Causes of De-Banking in the UK

The de-banking debate is still ongoing after several prominent cases in 2023 and intense media attention, placing the issue high up on the FCAs political agenda. In the latest development, the Treasure Committee has published data revealing that major banks in the UK closed 142,000 small business accounts over the year. Several key factors led to these account closures, according to the Treasury Committee:

  • Risk appetite: Some businesses presented an unacceptable level of business risk to banks to three of the UK’s major banks.
  • Financial crime prevention: Some accounts were closed due to financial crime concerns. Indeed, banks have a legal and regulatory obligation to stop/prevent money laundering and other financial crime.
  • Information sharing: Banks closed accounts due to being unable to complete their customer due diligence because of a lack of information sharing from customers. 

The Treasury Committee is worried that this is part of a bigger pattern where UK banks are closing accounts quickly and without much notice. Consequently, the Treasury Committee is closely scrutinising banks de-banking practices.

It is understandable that the Treasury Committee wants to make sure customers are treated fairly, and checks and balances are certainly necessary. However, the situation is more complex and nuanced.

Firms’ Duties and Public Misconceptions

The scope of de-banking has been exaggerated by sensational headlines, focusing on exceptional cases that do not reflect a wider de-banking issue. Firms close accounts for various reasons. Firms must conduct customer due diligence at the start and during the relationship, to understand the customers, their activities, and their risks. If customers do not cooperate or give the needed information, or where money laundering or other financial crime concerns arise, the decision to de-bank a customer is not a choice, but a legal duty that the Financial Conduct Authority enforces strictly to help detect and deter criminal activities.

Additionally, firms need to protect their reputation and brand from customers involved in illegal activities. They also have a duty to their shareholders, which may necessitate the closure of risky and unprofitable accounts.

Further, firms use different sources to assess customers’ risk. They close accounts based on risk assessment, not on impulse. A spokesperson for UK Finance has commented:

“If an account is closed or an application declined, the main reason is dealing with financial crime concerns and the financial sector is at the forefront of efforts to tackle this crime.”

What is often overlooked is that de-banking also protects legitimate customers’ funds from fraud and customers’ data from cyberattacks. De-banking therefore helps the banking system’s overall integrity and is a primary reason for the UKs robust banking system.

Practices and Communication

The notion that banks are closing accounts suddenly and with insufficient notice is also oversimplified, as illustrated by a spokesperson for UK Finance who commented as follows:

“Customers should receive good communication about their accounts and a notice period should be served before an account is closed. However, there may be exceptions to this if, for example, money-laundering is suspected. We look forward to reviewing the full HM Treasury response to consultation when it is published.”

In our experience, most firms are giving careful thought to how to deal with freezing/terminations, borne out in data that we collated in October 2023 from some of the UK’s leading regulated firms:

  • Of those firms that we surveyed, 81% had a clear policy in place as to how de-banking decisions are taken. This is important, as a clear policy ensures transparency and consistency in decision-making processes.
  • 100% of firms surveyed confirmed that their relevant personnel receive training on de-banking, proving that they are keen on ensuring that staff members are well-informed about the procedures and considerations involved in de-banking decisions.
  • With regard to contacting customers before terminating their accounts: 35% of firms said they make four or more attempts to reach out to the customer; 47% make three attempts; and 18% make two attempts. None terminate accounts after just one attempt. This commitment to communication and providing customers with opportunities to address any issues provides a different lens through which to view the de-banking issue.
  • In terms of freezing customer accounts for non-responders: 19% of firms said that they wait 91 days or more; 31% wait 61-90 days; 38% wait 31-60 days; and 13% wait 30 days, indicating that most firms are allowing a reasonable period for customers to respond before acting.
  • For the average time from suspension to account termination: 21% of firms said they take 90+ days; 21% take 61-90 days; 29% take 31-60 days; and 29% take 1-30 days.

Steps for Firms

Firms take their de-banking obligations seriously and de-bank customers when required by the relevant laws and regulations. We consider that firms should continue to:

  • Have clear and documented policies and procedures for de-banking, communicate properly, and explain decisions and reasons.
  • Continue to provide de-banking training to relevant personnel.
  • Communicate and be transparent with customers. There will be instances where banks are not able to provide customers with reasons for their account closure, where doing so would amount to tipping off.
  • Follow all relevant regulatory guidance, such as the Banking Conduct of Business Sourcebook.
  • Regularly review and update their risk appetite and de-banking criteria, and make them clear, objective and evidence based.
  • Record and justify decisions and processes.
  • Assess customers’ risk on an individual basis.
  • Engage with the FCA and other stakeholders and collaborate with other firms and industry bodies to share best practices and solutions.
  • Make decisions in line with the Consumer Duty. 

When there are no financial crime or customer due diligence issues, firms should give customers full information on why they are de-banked.

Ruth Paley, Partner, Corporate Crime & Investigations; and Dominic Simon, Associate, Financial Services Disputes and Investigations at Eversheds Sutherland

The Institute of Money Laundering Prevention Officers trading as The Institute. © Copyright Institute of Money Laundering Prevention Officers. All rights reserved.
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