Bankers aim to plug a breach of confidence: Derek Wheatley on calls for change to the status inquiry system

WHEN MR A wants to do business with Bloggs & Co for the first time, he can ask his bank to inquire of the bank of Bloggs & Co whether the company is 'good for a transaction of pounds 100,000'.

That bank will then give A's bank its opinion.

This is the status inquiry system. Little known to personal customers, it is well established. In a 1910 case, the Master of the Rolls said the system was '. . . 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'.

However, concern that the system may breach banking confidentiality has led to calls for change.

The British Bankers Association, in a document that must be commented on by the end of this week, has proposed that the questions should only be asked where the customer consents and agrees to pay the costs involved.

This is an attempt to deal with a situation that was made clear as far back as 1924, when a judge said that inquiries could only be justified on the basis of 'the implied consent of the party being inquired about'. In other words, it was recognised that actual consent would not have to be given.

This meant that nothing need actually be said and the unknowledgeable customer might never know what had happened or why some promising deal never materialised.

In 1972, the clearing bankers told the Younger Committee on Privacy that to notify a customer when an inquiry was being made about his financial standing might damage the relationship between the customer and the inquirer.

The 'sole justification' of implicit consent under which the system operates is dubious. It is probably understood by the majority of businessmen that just as they are able to inquire about others, so others will be able to inquire about them. But personal customers and some small business owners will be shocked to hear that the confidentiality owed to them by their banker is subject to the ability of a total stranger to obtain the opinion of their bank manager about their financial status.

The banking code of practice says only that banks and building societies will on request advise customers whether they provide bankers' references in reply to status inquiries made about their customers, and explain how the system of bankers' references works.

Tired of public criticism, the banks have become wary of continuing to provide the service.

The BBA's proposals will at least answer the complaint that the customer has never really agreed that his bank can report on him.

The proposal that the bank whose opinion is sought should go direct to the inquirer will cut down on time and expense, but the answers given may need to be interpreted to be of any value.

If - as seems likely - the proposed changes come about, the system will be much more open. But this may destroy some of its usefulness for the inquirer.

The author, a QC, is former chief legal adviser at Lloyds Bank and is currently banking consultant at City solicitors Watson, Farley & Williams.