Chat with us, powered by LiveChat

Derisking and compliance

Image related to Derisking and compliance

By Sharokh Koussari, 6 November 2023

The furore over Nigel Farage’s account closures has shed some light over the issue of ‘de-banking’, i.e. the process of closing personal and business bank accounts which at times appears to have been carried out for rather arbitrary reasons. 

Ongoing issue

For the past 10–15 years, many banks have implemented a process of derisking, whereby a number of bank accounts have been closed in order to reduce exposure to potential risk factors. 

However, there have been complaints about this from different quarters, leading to a House of Commons Committee hearing concerns regarding lack of access to banking, and the issues being raised to the Financial Conduct Authority (FCA). In response, the FCA commissioned consultants John Howell & Co to prepare a report on the impact of derisking. This report, entitled Drivers & Impacts of Derisking, was published in February 2016. 

The report’s findings were that the banks were rather sensitive with regard to the higher costs of compliance, including regulatory settlements for potential anti money laundering (AML) failings, and that they were trying to, ‘do what they believe is expected of them under the risk-based approach to AML and countering the financing of terrorism (CFT).[1]

The report also concluded that higher compliance costs, pressure from correspondent banks, and regulatory action had created a ‘perfect storm’ which led banks to strategically review their business. That sometimes meant, ‘slimming down of business or existing relationships that were considered non-cause’.

Impact on communities

The result was that several communities felt particularly targeted, and this was confirmed by a Citizens Advice (CA) report in 2016.[2] In fact, there have been a number of reports in the press and social media of various individuals belonging to the Iranian community whose accounts have been closed with no particular reason provided, one notable example being the case of Mr Iraj Hashi,[3] an economics professor and holder of an MBE. 

Whilst many of these account holders have brought proceedings against various UK banks for discrimination, these issues have not been decided in court. Interestingly, the Workplace Relations Commission (WRC) in Ireland dealt with a matter where a bank had requested its customers, a couple of Iranian heritage, to agree to a number of restrictions on their operation of the accounts.[4] The couple claimed they were discriminated against on the grounds of race/nationality, and the bank argued the imposition of restrictions was objectively justified (this is a defence to indirect discrimination claims) in that such restrictions were necessary as the bank had to comply with national and EU laws regarding money laundering and CFT, as well as the need to comply with sanctions against Iran.

However, the WRC adjudicator was not convinced, and said that the bank should have used other methods of complying with regulatory requirements, including, ‘implementation of robust IT systems and procedures, customer advice/guidance and information systems and/or a helpline as part of the process to monitor accounts activities.’

No reason for termination

Another issue which the Farage saga has brought to light is the fact that often the banks do not provide any reason for closure of accounts. If they do provide reasons, often they tend to be opaque and rather irrelevant to the situation at hand. 

It‘s right to say that this situation is not easy for the banks either, as they have been under pressure to ensure that they comply with money laundering rules and economic sanctions. As to money laundering, the banks do appear to be concerned that informing their client of the reason for their decisions to either impose restrictions on, or to close, bank accounts might be considered to constitute ‘tipping off’.

The UK Treasury has instructed the FCA to conduct a review of the existing FG17/6 Guidance, published in 2017, on the treatment of politically exposed persons (PEPs). By updating the guidance, it is hoped that banks will find it easier to tread the difficult line between minimising financial crime and avoiding sanctions breaches, while also not creating unnecessary barriers for individuals.

New rules

In a new UK government policy statement issued on 21 July 2023, it is stated that, ‘banks and other payment services providers which occupy a privileged place in society – should not be terminating contracts or payment account facilities on the grounds relating to users exercising of their right to lawful freedom of expression. The government strongly supports this fundamental right afforded to all people in British society and will take the action necessary to protect it’.[5]  

The review suggests that there should now be a 90-day notice period – as opposed to the existing 30 days’ notice – when payment account providers decide to terminate a contract and that the users should clearly understand why their bank account would be terminated.

Whilst this is welcome, it does not deal with the issue of ‘tipping off’ referred to above, and since this has on many occasions been used as a justification for the banks in not providing any information to their customers, it’s important that the rules provide unambiguous guidelines confirming that giving customers explanations as to why their accounts have been closed will not put banks in breach of money laundering laws.


Sharokh Koussari is Discrimination and Employment partner at law firm Spencer West.