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Freshfields Risk & Compliance

| 4 minute read

FCA's further report on de-banking focuses on the Consumer Duty

The FCA has published its follow-up report on “UK Payment Accounts Access and Closures: Update” (the Update Report). In its last report, which we mentioned in our previous article on de-banking, the FCA focused on the reasons firms were suspending and/or closing customers’ accounts, including whether there was any evidence to suggest firms were doing so because of political views expressed by customers.  In the Update Report, the FCA confirmed that there was still no evidence of firms de-banking customers because of political beliefs or other views lawfully expressed.  However, the Update Report made various findings about account suspensions and closures, the most interesting of which relate to the FCA’s views on how the Consumer Duty interacts with de-banking and the FCA’s expectations of how firms should be improving their policies on de-banking customers in light of this duty. 

The FCA’s general expectations in light of the Consumer Duty

Under the Consumer Duty, which came into force on 31 July 2023 for open products and services and on 31 July 2024 for closed products and services via a new Principle 12, firms are required to act to deliver good outcomes for retail customers. The cross-cutting rules which supplement Principle 12 require firms to act in good faith towards retail customers, avoid causing foreseeable harm to retail customers and enable and support retail customers to pursue their financial objectives.

In the context of account access decisions, which include the denial, suspension or termination of a customer account, the FCA explains in the Update Report that it expects firms to (i) have up-to-date internal policies and procedures and (ii) consider how its interactions with a customer can support the customer’s objective to open, use and enjoy the benefits of a customer account.

The FCA expects employees making decisions as to whether to decline or terminate an account to be operating in light of up-to-date guidance on the reasons which may justify these decisions and adequate training.  Financial crime risk may be a legitimate reason for denying or terminating accounts where the firms act proportionately to the risk identified, but the FCA warns against denying or terminating accounts on spurious or unfairly biased grounds or for discriminatory reasons. Where account access decisions are automated, the FCA expects firms to monitor these systems and mitigate risks of biases and worse outcomes for specific groups of customers, e.g. firms’ systems flagging key words which are identified with a certain race and denying new accounts on this basis.

In terms of customer interactions, firms are expected, where they are able to do so, to provide clear communications to customers so that customers understand the reasons for the firm’s decision, the impacts of the decision and the next steps customers should take.  In terms of next steps, the FCA expects firms to provide relevant support where possible and highlight options that are available to the customer e.g. the availability of a basic bank account (BBA) and firms who provide them. The FCA also expects firms to give customers the required level of notice for their decisions and inform them of their right to complain.

The FCA’s findings in the Update Report and detailed expectations

In the Update Report, the FCA made the following specific findings and set out its related expectations (where relevant) in light of the Consumer Duty.

BBAs are not well-known to customers and there is an inconsistent treatment of BBA customers

In light of this finding, the FCA expects firms to make clear the availability of BBAs and to improve access for prospective customers to BBAs, which includes: 

  • Providing clear information on the identity documentation required to apply for BBAs;
  • Evaluating the reasonableness of identification requirements and whether new customers are denied access unreasonably as a result;
  • Proactively considering whether a customer who is ineligible for a general customer account should be eligible for a BBA instead;
  • Reducing unnecessary hard credit checks which impact a customer’s credit rating; and
  • Providing reasons (as set out above) for decisions on offering, refusing or terminating customer’s accounts.

Data on account access was limited or unclear 

The FCA expects firms to keep records of the decision-making process and the reasons for account access decisions as well as policies to evidence compliance with the Consumer Duty, both internally and to the FCA (where requested). This can evidence whether their decisions are made in line with the firm’s documented approach. 

Use of "reputational risk" in varying ways as a reason for account access decisions

As mentioned above, the FCA expects firms to have well-considered and up-to-date policies which guide account access decisions. The FCA does not prescribe definitions but expects firms to have a clear and consistent approach on the definition and application of “reputational risk” and it says that this reason should only be relied on when there is a “material reputational risk to the firm’s business”. The FCA also expects firms to have appropriate training for employees, good record-keeping and adequate monitoring of how reputational risk is used to deny or terminate account access, such that firms can intervene accordingly if internal policies are not applied consistently.

Inconsistent approach to customers in vulnerable circumstances

Last but not least, the FCA obtained feedback from consumer groups and charities and identified several improvements to support the needs of vulnerable customers. This includes maintaining robust policies on identification and approach to vulnerable customers and training staff on all levels (including branch staff) appropriately to avoid account denials where firms are making incorrect assumptions about a customer’s capacity or not managing the needs of customers with learning disabilities, cognitive difficulties or mental health challenges. 

Comments

There has traditionally been limited guidance from the FCA and from case law on account access decisions, aside from two well-known High Court cases. In N v The Royal Bank of Scotland (discussed here), the Court found that RBS’s decision to terminate the customer’s account was within the range of what was honest, rational and reasonable due to its financial crime concerns, regardless of the availability of other decisions RBS could have made. The Court therefore did not need to determine the precise standard a firm needs to meet when exercising this type of contractual discretion, as RBS had met all potentially applicable standards. In Uzbekov v Revolut (which we wrote about here), the High Court struck out a “de-banking” claim which served no objectively useful purpose as there was no financial loss arising out of the closure and Revolut had closed the account by acting in good faith in seeking to comply with anti-money laundering legislation (even if, in fact, its financial crime concerns might have been shown to be unfounded). 

However, given the recent attention and the FCA’s increased expectations in light of the Consumer Duty, including its views on when firms should rely on reputational risk clauses, firms should consider reviewing their internal policies on account access decisions and how those policies are being applied in practice. Firms should also check that decisions made on individual accounts are being recorded adequately so that they are able to demonstrate their compliance with the Consumer Duty in this area, particularly where the decision is a nuanced one.

 

Tags

fca, financial institutions, uk, financial services, regulatory framework, the financial conduct authority