On 24 May 2016, the FCA published the findings of research into the nature and scale of bank de-risking in the UK. This research, conducted by consultants John Howell & Co Ltd, represents the FCA’s response to concerns that banks are withdrawing or failing to offer banking facilities to customers in greater volumes than before, driven by concerns of perceived heightened money laundering and terrorist financing risks posed by particular categories of clients. It has been suggested that this trend is influenced by the scale of fines imposed on banks in recent years by regulators and prosecutors, particularly in the US, for primarily historic weaknesses in their anti-money laundering defences and for breaches of financial sanctions.
The consultants collected data from banks on a voluntary basis, which, by the FCA’s own admission, limited their ability to obtain a complete picture of account closures in the UK, however certain high level conclusions have been drawn.
The report confirms that, in general, banks are seeking to reduce their overall risk profile. However, the evidence suggests that this is not entirely attributable to the financial crime risks posed by particular customers. Since the financial crisis, banks have been faced with higher capital requirements and liquidity thresholds as well as greater enforcement by regulators. The consultants partly attribute the recent trend towards de-risking to recent enforcement, but also to higher compliance costs and a more challenging environment in which to maintain profitable relationships. In response to these pressures, it is evident that many banks have undertaken a strategic review of their business and functions and committed to focusing on their “core” business. The report highlights that banks appear to weigh up a variety of benefits and costs of maintaining an account that are not always related to the financial crime risks the customer might pose.
As the report demonstrates that de-risking is the result of a complex set of drivers, there appears to be no “silver-bullet” to combat the issue. However, the FCA highlights that potential options for mitigating the drivers of de-risking may lie in balancing the costs of financial crime compliance and risks between banks and high-risk sectors, and a better developed understanding of how to measure money laundering/terrorist financing risk on a ‘case by case’ basis. In particular, it is perceived that a lack of reliable empirical measures of financial crime risk can mean that banks run the risk of identifying as high-risk the “good” customers within a particular sector as well as the “bad” and the “negligent”. The FCA recognises that an understanding, shared by supervisors and banks, of how risk can reasonably be judged at a detailed level, and the acceptance of this understanding as legitimate by businesses and other customers, would be an important tool in combatting the costs of de-risking.
The sectors that are identified as being particularly vulnerable to bank de-risking include politically exposed persons, correspondent banking, money services businesses, charities, casinos and internet gambling, and the defence and arms sectors.