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Cases of de-banking are on the rise

Several recent highly publicised cases have drawn attention to ‘de-banking’ and highlighted its expanding upward trajectory.

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Published 21 May 2024

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As the digital economy continues to boom, banks have been struggling to balance their compliance obligations with their customer care duties.

Several recent highly publicised cases have drawn attention to ‘de-banking’ – where banks close customer accounts due to perceived risks like fraud, credit issues, or reputational damage – and highlighted its expanding upward trajectory.

This has resulted in a notable rise in complaints to the Financial Ombudsman Service (FOS), from 367 in 2022-23 to 666 in 2023-24. Banks’ strict adherence to anti-money laundering laws and other regulatory requirements has made them excessively cautious, leading to frequent account closures without thorough, case-specific evaluations.

These account closures can severely disrupt business operations, affecting their financial stability, credit ratings, and reputations. Customers typically have limited options to contest these closures due to the extensive termination powers in banks’ terms and conditions. While complaints to FOS can lead to financial compensation, the resolution process is slow and does not provide immediate relief. In rare cases, customers might seek a court injunction to prevent closure, but this requires proving a breach of contract and demonstrating that financial compensation is insufficient, which is difficult.

The government plans to introduce new legislation requiring banks to give at least 90 days’ notice and explain their reasons for account closures to improve transparency. However, this might not significantly help customers due to the banks’ favorable terms. We argue for further legislative measures to ensure fairness, accountability, and quicker resolution of disputes as well as the need to balance banks’ autonomy with customers’ access to financial services while complying with anti-money laundering regulations.

This is an article summary. Click here to read the full article that was first published by FT Adviser on 20 May 2024.

For more information, please listen to our podcast on De-banking or visit our Banking & Finance disputes page.

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Shorter Reads

Cases of de-banking are on the rise

Several recent highly publicised cases have drawn attention to ‘de-banking’ and highlighted its expanding upward trajectory.

Published 21 May 2024

Associated sectors / services

Authors

As the digital economy continues to boom, banks have been struggling to balance their compliance obligations with their customer care duties.

Several recent highly publicised cases have drawn attention to ‘de-banking’ – where banks close customer accounts due to perceived risks like fraud, credit issues, or reputational damage – and highlighted its expanding upward trajectory.

This has resulted in a notable rise in complaints to the Financial Ombudsman Service (FOS), from 367 in 2022-23 to 666 in 2023-24. Banks’ strict adherence to anti-money laundering laws and other regulatory requirements has made them excessively cautious, leading to frequent account closures without thorough, case-specific evaluations.

These account closures can severely disrupt business operations, affecting their financial stability, credit ratings, and reputations. Customers typically have limited options to contest these closures due to the extensive termination powers in banks’ terms and conditions. While complaints to FOS can lead to financial compensation, the resolution process is slow and does not provide immediate relief. In rare cases, customers might seek a court injunction to prevent closure, but this requires proving a breach of contract and demonstrating that financial compensation is insufficient, which is difficult.

The government plans to introduce new legislation requiring banks to give at least 90 days’ notice and explain their reasons for account closures to improve transparency. However, this might not significantly help customers due to the banks’ favorable terms. We argue for further legislative measures to ensure fairness, accountability, and quicker resolution of disputes as well as the need to balance banks’ autonomy with customers’ access to financial services while complying with anti-money laundering regulations.

This is an article summary. Click here to read the full article that was first published by FT Adviser on 20 May 2024.

For more information, please listen to our podcast on De-banking or visit our Banking & Finance disputes page.

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