When are banks fiduciaries of their customers and clients? This question is of more than theoretical interest given the organizational structure of modern financial institutions and the broad-ranging functions they perform. In ‘Fiduciary Principles in Banking Law’, a chapter of the forthcoming Oxford Handbook of Fiduciary Law, I canvass fiduciary principles in banking law. I consider when fiduciary duties exist and what they require, the range of remedies available for breach, and the various techniques banks use to exclude or modify fiduciary duties.

For non-American lawyers, a puzzling feature of US law is that breach of fiduciary duty is a tort. Courts often begin their fiduciary analysis with the Restatement (Second) of Torts, which provides that a fiduciary relationship ‘exists between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation’. This doctrinal feature expresses itself in the broad range of remedies available for breach, but otherwise the usual fiduciary analysis would be familiar to a common law–trained lawyer. Another puzzling feature of the US legal landscape is that clients bring actions less often than banks’ size and conduct might suggest and actions that are brought rarely proceed to trial. Legal uncertainty often results.

Fiduciary law nevertheless constrains banks’ activities: courts have cast banks as fiduciaries in all of the major commercial and investment banking functions, including making loans and accepting deposits, advising on merger and acquisition (M&A) transactions, and underwriting securities offerings, although banks face greater risks in some of these areas than others. When fiduciary duties exist, they arise on a fact-specific basis.

The risk of fiduciary characterization is greatest in investment banking. Perhaps uniquely among common law jurisdictions, US courts have regarded the securities underwriting function as giving rise to fiduciary duties. Courts have also imposed fiduciary duties on banks giving mergers and acquisitions (M&A) advice. In fact, in the M&A setting courts applying New York law have had little difficulty dismissing banks’ motions to dismiss actions alleging fiduciary breach, although the inquiry is necessarily fact dependent. Courts’ approach is often reminiscent of that of the Federal Court of Australia in Australian Securities & Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) [2007] FCA 963, (2007) 160 FCR 35 [326], in which an M&A advisor-client relationship was found to ‘contain all of the indicia of a fiduciary relationship of adviser and client’.

Banks may also owe fiduciary duties in making loans and accepting deposits. An overwhelming majority of US states have characterized banks as fiduciaries in these settings when so-called special circumstances exist. Such circumstances involve banks acting outside their usual role of lending money or accepting deposits on an arm’s-length basis. A common thread in these cases is banks encouraging customers to trust their advice, thereby inducing the customer’s reliance. It is probably the atypical commercial banking relationship that gives rise to fiduciary duties.

US law also differs from Anglo-Commonwealth law in its treatment of fiduciary disclaimers or waivers. Banks regularly use these provisions to attempt to avoid fiduciary liability. In investment banking in particular, bank engagement letters include boilerplate provisions disclaiming or waiving fiduciary duties. While Anglo-Commonwealth courts have given effect to clearly worded fiduciary disclaimers (the aforementioned ASIC v Citigroup is a prominent example), US courts have been more reluctant to do so. In recent decisions, courts have refused to accept these measures as automatically effective for avoiding fiduciary liability. Rather, courts insist that they, rather than the parties themselves, determine whether fiduciary duties exist and what they require. The law thus diverges from some theoretical accounts of fiduciary doctrine, posing challenges for banks and new questions for scholars.

Andrew F Tuch is a Professor of Law at Washington University in St Louis School of Law.