Features of a Current Account - Essay Example

Current Account Your name: Institution name: Introduction A current account is a deposit account that is being held at a financial institutions or other bank, for the purpose of securely and quickly providing frequent access to money on demand, through a variety of different channels.1 Current accounts are neither for the purpose of earning interest nor for the purpose of savings, but for convenience of personal clients or business; hence do these types of accounts not earn any interest.2 Instead, a customer operating a current account can withdraw or deposit any amount of money many times, subject to availability of money. The current account is an important part of the Australia banking sector. As at 2007, the personal current account was reported to have returned eight billion dollars per annum in revenue, and is judged as an indispensable financial services tool as it was employed by more than 90 per cent of all adults who use banking services thus underscoring its reputation as the centerpiece of the financial system in the Australia. Understandably, the primary gainers of current accounts are the financial institutions that provide this service i.e. building societies and banks. However, the benefits of current accounts are not restricted to their returns to service providers; they are benefits to the economy and indeed the consumers as a whole.3 Personal current accounts allow the customers to access financial solutions ranging from ordering direct third party payments to loan facilities. Features of a Current Account The main features of the current accounts include the ‘free if in credit’ system where no banking charges are paid for the banking services that have been rendered as the current account had a credit balance; access to credit or debit card facilities which an account holder can use to withdraw money from ATM machines or make payments at the point-of-sale (POS) that are locate all over Australia and even they can be accessed overseas; current account enable customers to make instant payments to third party creditors via bank instruction; access to overdraft facilities; access to internet banking facilities in some situations; setting up of standing payments orders; 4 applying for mortgages and other loan facilities; secure and fast money transfer facilities to any part of the universe; current account It does not promote saving habits with its account holders; there is no restriction on the number and amount of deposits;5 current bank accounts are operated to run a business; It is a non-interest bearing bank account; penalty is charged if minimum balance is not maintained in the current account; and it charges interest on the short-term funds borrowed from the bank. The personal current accounts have been found to promote economic growth by providing financial solutions on different levels. For instance, the direct debit facility ensures consistent and prompt bill payments which are of benefits to a lot of companies or businesses. The personal current account is also a veritable tool that can be utilized by the federal government in its efforts at sustaining and promoting financial inclusion. Overdraft Facility The legal relationship that has been created between banks and consumers upon the opening of a personal current account is that places an obligation on the financial institution or bank to make payment upon being instructed by the customer or a demand of payment made by the customer. In fact, the banking laws recognize the financial institutions as an agent of the customer in relation to collecting of cheques and payment of money. However, this duty only exist as long as the current account holder maintains an adequate credit balance in their accounts or overdraft facility that enable the account holder to cover any demand otherwise the financial institution will not be obliged to make payment of money requested, and the financial institution may be forced to reject such a demand where the account does not have enough money or the money is insufficient in the current account.6 An overdraft is peculiar to the personal current account and has been defined as “funds or money that is being lent by the financial institution or bank representing a form of soft loan facility, on a current account used by the customer upon demand either through instructing the financial institution to make payment to a third party, in order to clear a debit, or the current account holder withdrawing cash himself. Overdraft facilities are usually granted as a matter of agreement between the bank and the account holder. In practice, personal account holder may be given advanced money on their current account through an overdraft payment that has not been arranged. This was observed in Cuthbert v Robarts, Lubbock & Co [1909] 2 Ch 226, where it was held that there was insufficient funds in the account, but the current account holder issued a payment mandate.7 It was argued that the request amount above what existed in the customer current account was treated as an overdraft facility and the customer had agree to the payment of any financial institution financial charges in respect to the overdraft facility. Therefore, current account holder will not have breach his contract with his financial institution where he gives instructions to make payment even without having enough money to his/her account or with having a pre-arranged overdraft facility.8 And, in event that the financial institution makes payment in accordance with the customer request, it will then be said as having extended overdraft facilities by honoring the payment with the transaction having the same effect in law as a pre-arranged overdraft facility. Thus, the customer will deemed to accepted the condition of the loan being granted to him or her., and the customer is also deemed to have accepted the terms and conditions of the loan in line with the financial institution standard terms. Appropriation Most financial institutions have the right to transfer money from one bank account to pay off other debts held with them, such as loans or credit cards. It’s known as to combine accounts or right to “set-off”. Right to “set-off” won’t happen to most people, but only those people who are struggling financially.9 An example, a financial institution may, without notice, set off a debit interest, or debit balance, on an account against any account with a credit interest or credit balance held by the same customer or account holder. Technically, the rule of “set-off” give powers to banks, way beyond just sorting out un-paid accounts.10 This means if a customer had a credit card with a financial institution, owed 2,000 dollars, and the financial institution decides it wanted to reduce the customer’s credit limit to 500 dollars; it could take the money from the customer savings account; though such cases have not been heard before. In Deeley vs. Lloyds Bank Limited and Cory Brothers & Company vs. Owners of Turkish Steamship ‘Mecca’, the court stated that the majority rule is that financial institution such as banks may ‘set off’ obligations to the financial institution against a financial institution account,11 where the financial institution “has no knowledge of the interest of a third party in an account.” But where neither debtor nor creditor makes any appropriation, the default position is that payment will be made first to the oldest debts as is the case in Devaynes vs Noble. In W P Greenhalgh & Sons v Union Bank of Manchester [1924] 2 KB 153, it was held that a bank which has agreed with it client to open two bank accounts in the customer name, and who hold bills which the client has specifically appropriated to one account is not entitled, without the client’s consent, to transfer the proceeds of such bills to the other bank account.12 Similarly this rule was stated in Warwick v. Rogers [1843] 134 ER 595. The rule in Clayton’s Case holds that where a person mixes fund from many trusts in one account and then remove money from the current account, the person is deemed to have taken out the money that was first deposited in the current account.13 The reason for creation of the rule in Clayton’s Case appears to be to facilitate the tracing of funds in situations where the equities were equal and there may be difficulty in ascertaining the proportionate share to be awarded to each of the trusts in question. The rule in Clayton’s case was applied in Equity Trustees Executors and Agency Co Ltd [1940] VLR 201 and approved by the HC in Australia and New Zealand Banking Group Ltd v Westpac Banking Corp (1988) 164 CLR 662. Combining Accounts A financial institution is only obliged to make payment only if the overdraft or balance is sufficient to cover the amount being paid. If the overdraft or balance in the account falls short of doing so, even by a dollar, the financial institution is entitled to ignore the request completely.14 At a common law, a financial institution will not have any obligation to combine a customer’s accounts held at different branches if there are not enough money in the account to which the payment request is directed. It is unclear whether in these circumstances the bank must combine accounts at the same branch, although for reasons of consistency this would seem to be the sensible rule. This rule was applied in Arab Bank v Barclays Bank (DCO) [1954] AC 495, where the bank dishonor a cheque drawn by the customer on one account, although there are funds in another account.15 In the case that the financial institution does make payment where there is no enough money in the account, it will be construed as the bank having extended an overdraft facility to the customer through honouring the payment with transaction having the same effect in banking laws as a pre-arranged overdraft facility. As in Cuthbert v Robarts, Lubbock & Co [1909] 2 Ch 226 where payment was treated as an overdraft. 16 Reference List Books Horrigan, B 1991, 'Combining Bank Accounts in Different Currencies'. 65 ALJ14. Malan, F, Pretorius, J., and de Beer, C 1994, Malan on Bills of Exchange,Cheques and Promissory Notes in South African Law 2nd edn., Butterworths, Durban. McCracken, S 1996, The Banker's Remedy of Set-Off 2nd edn., Butterworths, London Sandrock, O and Klausing, E 1999, 'Germany', in R. Cranston (ed.), European Banking Law, LLP, London. The Banking Ombudsman Scheme, Annual Report 1994-95 (London, Office of the BankingOmbudsman,1995), 28. Cases & Laws Arab Bank v Barclays Bank (DCO) [1954] AC 495 Cuthbert v Robarts, Lubbock & Co [1909] 2 Ch 226 Devaynes vs Noble. In W P Greenhalgh & Sons v Union Bank of Manchester [1924] 2 KB 153 Devaynesv. Noble; Clayton's Case (1816) I Mer. 572,35 ER 767. Deeley vs. Lloyds Bank Limited and Cory Brothers & Company vs. Owners of Turkish Steamship ‘Mecca’ Read More