De-Banking – Recent Developments And Litigation And Regulatory Risk

Scrutiny of de-banking practices has continued to intensify and this article considers the litigation and regulatory risks faced by banks, guidance from the courts and some practical pointers when making a decision to freeze or close a customer account.

Recent high profile reports on the closure of customer bank accounts have included the following:

1. In February 2024, the Treasury Committee published a report with data showing that eight of the UK's biggest banks closed the accounts of 140,000 small businesses in 2023, or nearly 3% of those banks' total SME customer base. The banks gave various reasons for the closures including financial crime concerns and "where a business has been unable to satisfy verification requirements or has not responded to our attempts to contact them". Only three banks listed risk appetite as a reason for account closures.
2. On 21 February 2024, the All-Party Parliamentary Group (APPG) on Fair Business Banking published a de-banking report covered here. The APPG found that thousands of customers were being 'de-banked' each month and this was often due to financial, regulatory and reputational pressures facing banks.
3. In April 2024, the Treasury Committee published new data on customer service complaints to the Financial Ombudsman Service (FOS). The data showed that de-banking related complaints received by the FOS increased by 44% from 2023. This is a continuing trend: since 2020/21, the number of complaints received by the FOS related to account closures had increased almost three-fold. This is considered in more detail in our article in Regulation Tomorrow here.

The legislative environment in which banks provide banking services to customers is also changing. Amendments to the Payment Services Regulations 2017 which, prior to the announcement of the General Election, were expected to take effect later this year will require payment service providers (including banks) to give at least 90 days' notice prior to termination of contracts for payment services, together with a sufficiently detailed and specific explanation for the termination, subject to limited carve outs.

Balancing risk

Banks might choose to terminate their relationship with customers to mitigate different (and often overlapping) areas of risk including anti-money laundering, sanctions, politically exposed persons, and reputational risk, as well as to reduce their regulatory burden and potential exposure, and save costs. The rising costs of compliance, including with anti-money laundering requirements throughout the customer lifecycle, may provide an incentive for banks to limit the services they provide, taking a risk-based approach, particularly when they have faced a regulatory investigation or are otherwise in the regulatory spotlight and when individual senior managers risk being held personally accountable for any bank failings.

Whilst 'de-banking' may be an entirely appropriate and necessary outcome, the "de-risking" trend is now facing a backlash and banks may face criticism for managing those risks in a way which curtails services and does not treat customers fairly. This brings regulatory as well as litigation risk.

The FCA may be concerned if:

1. a bank decides to close an account in a way which breaches a regulatory requirement such as one of the Principles for Businesses - for example, by not communicating with the affected customer in a way which is clear, fair and not misleading, which is contrary to the Consumer Duty's requirement to act to deliver good outcomes for retail customers, or which contravenes the rules in the banking conduct of business sourcebook (known as BCOBS) which also imposes requirements on customer communications, or
2. a bank fails to provide reasonable notice (proposed changes to the UK Payment Services Regulations 2017 include extending the notice period for contract terminations from 2 months to 90 days and to provide sufficient explanation to customers to enable customers to understand the reasons for the contract termination) or otherwise fails to comply with the relevant contractual terms or its own internal policies and procedures.

There is also a risk of:

• complaints and referrals of complaints to the Financial Services Ombudsman (the FOS) which will consider what is "fair and reasonable in all the circumstances" taking into account the relevant legal and regulatory requirements and the contractual context. The FCA's complaints handling rules will need to be followed including giving consideration to wider implications and whether there are any recurring problems such that consideration should be given to the impact on other customers who have not complained;
• reports being made directly by customers to the FCA which encourages those who believe that a firm is involved in wrongdoing in an area regulated by the FCA to make a report in confidence or 'whistleblow'. If the FCA decides to investigate there is a risk of enforcement proceedings and also reputational damage and this may also extend to relevant bank staff including senior managers; and/or
• legal proceedings initiated by customers who consider that a bank has suspended or terminated an account wrongly or has not followed the correct process in doing so (customers may be able to bring claims based on breaches of relevant FCA requirements under s138D FSMA) . Most cases will settle before trial but as set out below there have been a couple of recent reported cases arising out of banks freezing or suspending customer accounts following suspicions of fraud or other criminal activities.

It is also the case that isolated account closure processes, or indeed business unit wind downs can be operationally complex, and sometimes require compliance with additional regulatory requirements. Firms may struggle to effectively discharge their legal liabilities under the banker-depositor contract; locating gone-away customers for example can often be time consuming. Similarly, rules and guidance on the fair treatment of vulnerable customers requires banks to take particular care to organise such exercises in ways which minimise potential adverse impacts to customers in those circumstances.

A snapshot of recent litigation

In Harvey v Santander UK plc [2023] EWHC 2947 (KB) the High Court dismissed an application by the claimant for an interim mandatory injunction to force a bank to unfreeze their account.

The claimant had a business account which the bank said was subject to their general terms and conditions. These provided that the bank could refuse any withdrawal or payment from the customer's account if: (a) it placed the bank in breach of any legislation or law or the bank reasonably suspected it may result in any regulatory action against it in any jurisdiction; or (b) the bank reasonably suspected it related to fraud or any other criminal act. There were also provisions which stated that the customer must not misuse their account or act in any way that would give rise to a "reasonable suspicion" of fraud or other criminal activities, and if the customer breached these terms the bank could suspend or close the customer's account immediately without notice.

The bank's alert system was triggered when the customer received a large payment into his account and following an investigation and correspondence with the customer, the bank froze the account. The customer was not satisfied with the information provided by the bank as to why it took this action and issued a breach of contract claim. The customer then applied for an injunction to compel the bank to unfreeze the account. The bank position was that it was contractually entitled to act in the manner it did.

The High Court dismissed the claimant's application ruling that the bank's action was permitted by its contractual terms. The High Court also commented that, if it had granted the injunction wrongly, damages would then be an inadequate remedy for the bank as it may have faced regulatory action and/or criminal sanctions, as well as potential actions from third-parties.

In January 2024, in a case involving a high net worth individual and a fintech company ([2024] EWHC 98 (KB)), the High Court struck-out a claim by the individual finding that an account closure was justified given the company's money laundering suspicions and that it had not been motivated by reputational reasons (as suggested by the claimant).

This decision comes after others in N v The Royal Bank of Scotland plc [2019] EWHC 1770 and Shah & Anor v HSBC Private Bank (UK) Ltd [2012] EWHC 1283 (QB), where the High Court also ruled in favour of the defendant banks.

Despite these judgments favouring the banks, many other cases have settled before trial and we expect de-banking claims to increase. Allegations regarding de-banking are also increasingly part of the claimant toolkit in broader commercial litigation (including the Mike Ashley owned Frasers Group litigation against Morgan Stanley, although the claims were subsequently withdrawn before judgment).

Potential causes of action include breach of contract, negligence, breach of statutory duty and/or discrimination/defamation and are more likely in circumstances where (i) the customer is an organisation relying on its current banking arrangements to run a business, and (ii) there are restrictions on the notice or reasons that can be given (which is often the case in a financial crime context under the Proceeds of Crime Act 1981 (POCA)). However, a key hurdle for claimants is whether they can show any loss.

Practical tips and key takeaways for banks

The case law demonstrates the importance for financial institutions of considering the following when making a decision to freeze or close a customer account:

1. The first step before making any decision is to identify the relevant contractual term allowing suspension or termination. Is there a contractual basis on which you can do what you propose to do?
2. Identify whether a notice period is required and check, particularly for personal accounts, whether this is consistent with current law, particularly given potential upcoming changes. Take particular caution if you are dealing with a consumer or a person otherwise falling within the scope of FCA regulatory requirements – are you exercising discretion consistent with the various obligations including the Consumer Duty?
3. If you are taking action because of suspicious activity, consider whether those suspicions are objectively 'reasonable' and also the extent to which it is possible to provide information to the customer.
4. Assess which accounts are being frozen or closed (customers may have different types of accounts in different jurisdictions).
5. Consider whether any notification is required to the FCA or whether other proactive regulatory engagement would be helpful – for example notifications may be required where a fraud is being perpetrated.
6. Consider the risk of group claims (for example if groups of customers are being exited and there is a risk the closures leak). There could also be competition issues regarding the treatment of particular industries.
7. Take care over communications, including giving consideration to how best to retain legal privilege where appropriate over relevant internal and external communications with legal advisers– litigation may involve disclosure of non-privileged materials. Customers may also make data subject access requests.

Once the decision is taken:

1. Document the contractual and/or other basis for the decision carefully and clearly.
2. Consider how best to notify the customer of the decision, and whether the bank is legally able (or obliged) to explain the decision, and reasons for it, in detail, again in light of current law and upcoming changes. Balancing risk is key (e.g. where the bank has a suspicion of money laundering, clearly the restrictions in section 300 (if regulated) and section 337 or 338 (if not regulated) of the Proceeds of Crime Act 2002 will be relevant and careful consideration will need to be given as to how these apply and what communications can nevertheless be made).
3. Lastly, consider the communications/PR angle if the customer complains publicly. It will depend on the identity of the customer, but if the individual is high-profile it is advisable to prepare for the public response (and the bank's response to that).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.