On July 20, HM Treasury announced its intention to introduce new regulatory rules, using new powers granted by the Financial Services and Markets Act 2023, concerning the process banks must follow when closing customers’ accounts.
The Treasury explained in a July press release that the proposed rules constituted a government intervention “to address fears that banks are terminating accounts because they disagree with someone’s political beliefs”. This was a thinly veiled reference to the widely publicised dispute between Nigel Farage and Coutts after he obtained evidence that the bank’s decision to close his accounts had been influenced by his political views.
This government intervention aligns with both government and regulators’ long-standing concern about financial exclusion, which disproportionately affects those in lower socio-economic groups and the elderly, who find it increasingly difficult to access banking services due to digitalisation.
The Financial Conduct Authority (FCA) is also undertaking a review, expected to launch this month, of its 2017 guidance on the treatment of politically exposed persons (PEPs) for anti-money-laundering purposes. It seeks input from PEPs and their families to assess whether banks are taking an overly cautious approach to the risks PEPs present, making it unnecessarily difficult to access financial services.
The new rules are to be two-fold: requirements, with limited exceptions, to give customers 90 days’ notice of proposed bank account closure, as well as a clear explanation of the reasons for withdrawing services (unless it would be unlawful to do so — such as when providing full reasons would involve unlawful “tipping off” or breach a duty of confidentiality to another customer).
It is important to note, however, that the Treasury does not have the power to dictate to the regulators the exact terms of the new rules. Section 30 of the Financial Services and Markets Act (FSMA) 2023 empowers the Treasury to require a regulator to use their rule-making powers to make rules, specifying matters that the rules must cover, but it does not permit the Treasury to specify the form, specific content or outcome of these rules.
Why are the new rules considered necessary?
The UK financial services regulatory regime has already had a huge upgrade this summer, in the form of the FCA’s new Consumer Duty, which came into force on July 31 and introduces, for the first time since the FSA’s creation in 2000, a new FCA Principle for Businesses.
This comes with detailed accompanying rules, requiring firms to re-evaluate how they balance their interests with those of their customers. Under the previous regime, firms were obliged under Principle 6 of the Principles for Businesses to “pay due regard to the interests of customers and treat them fairly”. The new Principle 12 takes an outcomes-based approach, requiring firms to “act to deliver good outcomes for retail customers”.
According to the FCA: “Principle 12 imposes a higher and more exacting standard of conduct in relation to a firm’s retail market business, relative to what Principles 6 or 7 would have otherwise required.”
Principle 12 (and the accompanying rules) require firms to “act in good faith towards retail customers”, which, in this context, means acting not only fairly, honestly and openly, but “consistently with the reasonable expectations of retail customers”.
Such reasonable expectations ought to include not withdrawing banking services without good reason — or without giving reasonable notice or a transparent explanation. Likewise, the new obligations to “avoid causing foreseeable harm to retail customers” and to “enable and support retail customers to pursue their financial objectives” may be capable of being breached by a sudden, unjustified withdrawal of banking services.
What does this mean for banks?
The proposed new “debanking” rules would arguably add nothing to the regulatory duties that firms already hold. However, they may still be important on a practical level because they would force firms to be transparent about their reasons for closure and to provide sufficient time for customers to determine how best to challenge the decision.
Another possibility is that the proposed “debanking” rules are intended primarily to highlight the issue to banks
The risks of very practical problems to individuals who suddenly lose access to banking or payment services arguably require a very practical control, offered by the Treasury’s suggestion of mandating a 90-day notice period and a clear explanation of the issues that need to be addressed.
It may also be part of the Treasury’s reasoning that, unlike some of the FCA’s rules, which are actionable by a private individual under section 138D of FSMA 2000, the new Consumer Duty rules do not give a legal basis to consumers to take action against firms for breach of statutory duty — breach of the Consumer Duty can be enforced only by the FCA. The Treasury may therefore have taken the view that specific rules actionable by individual consumers are needed to achieve the desired impact.
Another possibility is that the proposed “debanking” rules are intended primarily to highlight the issue to banks so that they consider proposed closures and their validity more carefully, rather than introducing a regulatory obligation that did not exist before.
It remains to be seen exactly what the debanking rules will say, whether they will be actionable at the suit of a private individual, and if they will add anything of substance to the existing regulatory regime. A further, significant unknown is how they might interact with the soon-to-be-updated FCA guidance on PEPs.
In a world where the geopolitical climate can change dramatically and suddenly, the tension between meeting the FCA’s expectations on financial crime risk management and on customer care will continue to present tough intellectual and practical challenges for compliance and risk professionals in banks and payment services providers.
In preparation for the new rules, many firms will be reviewing and updating their account closing policies and procedures — in particular, ensuring that the reasons for closure are appropriate vis-à-vis the government’s position that “financial services should be provided without discrimination as to a user’s lawful views or expression of beliefs”, properly considered and clearly documented.
Any efforts taken now to address these issues are unlikely to be wasted, whatever the new, Treasury-inspired rules ultimately say, or what their legal consequences might be.
Polly James is a partner and David Scott is a senior consultant at law firm Bryan Cave Leighton Paisner LLP.
