The Banking and Financial Institutions Act 1989 (Act 372) (hereafter BAFIA) is

the most important piece of legislation governing banking practices in Malaysia.

However, the existence of banking laws can be traced back to the year 1940 where
Companies Ordinance was enacted by the British. In the year 1957, a more specific
Banking Ordinance came into existence before it was replaced by the Banking Act 1973.
The BAFIA then superseded the Banking Act 1973. Therefore, it can be said that many
provisions in the BAFIA are in conformity with the old common law banking principles.
The definition of ‘bank’ and ‘banking business’ which is embodied in Section 2
of the BAFIA was derived from common law. The Section provides that ‘bank’ is a
person carrying on banking business and ‘banking business’ means the business of
receiving deposits on current account, deposit account, saving account or other similar
account; paying or collecting cheques drawn by or paid in by customers; and provision of
finance. This definition in the BAFIA was taken from the landmark English case of
United Dominions Trust v Kirby which was decided in the year 1966. The decision in this
case was an anomaly since the court took into consideration the reputation of the firm as
a banker eventhough it does not fulfill any of the criteria of a banker laid down by the
court. This evidently shows that the definition of banking business and a banker which
was laid down in the case was inadequate. Furthermore, in the case of Woods v Martin
Bank, the court departed from the traditional approach and held that giving financial
advice is also part of banking business. It appears that the definition provided in the
BAFIA is not helpful since it provides that to determine whether or not an institution is a
bank, the court has to review its business and compare it with that transacted by banks
generally. It treats that business of banking as being carried out in an uniform manner.
Nowadays, it is common for banks to diversify their activities which traditional banks did
not venture into. Banks do engage in businesses like securities, derivatives, investment
management, insurance and pensions in today’s modern banking. The expansion of
banking business in the era of electronic banking will need also requires the archaic
common law definition to be expanded. Cheques are used lesser and lesser to the extent
where the annual volume of personal cheques is less than half compared to the usage 10
years ago. Electronic banking mechanisms such as debit cards, an electronic transfer and
automated teller machine (ATM) has taken over the old paper transactions. Eventhough
Section 2 of the BAFIA requires the Minister to issue a license before a bank carries out a
banking business; there is no clear guideline in the Act as to how the Minister should
exercise his discretion and the criteria that he should follow. Therefore, it is submitted
that the definition of ‘banks’ and ‘banking business’ has to be amended to include a
wider and expansive definition compatible with recent needs.
Additionally, it is known that the law of banking concerns primarily the
relationship between a bank and its customer. The BAFIA however does not provide the
definition of ‘customer’ but it defines ‘depositor’ as a person entitled to repayment of a
deposit. The problem with the word depositor is that it has a narrower meaning compared
to customer since all depositors are customers but not all customers are depositors. Since
there is no definition in the Act, resort has to be made to the common law definition. In
common law, a person is deemed to be a ‘customer’ only when there is a contractual
relationship between him and the bank. The contract can be in the form of an account
with the bank or an undertaking by the bank to open an account or to carry out the
instructions of a customer. The courts however in some cases expanded the definition by
holding a person to be a customer even though there is no act of opening a bank account.
The Wood’s case is an example where the court held the plaintiff to be a customer of the
bank based only on the negotiations between them to open a bank account. Technology
advancement in banking transactions however has caused the common law definition of a
‘customer’ to be outdated. For example, in Malaysia the MEPS system was introduced
where a customer of a bank holding a Bank Card can actually withdraw from any of the
ATM machine of another bank. The issue will be whether the person who withdraws
form the ATM machine of another bank then becomes a customer for the bank. The issue
is important to be answered because there can be a situation where there might be a
dispute as to the payment of money between the card holder and the other bank which
owns the ATM machine. It will be an ideal solution if all persons using the MEPS service
are deemed to be customers of the ATM paying bank at the moment of the transaction so
that the customer may sue the bank in the event of a payment dispute. Electronic transfers
also expose the inadequacy of the common law definition of a customer. Money can now
be transferred via computers and it is becoming a preferred method of banking especially
with more international transactions taking place. Many of this type of transactions do not
require the transferor to open a formal account with a bank. It is suggested that the
BAFIA should be amended to include customers of electronic transfers since bankers
now are suppose to know who they are dealing with to combat money laundering. The
Association of Banks Malaysia has also issued the Code of Good Banking Practices in
1995 requiring banks to satisfy themselves with the identity of a person seeking to deal
with the bank in order to protect the bank and its customers. Therefore in order for the
banks to know the identity of the real customer behind the electronic transfer, the
transferor should be recognized as a ‘customer’ beyond the old common law definition in
order for banks to require particulars from an individual.
Common law courts have also enunciated the principle that banks owe a fiduciary
duty towards their customers. This is to enable a customer to recover losses from his
bank. Duty to exercise reasonable care and skill has been imposed on banks when dealing
with customer’s account. Banks have also been held liable as constructive trustee in
knowingly assisting a fraudulent breach of trust or receiving trust funds illegally. An
example is the case of Selangor United Rubber v Craddock where the bank was held
liable as a constructive trustee for knowingly assisting an agent to defraud his principal.
The plaintiff in this case sued the bank both in contract and equity. The claim in equity
was based on the allegation that the bank was aware of the circumstances which would
suggest to a reasonable banker that an agent was drawing cheque to defraud his principal.
The duty imposed on the banker by the court in this case seems to impose a high burden
on them where banks are supposed to make inquiries before making any payments. The
standard however was lowered down by the English Court of Appeal in the case of
Lipkin Gorman v Karpnale where the court took into account of practical realities of
commercial transactions and held that the test will now be an honest and a reasonable
banker. The usage of constructive trusteeship in holding banks liable has drawn many
criticisms from many authors of banking law including Prof E.P Ellinger. The usage of
the equity via the constructive trustee principle is viewed as a complicated and
troublesome way when an easier method is available through the law of contract. Another
obvious problem is that courts have for the past changed the knowledge requirement in
holding a party to be a constructive trustee. The latest development in this area was from
the case of Royal Brunei Airlines v Tan Kok Ming, Philip where the Privy Council held
that an accessory can be held liable in a fraudulent breach of trust by a trustee eventhough
the accessory had no dishonest or fraudulent intent. It is submitted that constructive
trusteeship should only be confined to cases of breach of trust and not to be extended to
banking law cases as it creates more uncertainty. Futhermore, the BAFIA should
encapsulate specific provisions regarding a bank’s liability in cases of wrongful of
payment and the standard o care which is required from the banks in such cases.
The common law principle of duty of secrecy which was imposed on bankers
when dealing with customers’ account is