequently, such a client may halt their relationship with the bank for fearing that the incident would reoccur. However, concerns emerge concerning what bankers can do to avoid the penalty of their consumers in scenarios where the law compel them to go against confidentiality rights. Otherwise, failing to clarify the boundary could expose more bankers to increased criticism from their clients who would blame them for incompetence and insincerity. There is need to respond urgently because no firm would want to lose its clients for such reasons.

The assignment illustrates that bankers have an obligation to safeguard their clients’ confidentiality and that the government can override the duty under particular circumstances. The law overrides the obligation in case of the government requires particular information for legal purposes. A banker may also violate their clients’ confidentiality if the bank is engaged in legal proceeding and a suitable evidence would be to access customers’ personal data. The study reveals that whereas the law could override a banker’s obligation to safeguard their clients’ confidentiality, the latter have the mandate to initiate legal proceedings against an individual employee or the whole organisation. Thus, it is essential to draw a line between when a banker is permitted to access and use their clients’ personal data to avoid scenarios where information owners do not initiate legal proceedings against service providers.

Works Cited

Abdulla, Samahir. “The Bank’s Duty of Confidentiality, Disclosure Versus Credit Reference Agencies; Further Steps for Consumer Protection: ‘Approval Model’.” European Journal of Current Legal Issues, vol. 19, no. 4, 2013, https://webjcli.org/index.php/webjcli/article/view/296/405  

“Bank Confidentiality – A Dying Duty but Not Dead Yet?” Coucounis, 2015, http://www.coucounis.com/index.php/en/news-insights/publications-articles/77-bank-confidentiality-a-dying-duty-but-not-dead-yet. Accessed 17 Mar. 2022

Capital Market Authority. “Credit Rating Agencies Regulations.” CMA, https://cma.org.sa/en/RulesRegulations/Regulations/Documents/Credit%20Rating%20Agencies%20Regulations%20-%20English%20Translation.pdf. Accessed 17 Mar. 2022

Hagen, Kailey. “What Information is on a Credit Report.” The Ascent, July 21, 2021, https://www.fool.com/the-ascent/credit-cards/articles/what-information-is-credit-report/  Accessed 17 Mar. 2022

Kwama, Kenneth. “Banks on the Spot Over Filing False Reports to Credit Reference Bureaus.” The Standard, February 21, 2012, https://www.standardmedia.co.ke/business/financial-standard/article/2000052513/banks-on-the-spot-over-filing-false-reports-to-credit-reference-bureaus. Accessed 17 Mar. 2022

Mungiria, James and Ibrahim Ondabu. “Role of Credit Reference Bureau on Financial Intermediation: Evidence from the Commercial Banks in Kenya.” International Journal of Accounting and Finance, vol. 8, no. 3, 2019, pp. 73-79.

Sickler, Alexandra. “The (Un)Fair Credit Reporting Act.” Loyola Consumer Law Review, Forthcoming, 2016, pp. 1-43.

“The Principles.” ICO, 2022, https://ico.org.uk/for-organisations/guide-to-data-protection/guide-to-the-general-data-protection-regulation-gdpr/principles/ . Accessed 17 Mar. 2022