This summer’s de-banking saga involving former Brexit Party leader Nigel Farage has led to some very senior heads rolling in the City, and the ripples are continuing to be felt.
Announced in its wake, the Financial Conduct Authority’s review of the treatment of domestic politically exposed persons (PEPs) by regulated financial institutions in the UK is now well under way.
While the review is welcome (and arguably overdue), it has been greeted with an understandable level of scepticism by legal professionals.
Banks, naturally wary of reputational risk and motivated by commercial considerations as well as anti-money laundering concerns, will remain conscious of not exceeding their risk appetite.
It may well take more than a minor political scandal to change attitudes in the UK to offering banking solutions to PEPs and other high-risk customers.
What criteria constitutes a PEP?
PEPs are generally understood to be the current or former holders of prominent public functions, but it is left up to financial institutions to translate this into practice.
Just how senior does someone have to be to be deemed a PEP, and how long do they retain their status once they have stepped down from public life, you may ask.
There is no hard and fast rule; PEP status is in the eye of the beholder (or bank account provider, in this case).
Banks told the FCA that typically closures are based on reputational risk or financial crime concerns. No surprises there, then.Taking a step further, who counts as a ‘close’ PEP associate and how far does a PEP’s family stretch? Again, there is no uniform answer to these questions, which may lead to an inconsistent use of the label.
While the public airing of UK politicians’ banking difficulties has led to parliament directing the FCA to focus its review on domestic PEPs, it is important not to lose sight of the fact that foreign PEPs and their families face similar, if not worse, problems when attempting to open or maintain bank accounts in the UK, given that they tend to be perceived as considerably higher risk rating than, say, a junior Tory minister.
Plenty of customers also share the same plight as foreign PEPs, as banks consider them high risk due to their background or the perceived nature of their business activities (whether rightly or wrongly).
The matter at hand
It is therefore difficult to shake the suspicion that by ordering the FCA to focus on domestic PEPs, Westminster is looking after its own while avoiding to address the real problem areas.
The FCA’s initial findings, published on September 19, are also not particularly encouraging: concluding that regulated firms did not close a single bank account in the 12 months to July 2023 “because of a customer’s political views”.
This assessment seems to be based on the fact that no bank has made a self-declaration to the FCA to this effect – predictably enough, one may think.
Instead, they told the FCA that typically closures are based on reputational risk or financial crime concerns. No surprises there, then.
Putting aside the question of where political views end and reputational risk begins – which the FCA concedes will need closer examination – the real concern should surely be to ensure that financial institutions collect sufficient and appropriate information before closure decisions are made.
In practice, customers are often contacted too late down the line to be notified of the inevitable account closure rather than asked the right questions by their bank, leaving them with little recourse to provide explanations or challenge a decision already made.
What will happen next?
While new legislative provisions requiring banks to improve transparency around account closures and enhance their customers’ understanding of their decision-making is certainly a step in the right direction, banks need to do the real thinking at the point of categorising and risk assessing their customers.
Furthermore, financial institutions’ hands will always be tied by financial crime considerations, meaning that criminal tipping-off rules will prevent them from sharing the reason for closure with their customers where AML concerns are present.
This is significant as financial crime compliance is a much more common reason for de-banking a customer than their exotic political views.
The FCA will not report in substance on its review until next summer at the earliest.
A thorough look at how banks apply what the FCA would expect to be an “effective and proportionate risk-based approach” to PEPs, their close associates and family members will be warmly welcome.
However, something closer to a cultural shift may be required to make a meaningful difference to the treatment of high-risk customers.
In reality, the ability of lawmakers to regulate banks’ commercial decision-making will necessarily be limited – within reason, financial institutions will always be free to make up their own minds about whom they wish to have as their customer.
Should the government consider introducing a universal right to accessing banking facilities in the UK, the outlook may be different – however, that is not on the agenda for the time being.
Diana Czugler is a senior associate at Peters & Peters
