Sizing up the de-banking clampdown

There has been a marked rise in de-banking over the last ten years, with recent data showing more than 140,000 businesses had their accounts closed by the UK’s largest banks last year. The de-banking row that broke out last summer between Nigel Farage and Coutts escalated public awareness of this trend, with the government, the Financial Conduct Authority (FCA) and other groups subsequently fast-tracking a review of the issue. This has recently culminated in proposed new legislation requiring banks to give customers 90 days’ notice and detailed explanations of the reasons for account closures.

Why did this become a significant issue?

At present, the law does not provide all individuals or businesses with a universal right to banking facilities. (However, the nine largest credit institutions must provide a basic bank account to eligible UK personal customers who would not otherwise be able to get an account. This comes without fees, charges or an overdraft. There is no equivalent requirement for businesses, including charities or campaign groups.) As long as banks comply with the applicable law and regulation, they can decide whether to provide an account based on commercial and risk factors.

It is well recognised that UK banks face challenges in relation to the increasingly expensive regulatory burden in preventing financial crime, and maintaining consumer/stakeholder trust. Against this background, where an individual or corporate is identified as posing reputational risk or excessive compliance burden to a bank, it may seem a straightforward solution for banks to offload these customers. However, account closures can effectively exclude persons from the financial system, with far reaching consequences (for example, it can lead to missed payments, affect credit ratings, and ultimately hinder and prevent business operations).

While de-banking is certainly not new (we note the FCA examined the issue in depth in 2016), the proportion of individuals and entities impacted has surged in recent years. The latest figures released by the Parliamentary Committee show that closures instigated by banks last year accounted for 2.7% of the 5.3 million business accounts provided by the relevant banks to SMEs.

The Farage–Coutts debacle was an extreme example of reputational concerns impacting decision-making. Farage obtained internal Coutts documents showing its reputational risk committee believed his views ‘were at odds’ with the bank’s position ‘as an inclusive organisation’. Nevertheless, this triggered the very public row over wider access to banking services. The government reacted by instructing the FCA to conduct a deep dive into this issue and it vowed to toughen up the rules on account closures.

The FCA’s report

The FCA sent an information request on account closures to several banks and building societies, reporting on the results in September 2023. The FCA considered that it was not provided with sufficient data to enable it to understand the principal reasons for account terminations, owing to the generic way in which banks collect data. Notwithstanding this, the FCA was able to report the following:

• Unsurprisingly, one of the most common reasons banks give for closing accounts is a concern about financial crime.
• The report suggested that no accounts were closed due to an individual’s political beliefs or views (hence, Farage appears to be an outlier).
• There was inconsistent information in respect of accounts closed because of general reputational risk.

The FCA’s report did contain some of its own proposals and alluded to undertaking further work in consultation with banks. In practice, however, any FCA ‘crackdown’ is unlikely and would be guided by governmental reforms, which as detailed below, are fairly limited.

Legislative reform

The draft legislation (which will amend regulation 51 of the Payment Services Regulations 2017) proposes that all payment service providers (including banks) are obliged to give 90 days’ notice of an account closure (increased from two months) and must provide a ‘sufficiently detailed and specific explanation to the customer’. Banks must also set out how a complaint can be made and that eligible customers (this covers individual consumers, small businesses and charities) have the right to refer a complaint to the Financial Ombudsman Service (FOS).

Whilst the requirements will not strictly apply to pre-existing contracts, the government has made clear that it expects all customers to be ‘treated fairly’ during contract termination (which accords with the FCA’s consumer duty, as it applies to the closure of customer accounts).

On its face, the proposed reforms are positive. First, additional time to find alternative banking provision is a help, if not a solution, to de-banking concerns. Second, banks are not currently obliged to give customers reasons for closing their accounts, so any increase in transparency is a good thing. The reality, however, is that it is unrealistic to expect banks to share detailed explanations that might open the door to customer complaints, or even litigation. Indeed, the government has confirmed that termination notice content need not be prescriptive, and reason codes alone may be adequate (provided the codes are sufficiently detailed and specific).

The government has also made clear that strengthening the termination requirements must be carefully balanced to account for banks’ other legal obligations. Notably, banks closing an account due to anti-money laundering (AML) or terrorist financing concerns would not have to give a notice period or an explanation (to avoid ‘tipping off’ offences).

Parliament is expected to approve the legislation before the summer.

The APPG report

The All-Party Parliamentary Group (APPG) on Fair Business Banking has also recently published a report exploring this topic.

Prohibitive compliance costs

The report acknowledges the financial pressure banks face from increased regulatory and legal obligations, with additional AML checks, ongoing monitoring, and due diligence at the point of onboarding all adding costs to the provision of banking facilities to particular categories of customer. Groups with certain common risk characteristics are finding themselves increasingly de-banked – the APPG cite crypto businesses, jewellers and yacht brokers as examples – where perceived risk profiles are higher, with typical risk issues including regular cash deposits or overseas remittance of funds. The additional compliance costs of servicing these groups mean that the commercial ‘solution’ for banks is often to simply close their accounts.

The remedies considered by the APPG include the introduction of a basic bank account for small businesses - which could limit compliance costs for banks, for example by setting limits on balances or turnover on accounts - and the introduction of protections to stop banks withdrawing facilities purely due to cost. This could be addressed by banks either increasing their charges, or restricting services to more basic facilities.

Reputational risk – should banks be permitted to take this into account?

Existing FCA guidance envisages firms assessing risk with respect to their own reputation, the reputation of their customers and the markets in which they operate. The APPG suggests that the FCA should issue guidance that requires banks to disregard reputation as a consideration (in all cases other than unlawful conduct) in this context. Proposed guidance would provide banks with protection from criticism, with the argument put by the APPG that, ‘in the same way that no-one would expect a water or electricity company to withdraw their services from any party due to their unpopular or unfashionable reputation, access to banking facilities should also be above such considerations’. This has some superficial attraction, but in circumstances where banks can legitimately find other reasons to terminate customer banking facilities, we suspect it is unlikely to gain traction.

Impact of financial crime risks on de-banking

Here, the APPG’s insights are particularly notable. They flag developing evidence that banks may (wrongly) be using a financial crime ‘label’ to close accounts which are commercially unviable. In particular:

• the FCA’s data shows that the volume of customers terminated due to financial crime reasons surged 370% between 2018 and 2022; while
• the number of suspicious activity reports (SARS) filed by banks rose just 77% over the same period.

The banking industry will say, with some validity, that the 370% increase is the result of banks becoming better at identifying potential AML offences, due to improved systems, including the introduction of automation and the use of artificial intelligence (AI). However, if the increase in de-banking was simply due to improved monitoring and detection of financial crime, the number of SARs filed with the National Crime Agency (NCA) ought to show a comparable rate of increase.

The pending new legislation does not grapple at all with these wider issues touched upon by the APPG.

What will the legislation mean for banks and their customers?

Given the government’s reforms are expected to be implemented swiftly, banks will already be reviewing their contractual terms and processes now. In addition to the 90-day notice requirement, banks will need to review and amend their operational processes to allow for providing ‘sufficiently detailed and specific’ reasons to customers.

As for customers, what will the impact be and are they in any better position to challenge account closures? To date, provided that adequate notice has been given, there has been very little that customers can do when a bank decides to close their account. Indeed, where a bank has not provided any reason for the closure (or has only provided generic, imprecise reasons, as is often the case), it is very difficult for customers to assess whether the bank’s actions accord with its terms and conditions – and the new law will not make it any easier for customers to successfully assert that banks are in breach of their own, conservatively drafted, standard terms of business.

Whilst the new law will now require banks to provide a reason for account closures, it is unrealistic to expect banks to share lucid explanations that might add fuel to the fire for customer complaints, or even litigation. Nor does the proposed law provide any new form of redress to customers - instead it merely highlights the options for raising a complaint.

So, what options will be open to de-banked customers? Some of the notable ones are as follows.

1. Data subject access requests (DSARs)

Individuals can ask organisations for copies of any personal information that it holds about them and, whilst this means companies cannot submit a DSAR, its directors can. The responses do sometimes produce material which is useful for developing a complaint (this is how Farage obtained the relevant Coutts report). However, customers should expect that banks will ensure their teams are well trained to comply with data protection law, while minimising any risk of unhelpful ‘over disclosure’ going forward (for example, by relying on a plausible exemption for certain documents).

2. Complaints to the FOS

FOS complaints can represent a low-cost option for eligible customers (after complaining to the bank first). The FOS has the power to make further document requests to a bank and has a dedicated team who can assess sensitive issues that often lie behind an account closure without risking making a disclosure that could prejudice a financial crime investigation. The FOS can direct that an account be maintained or re-opened and can also award compensation of up to £415,000 for an upheld complaint. But the FOS generally takes several months to consider complaints, so it is unlikely that initial account closure and the need to find alternative banking providers can be prevented, even with the new extended notice period. This is compounded by recent data from the Treasury Select Committee that confirms a spike in de-banking complaints to the FOS: overall there was a 44% increase between 2022/23 and 2023/24, which includes an 81% jump in the volume of de-banking complaints made by businesses.

3. Legal action

Can the courts assist victims of de-banking? In short, the answer is, in most cases, so far, no. The current direction of the courts is to uphold bank decisions to close accounts due to suspicions of fraud or criminal activity. In a recent decision, Uzbekov v Revolut [2024] EWHC 98 (KB), the High Court struck out Uzbekov’s claim on the basis that there was no real prospect the court would grant a declaration that the termination of the relevant banking facilities was in breach of the contract with the customer. The court considered that a declaration was not in the public interest and pointed to the FCA as better placed to consider systematic issues of de-banking.

Conclusion

Based on the parameters in the draft legislation, the ‘clampdown’ talked about by government will almost certainly prove to be limited, and despite increased media scrutiny and public awareness of de-banking, banks will be able to continue to deploy account closures as a means to manage the various risks they face. There is no doubt that de-banking can cause customers – particularly companies – significant financial losses where, for example, de-banking can impact business operations and result in losses. It is likely to take a brave decision by the ombudsman or the courts (Farage has intimated that he will litigate against NatWest) to provide momentum for these claims, in a way that the new laws will not themselves achieve.