In September 2020 we wrote about whether there should be a right to banking, and the possibly unintended consequences of banking facilities being withdrawn or frozen.
We discussed N v RBS and the large fine levied against Deutsche Bank as a result of operating accounts on behalf of Jeffrey Epstein. As we explained, the issue caused by banks taking a more stringently risk-averse approach (‘de-risking’) was the increasing number of people excluded from the banking systems which, with more and more transactions occurring online and the decreasing use of cash, had the effect of excluding or marginalising people from swathes of society as well as causing difficulties if such parties needed to instruct lawyers to provide advice. A customer excluded from regular banking facilities might still need to process transactions, but the net effect of the exclusion could cause them to rely on non-standard and alternative methods of transferring funds. Rather than making payments safer and better regulated, and reducing the risk of money laundering and the financing of terrorist activities, this use of underground or unregulated and unmonitored spheres is therefore likely to have the opposite effect: making it harder to detect and report suspicious activity.
Concern about de-risking practices and financial exclusion is not new. In February 2016, the FCA published a statement saying that it was aware that some banks no longer offer financial services to entire categories of customer they associate with a higher risk but that ‘effective money-laundering risk management need not result in wholesale de-risking’. The FCA recommended that banks should use ‘judgement and common sense’, saying ‘this is what we would regard as an effective risk-based approach’.
International organisations have also sought to deal with this problem: the World Bank has been actively examining this issue for years, pointing out that ‘de-risking can frustrate AML/CFT [combating the financing of terrorism] objectives and may not be an effective way to fight financial crime and terrorist financing’. The G20 High-Level Principles for Digital Financial Inclusion strongly encourage a risk-based approach as opposed to de-risking entire categories of customers or accounts.
The European Banking Authority (EBA) is the latest body to recognise and seek to address this problem. In March it observed the increasing amount of de-risking being undertaken by banks and financial institutions and the impact this had on issues of customer protection and financial stability. On the basis of these observations and an information-gathering exercise, it published three regulatory instruments designed to deal with the problem. Echoing the guidance cited above, the instruments confirm that it is not necessary to refuse to provide facilities to entire categories of customer in order to comply with anti-money laundering obligations and counter terrorist financing. The instruments reiterate that the refusal of banking facilities could be an entirely appropriate approach to risk in certain circumstances, but that it could also be a sign of ineffective anti-money laundering and terrorist financing risk management: using a crane to crush a fly.
While recommendations that banks should take a risk-based approach (rather than take part in wholesale de-risking) are welcome, such guidance does nothing to address the commercial reality in which banks operate. Considering the possibility of heavy criminal sanctions and reputational risk against flaccid (albeit genuine) recommendations, it is clear where the balance lies.
One attempt at finding a solution to this problem can be found in the Payment Account Directive 2014/92, recognised by the EBA as imposing a conflicting requirement upon financial institutions. This provides the right to a basic payment account for those who are legally resident in the EU, predicated on the need to foster the participation of EU citizens in the internal market and its benefits. The directive was implemented in the UK by way of the Payment Account Regulations 2015 and, while the regulations were amended following Brexit so that the EU is now treated as a third country, the right to a basic payment account for those legally resident in the UK has been retained in UK law, subject to eligibility criteria.
The regulations require the provision of basic accounts to ensure no one is discriminated against, including those with no fixed address, asylum seekers and those without residence permits. These are parties who, by their very nature, are likely to be considered higher risk and therefore more likely to be denied an account. The regulations also make it clear that such a basic account can only be terminated in specific circumstances such as non-compliance with anti-money laundering legislation, but not because undertaking the necessary checks is time-consuming or otherwise onerous. While a step in the right direction, the regulations lack teeth: a refusal to open an account may result in a complaint to the Financial Ombudsman Service, but this would be unlikely to give any bankers a sleepless night.
It is clear a problem has been identified. The solution, however, remains elusive.
This article was originally published by the Law Society Gazette: 'De-risking and financial exclusion.'