Treasury Today Country Profiles in association with Citi

Documentation – bank mandate

The basis of your entire regular banking transactions, from making and receiving payments to dealing fx or in the money markets, should be a mandate. A mandate is a legal document that gives authority to the bank to act on your behalf within certain pre-determined limits. Banks provide standard mandates that are easy to sign, however it is worth negotiating specific terms with your bank. This article shows what to look for from a mandate and how to use one once it is signed.

What is a bank mandate?

A bank mandate is a document that gives the bank the authority to conduct specified business on your behalf. Mandates cover the range of services that your bank offers and describe the methods of interaction between you and your bank. Specifically, mandates will describe:

  • How accounts or services will operate.

    All services that you require (or that you might require) from your bank should be clearly identified in the mandate. It may be appropriate for a bank to hold more than one mandate from you, depending on the range of business that you want them to perform for you. A mandate will be required from each legal entity.

  • Which means of communication are accepted.

    It is important that the mandate describes the exact nature of the accepted means of communication. This should also include acceptable alternatives to the main form(s) of communication, should your main form of communication be unavailable. For example, if you normally communicate electronically, indicate circumstances in which and in what form alternative instructions (such as by fax or telephone) would be acceptable – this will include what to do when your electronic communications network fails. As we have implied, electronic means of communication are increasingly being used to transmit instructions to banks. If such means are to be used, agreement needs to be reached on the level of security attached to each message – at the very least, electronic signatures should be used in such a way that the bank can verify the sender.

  • In what form instructions will be made, and by whom.

    Only those people authorised by your internal controls should be allowed to transmit instructions to your bank. This, along with their individual limits, should be listed in the mandate. You will need to consider whether those who are authorised are to be identified by name or by function/title within the company.

  • How the bank will confirm instructions.

    This is particularly important in the case of any dealing. Once instructions have been made both parties should confirm those instructions. Ideally this confirmation should be made electronically. It is important that the bank’s confirmation should be sent to, and reconciled by, the back office function within your treasury. This will provide a further check on your dealer(s).

  • How the company will confirm instructions.

    As well as receiving a confirmation from the bank, you also need to issue a confirmation for all deals. How you issue this confirmation will depend on your treasury management (or other) system. Increasingly dealing modules are being developed that can both trade and confirm the deal automatically. Whichever system you use, it is important that your bank mandate includes details on how you will confirm any deals with the bank.

  • How you will receive information from your bank.

    With the development and use of more electronic methods of transmitting information, some of which will be provided in ‘real-time’. To be able to take the best advantage of such an offer, you need to be sure that your treasury systems can access the detail in the manner offered. If your system does not integrate with the bank feed, you should still be able to take advantage of the ‘real-time’ nature of the information although this will involve some transfer of data from one system to another, which will be timeconsuming and may involve an increased risk of error.

Why do you need one?

A bank mandate is effectively a service contract between you and your bank. It should describe the arrangements above in significant detail. It provides both you and your bank with a written statement of the service that they have agreed to provide you and on what terms that service should be provided. It will also detail your responsibilities to the bank.

How to develop the mandate

It is important that the mandate is designed to be as appropriate to your needs as possible. Banks will have their own blank mandates that they will try to use as a template for an agreement with you. By their nature, the standard bank mandate will be non-specific. For the mandate to work for both you and the bank, it is important that you try to develop a mandate that is as closely linked to your actual banking requirements as possible. This may take time – at the very least the bank will have to spend some time checking all the clauses – but you will have a better document if you persevere.

  1. Identify what the mandate must cover

    As we have suggested, a standard bank mandate that your bank might propose that you sign will be non-specific. If you want to develop a bank mandate that will work for you, you need to identify your specific banking requirements.

    You need to identify both the regular and the occasional business that you will require from your bank. For all potential types of transaction, you need to work out the details of communication that you want and can give (according to the list above). Any individual dealing limits that you want to include in the mandate should correspond to those in all your internal control documents.

  2. Negotiate with bank

    Once you have established what services you want from the bank, you should enter into a negotiation process with them. In principle, the bank should be prepared to accept some or all of your proposals. This is because any refinement of their standard bank mandate will mean that their exposure to operational risk will be reduced as they will have a clearer understanding of what you require.

  3. Recognise bank requirements

    However, it is perfectly possible that the bank will not agree to a mandate prepared entirely to suit your requirements. At the very least, it may decide that your requirements represent too high a risk for the stated return and may not be prepared to offer such a service.

    In addition, it will want to ensure that it has sufficient documentation recognising the authority of officials in your company to act in the way you describe. This might include copies of the minutes of board meetings giving you the authority to determine your company’s policy in these areas.

    Try not to agree any ‘blanket’ indemnities. These have the effect of transferring any risk in the event of any unforeseen circumstances to you rather than the bank. If the bank is serious about building a relationship with you, it should be prepared to shoulder at least some of this risk.

  4. Take legal advice

    For anything more than a straightforward mandate, you should seek legal advice before agreeing to any terms that the bank might propose. You should be aware in particular of any indemnities that the bank requires from you (for example in relation to the bank acting on the basis of faxed or telephone instructions) and take advice on the possible consequences of these.

Ongoing use of mandate

Once you have agreed a mandate, it is important that you use it in the manner for which it was intended.

  1. Follow terms

    You should take care to follow the terms of the mandate and only allow actions within them. Whilst the mandate will act as a contract in the event of any problems, such as fraud, if your company has failed to act within those terms and any loss occurs, then the mandate will be useless. This is because the bank (and the courts) will be likely to consider the established course of conduct to be part of the accepted procedure, even if it is not physically documented.

  2. Keep mandate updated

    Bear in mind too that you should keep your mandate updated whenever changes occur. You should advise your bank of any changes in staffing, including any changes in responsibilities and in individual dealing limits (these are often changed on a regular basis to reflect, for example, inflation and changes in exchange rates).

Remember internal controls

It is also important to recognise that the mandate is not a substitute for your own internal controls. Whilst it will provide you with some protection against fraudulent activity, notably if an employee has dealt over their limit, your internal controls should be sufficient to prevent such breaches taking place.

"Top Tips" in considering mandates

  1. Be clear as to the scope of the mandate.

  2. Be clear as to who has authority to act.

  3. Take legal advice regarding your own responsibilities and potential liabilities under the mandate.

  4. Ensure that adequate internal controls (as well as training and education) exist.

  5. Keep the mandate up to date on a regular basis.

We acknowledge the help of Timothy Parsons, Partner in Banking & Finance at KLegal (the law firm associated with KPMG), in the preparation of this article.