The UK’s Financial Conduct Authority has announced measures to require banks to give longer notice and explain reasons for closing accounts. Our Commercial Disputes team share their thoughts on the proposed legislative changes.

It is no secret that, as the digital economy continues to boom and currency is sent flying around the world with unprecedented ease, banks have struggled to balance their compliance responsibilities with their customer care obligations.

However, the recent bank account closure of Nigel Farage, broadcaster and former politician, has drawn attention to debanking and has highlighted its upward trajectory as a growing trend. The U.K. Financial Conduct Authority’s announcement in July on what it described as a new clampdown on unfair bank account closures will require banks to give longer notice of an account closure and explain their reasons for doing so.

The reasons a bank might discontinue its relationship with a customer and decide to close an account can be many, but generally relate to a perceived risk for the institution. This can be fraud risk, credit risk, reputational risk, or some other apparent risk — for instance stemming from the bank’s concerns about a lack of expertise in relation to a particular industry, business or country.

There have also been cases where banks close accounts simply for commercial reasons. For example, the perceived troublesome nature of a business customer’s account that involves frequent payments abroad, including to so-called risky countries, can mean that it ceases to be a worthwhile account to a bank if the customer decides to no longer deal with the bank for its foreign exchange requirements

Certain jurisdictions will attract greater scrutiny if banks deem them to be high risk, for example because they experience high levels of corruption, are subject to international sanctions, or have poor tax governance.

Transparency International eV, a nongovernment body founded by former employees of the World Bank, publishes a corruption perceptions index, which is a helpful guide to the various jurisdictions that might be deemed high risk.[1]

Given how severely banks can be prosecuted for falling foul of their anti-money laundering obligations, it is unsurprising that institutions prioritize compliance.

Banks have become hypersensitive as a result of the regulatory system in which they operate. This incentivizes over reporting, rather than an emphasis on undertaking more detailed and balanced assessments and evaluating all relevant factors in a particular case where an account is flagged as suspicious.

Unfortunately, customers get caught in the crossfire and can be left without access to their funds for some considerable time. A hasty and unjustified termination of a bank account can have significant consequences for businesses and individuals. It can disrupt their financial activities, lead to missed payments, affect credit ratings, and hinder business operations.

Further, when a bank closes an account, customers may face difficulty finding alternative banking options, especially if the closure is due to the bank’s risk assessment procedures. This can disproportionately affect businesses and individuals who may be considered higher risk, as discussed.

Provided that adequate notice has been given, there is little that customers can do when a bank decides to close their account. The banks’ terms and conditions usually give them powers to terminate customer relationships in a wide array of circumstances that rarely, if ever, require any wrongdoing on the customer’s part.

However, the U.K. Financial Ombudsman Service has made it clear that it requires banks to give reasonable notice of at least 30 days of an intention to close a personal bank account. This is intended to allow the customer sufficient time to make alternative banking arrangements, but it is recognized that a longer notice period may be appropriate for business customers.

The reasonableness of a bank’s conduct can be measured against its customer care obligations in FCA’s Banking Conduct of Businesses sourcebook. Under the sourcebook, a banking institution must in all circumstances pay due regard to the interests of its customers, treat them fairly and communicate information to them in a clear manner.

The FCA’s newly imposed consumer duty within the sourcebook also requires that banks “must act to deliver good outcomes for retail customers.”[2] This is intended to be a higher bar.

Particular care is required when dealing with a customer who might be in financial difficulty and the closure of a bank account at short notice could, for example, have a severe impact on an organisation’s ability to continue trading.

Customers who consider a bank to have acted unreasonably can ask the ombudsman to review the bank’s decision. In response to a complaint, the ombudsman can order the bank to pay financial compensation up to £415,000 ($526,000) or take other steps. It is within the ombudsman’s powers to order that an account remain open or be reinstated.

However, the ombudsman can take anywhere between 12-18 months to investigate and resolve a complaint, so the reality is that, while potentially helpful in the long run for customers who have suffered financial losses because of a bank’s actions, the ombudsman provides no urgent relief for anyone facing imminent closure of their account.

In July, the FCA announced what it described as a new clampdown on unfair bank account closures. Under the proposed legislative changes, which have not yet been explained in any detail, banks will be required to give at least 90-days’ notice of an account closure and explain their reasons for doing so.

These measures will apply across the board to all bank account closures. However, according to the FCA, they are primarily focused on protecting freedom of expression and seem to be in direct response to growing concern that banks are terminating accounts because they disagree with peoples’ political beliefs.

This is certainly a positive step, but the vast majority of bank account closures are unrelated to individual political preference and these changes do not tackle that wider issue.

Greater transparency will allow customers to make a fuller assessment about whether the bank’s decision to terminate their account is permitted under its terms and conditions in any particular circumstances. However, since those terms are usually skewed in the bank’s favor, information about why an account has been closed is unlikely to be of any great assistance.

It is worth noting that individuals can always employ their rights under the Data Protection Act 2018 to try to discover the reason for closure of the account. An individual is at liberty to submit a data subject access request, which would require their bank to divulge, within one month, all personal information that it holds on them.

This could include, for example, emails and internal reports regarding the individual, which might assist them in uncovering the reason the bank has closed their account.

Conclusion

We are unlikely to ever see the law fetter a bank’s power to close accounts at will, so perhaps it is the anti-money laundering machine that requires reform.

The FCA is apparently undertaking further work in consultation with banks to better understand the scale of account closures and the reasons behind them.

Ultimately, it is a policy matter for the government to enact further protections for the businesses and consumers that are suffering as a result of the system in which banks are obliged to operate.

This article was firstly published on September 4 2023 by Law360.