De-banking – the potential pitfalls

Public awareness was heightened recently following the “de-banking” of Nigel Farage by Coutts as a result of his personal and political views.  The furore has resulted in a light being shone on the practice adopted by banks to close customer accounts to manage their regulatory burden and to mitigate risk.  As a result, both HM Treasury and the FCA are considering taking action to address concerns that banks are failing to be open with their customers when closing accounts about their reasons for doing so.

The problem

Banks face ever increasing obligations and risks from a variety of sources including:-

Reputational risk – the possibility of the reputational damage which might be  caused by banking a customer may tempt banks to close accounts, although, conversely, as in the case of Nigel Farage, the reputational damage of doing so can be just as severe.    

Anti Money Laundering – according to the FCA, concerns about financial crime is one of the most common reasons banks give for closing accounts.  Given the extensive requirements on banks to detect and prevent money laundering, identify politically exposed persons (and apply enhanced due diligence) and prevent and deter other forms of financial crime, it is understandable why banks seek to avoid that burden by closing accounts seen to present a risk.

Sanctions – it is, for example, a criminal offence to deal with funds belonging to a sanctioned person or to make funds available to them without a licence and breach of the extensive regulations will often lead to regulators making an example of the bank involved leading to yet more reputational risk.  Little surprise that banks seek to avoid opening or continuing accounts in such circumstances.

But when can a bank close an account?

Whilst individuals over 16 have a right to a basic bank account under the Payment Account Regulations 2015 (“PARs”) (unless it is suspected that such account is, or will be, used for criminal activity) most current accounts have the benefit of additional features, such as an overdraft facility, and are, therefore, vulnerable to de-banking. 

In general, a bank may terminate a contract to provide banking services to a customer on reasonable notice, subject to any express contrary agreement or statutory impediment.  As for what constitutes “reasonable notice”, the Financial Ombudsman Service (FOS) suggests that, in the case of a personal current account, a bank should usually give the customer sufficient notice to allow them to make alternative arrangements, typically at least two months, although shorter notice may be permissible in exceptional circumstances (such as where the bank suspects the customer of fraud or where the customer has threatened the bank's staff). Banks should, however, also have regard to their non-discrimination obligations in respect of customers' access to a bank account.

The FCA expects banks to give reasons for the closure of an account where this does not go against their financial crime obligations. Banks should also keep in mind that the closure of an account can have severe consequences for a customer (especially in an increasingly cashless society) and take steps to mitigate such foreseeable harm. 

Greater protection for customers is on the way

To provide greater protection to customers HM Treasury intends to amend regulations (regulation 51 of the PSRs 2017) as soon as possible to require banks to:

• Provide a clear and tailored explanation to a customer where their account has been terminated, except when doing so would be unlawful.
• Provide at least 90 days' notice when closing an account, unless for a serious and uncorrected breach, such as non-payment, or other serious occurrence. Shorter termination periods will be allowed in certain circumstances, such as where a provider is required to terminate the contract to comply with financial crime obligations.

In addition, in September 2023, the FCA began a review of how banks reach decisions with regards to the opening, or closing, of accounts held for PEP’s.  However, in circumstances where the risk to banks of operating accounts (particularly given the rise in sanctioned individuals) remains severe, it seems inevitable that “de-banking” will continue to be used as a tool to manage that risk.

But what of the risk to the Bank of closing accounts?

In addition to the increased regulatory scrutiny which will inevitably be focussed on banks’ “de-banking” practices going forwards, banks may also find that, in light of that focus and the greater awareness within the customer base of such practices, their decisions to de-bank customers are increasingly challenged.

Banks will need to take great care that they comply with the rules when closing an account to avoid facing claims of unwarranted de-banking and, more specifically, that:-

• the bank has breached its contract with the customer by closing the account;
• they have acted in breach of mandate by failing to pay money from the account in accordance with their customers legitimate instructions;
• their customer has suffered additional consequential losses as a result of that non-payment;
• that customers have been discriminated against as a result of the bank failing to give due consideration to their individual risk profile prior to making its decision;
• or discriminated against under Regulation 18 of PARs or Part 3 of the Equality Act 2010;
• or even, potentially, according to a Treasury spokesman, if an account has been closed as a result of the opinions and/or lifestyle of a customer; and
• if the bank has disclosed the reason for the de-banking to a third party, that the customer has been defamed.

The future

Clearly concerns around unwarranted de-banking are here to stay with The Times, on 22 February 2024, reporting on the Report delivered by the All Party Parliamentary Group on Fair Business Banking which concluded that banks had often closed business accounts mainly due to cost and reputation, rather than in an effort to clamp down on financial crime.

That Report was supported by City law firm Humphries Kerstetter (a firm well known for group litigation) who are questioning whether it is “time to regulate the provision of basic banking services as if they were a utility”. 

In the meantime, they have raised concerns that “Decisions to date appear to have missed the fundamental point that the termination of one banking arrangement, for whatever reason, has a seriously detrimental – if not fatal – effect on an individual or businesses’ prospect of securing replacement arrangements. This in turn suggests that the damages in a wrongful de-banking case, where established, could be very significant indeed.”