Responsibility of Financial Institutions as Potential Intermediaries of Fraud and the Cheapest Cost Avoider Principle

Abstract

Generally, a bank may owe a duty of care towards its customers in a negligence claim. In a recent case of Koperasi Sahabat Amanah Ikhtiar Bhd v RHB Investment Bank Bhd, the Court of Appeal extended the duty of care of banks to non-customers. This new ruling has a significant impact on the bank to ensure that the bank will exercise reasonable skill and care in performing its duties to both customers and non-customers. The fact that a contractual relationship does not exist is not a bar to establish a duty of care in negligence claims. The principle of cheapest cost avoider is consistent with the doctrinal approach taken by the Court of Appeal in affirming the duty of care of financial institutions since financial institutions are most likely in the best position to deter fraud and minimise losses due to such over-sight. It is also suggested that such duty should also be applied to other deposit-taking financial institutions such as electronic wallet providers against unauthorised transfer for funds from account holders.