De-banking headache just beginning for banks

With Parliament in recess, Paul Montague-Smith, lead counsel – public affairs at MRM looks at the recent Nigel Farage de-banking scandal and what it means for financial institutions.

One thing you learn early on when you’re involved in public policy and regulation is that new rules – even if they’re designed with the best of intentions – can bring with them some serious unintended consequences. So it has been with the rules around Politically Exposed Persons (PEPs) and the financial system.

They stem from the Financial Action Task Force, which sets and monitors international anti-money laundering and counter-terrorist financing standards. PEPs are defined as people with “prominent public functions”. There’s no exhaustive list, but examples include ministers, MPs, ambassadors, the judiciary, directors of public bodies and those running political parties.

The rules are designed to reduce the risk of such people abusing their positions for private gain and using the financial system to launder illicit money. PEPs, as well as their families and close associates, are therefore required to go through enhanced checks when using the services of firms considered ‘gatekeepers’ to the financial system.

The objective is laudable and important – everyone would support limiting the scope for corruption in public life as much as possible. But their implementation has led to a furore and a renewed debate about the role of business in society.

For years banks – many of which have suffered multi-million-pound fines for anti-money laundering (AML) failures, and whose staff face the risk of prison for failing to implement AML rules – have been de-risking their businesses, closing the accounts of individuals and organisations that might pose an AML risk.

The issue has been bubbling along in Westminster for a while and reached simmering point during the recent parliamentary debates on the Financial Services and Markets Bill. MPs, Peers and members of their families have faced difficulty in getting bank accounts and regularly hear from constituents who have had services withdrawn.

The Bill was amended in the House of Lords to require the Treasury to change the AML regime so that domestic PEPs are viewed as lower-level risk than others and to require the FCA to review how the regime was working and whether it was proportionate.

It was on the same day that the Bill received Royal Assent that Nigel Farage revealed his bank accounts had been closed without explanation and that all the other banks he had approached had refused to provide him with an account. We all know what happened next – mishandled communications and briefings led to a reputational crisis for Coutts and NatWest ending with the resignations of their CEOs, not least because of pressure from the Government.

What’s interesting though is that Coutts’s decision on Farage was not confined to AML risk or even the commercial viability of his accounts, but included an assessment of his character, his politics, his views on social issues and the distance of those from the bank’s own values. The Coutts’s ‘dossier’ raised the question of whether financial firms are ‘de-banking’ people not just because of regulatory risk to themselves, but because of perceived reputational risk.

The political response to the Farage fiasco has been a strong affirmation that no one should be denied banking because of their personal or political views. But it has opened up a debate on the extent to which businesses – especially those so important to everyday life like a bank – should themselves have views or values on social and political issues and has highlighted the challenges that firms can face when dealing with individuals and organisations with opposing positions or values.

In response to the recent revelations, the Treasury and FCA have extended the notification period for account closure, so that people have more time to challenge a decision through the Financial Ombudsman Service or find another bank. They’ve also introduced a requirement for firms to provide an explanation for a closure to the customer.

The effect of the latter will likely be to ensure that decisions are made solely on the commercial viability and AML risks of accounts, excluding any assessment or judgment on the values or views of customers. It will, though, pose challenges for banks who have so far been able to close accounts without explanation. It will be tricky to explain and justify why they think someone poses an unacceptable AML risk.

I expect the vast majority of the ‘de-banking’ that we’ve seen will almost certainly be because of the impact of the AML rules on perceived regulatory risk and not because of judgments around values and reputational risk. Most people aren’t as high profile or influential as Nigel Farage.

But with him now spearheading a campaign to unearth the reasons behind the rise in de-banking in recent years, we’ll no doubt find out more in the months ahead. Meanwhile banks will need to gear up to manage the requests that will be heading their way from former customers to access their personal data.