The FCA has published a webpage setting out a consultancy firm’s findings following research into the nature and scale of de-risking in the UK.

The FCA explains that, in recent years, it has become aware that banks are withdrawing or failing to offer banking facilities to customers in greater volume than before. There is a perception that this is driven by banks’ concerns about the money laundering and terrorist financing (ML/TF) risks posed by certain types of customer, known as ‘de-risking’. It has been suggested that this trend is influenced by big fines imposed on banks in recent years by regulators and prosecutors, particularly in the US, for primarily historic weaknesses in their anti-money laundering (AML) defences and for breaches of financial sanctions.

However, as much of this information is anecdotal, in July 2015, the FCA asked a firm of consultants to research the nature and scale of de-risking in the UK. The FCA wanted to understand what banks were doing and why, and to hear experiences from groups affected by banks’ decisions.

Overall, the consultant’s report found that:

• since the global financial crisis, banks have been faced with higher capital requirements and higher liquidity thresholds as well as greater enforcement by regulators and prosecutors. This has caused banks to deleverage, and has also created a tougher environment in which to maintain profitable relationships. As a result, many banks have undertaken a strategic review of their business and functions, often choosing to focus on their core business;
• some banks are closing accounts for money transmission services, pawnbrokers, fintech companies, and charities operating in geographical areas perceived to present greater ML/TF risks. De-risking seems to affect small businesses more than large ones;

• 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 a customer might pose. These include specific customer considerations such as the assessment of the credit risk presented by the potential customer and the prospective profitability of a relationship. There are also broader business considerations driven by strategic business decisions, increased capital requirements, or overall compliance costs; and
• while the impact of de-risking on individuals or businesses can be acute, the number of de-risking decisions are small compared to the overall closure rates of bank accounts that the consultants’ report run to millions of personal accounts and hundreds of thousands of business accounts per year.

The FCA states that the report demonstrates that de-risking is the result of a complex set of drivers, and there appears to be no “silver bullet” to solve the issue. Although the report notes that some potential pathways towards mitigating the issue may lie in balancing costs and risks between banks and high-risk sectors, and a better developed understanding of how to measure ML&TF risk on a case-by-case basis.

The FCA mentions that it is important that banks retain flexibility in setting up appropriate systems and controls to ensure that they comply with applicable legislation, as well as in making commercial decisions on whether to provide banking facilities that are consistent with their risk tolerance. Banks should not use AML as an excuse for closing accounts when they are closing them for other reasons.

The FCA notes that banks are subject to competition law, in particular the prohibitions on anti-competitive agreements and abuse of market power contained in the Competition Act 1998, and in the Treaty on the Functioning of the EU. The FCA states that banks should be mindful of these obligations when deciding to terminate existing relationships or decline new relationships. It also notes that, from 18 September 2016, the Payment Accounts Regulations 2015 will require some banks to offer a payment account with basic features to consumers legally resident in the EU.

In addition, the UK will need to implement the revised Payment Services Directive by 12 January 2018. This will require payment institutions to have access to credit institutions’ payment account services on an objective, non-discriminatory and proportionate basis. The FCA comments that while banks will still have to comply with the Money Laundering Regulations 2007, the new measures should help some sectors particularly affected by de-risking. The FCA also advises that, among other things, it will continue to work with the banking industry to lessen the damaging effects of de-risking without constraining banks’ commercial freedom.

View FCA research into the issue of de-risking, 25 May 2016