The Risks of De-risking
In March of this year, Wafic Saïd issued a High Court claim against Barclays, with whom he had banked for over 40 years, after the billionaire philanthropist was given notice of the imminent closure of various accounts connected with him, his family, and most importantly the Saïd Foundation, an English charity. Mr Saïd sought an order compelling the bank to comply with its obligations under the Data Protection Act 1998.
After a confidential settlement was reached, Mr Saïd has ended his legal dispute with Barclays. The bank apologised to him for the way it ended their banking relationship and clarified the basis for its decision. An agreed joint statement was released on 3 June 2016 which included the following:
“Barclays is pleased to confirm that its decision to close the accounts was not based on any wrongdoing in relation to any account activity of Mr Said or any member of Mr Said's family or any company, partnership or other entity associated with any of those persons, including the Said Foundation and the Said Business School Foundation.”
This case raises the wider issue of what Financial Conduct Authority (“FCA”) commissioned research calls 'de-risking', where banks remove their services from certain classes of customers in order to reduce their compliance obligations and resultant costs. `De-risking’ in the banking industry has been a response to growing pressure from national and international regulators in relation to sanctions and anti-money laundering rules. This process has been equated to broad brush ‘risk-profiling’ of both potential and existing clients, and the reportedly unreasonable denial of banking services to, among others, businesses with ‘foreign’ connections and charities with similar links. The report discusses how the closure of an account impacts the customer, creating stress and inconvenience in having to secure alternative arrangements or make changes to the way they do business. This is reported as being compounded when there was a lack of communication from banks when closing an account or rejecting an application for an account.
In the UK, the press has focussed on Members of Parliament, Members of the House of Lords and their family members who have suffered, by virtue of being classified as high risk individuals under European money laundering rules. In the UK, the current regime is derived from EU Directive 2005/60/EC, implemented in the UK by the Money Laundering Regulations 2007/2157. Banks appear to be taking an excessively cautious approach.
The regulations refer to politically exposed persons (“PEPs”) who are defined as individuals who are or who have at any time in the preceding year been entrusted with a prominent public function outside the UK, but this also includes their immediate family members and any known close associates (predominantly individuals known to have joint beneficial ownership of a legal entity, a legal relationship or any other close business relations with such a person). This broad category of individuals requires additional attention from regulated institutions, required to adopt risk-sensitive internal policies, continual monitoring and senior management involvement if they are offering PEPs regulated services. This has a knock on effects on the costs associated with these clients. The definition is due to be further expanded with the next set of Money Laundering Regulations, to include UK individuals and their families. Yet already, it appears a risk aversion on the part of banks is causing them to go a step further than the Regulations require.
Indeed, Members of the House of Lords have expressed concerns that it is difficult for them and for their family members to open bank accounts, and that the regime does not operate proportionately according to the actual risk posed by a potential or existing customer.
The Bank of England and Financial Services Act 2016, coming into force on 6 July 2016, is expected to establish a more risk-based approach to de-risking, in response to what the House of Lords identified as its disproportionate application. Section 30 of the Act requires the FCA to issue guidance, which may require regulated entities to take a proportional, risk-based and differentiated approach to different categories of increased risk individuals: only time will tell whether this has a practical effect.
Mr Saïd has sought to draw the FCA’s attention to this wider issue of de-risking of individuals and businesses where the historical events giving rise to concern are irrelevant or unproven. Further, the FCA has been alerted to the harm which can be suffered by a properly regulated charity, such as the Saïd Foundations, when it is refused banking. The FCA has commissioned an independent study to research the customers being denied access to banking services and as indicated above, changes in its guidance to banks may follow.
Carter-Ruck and William J Heard acted for Mr Saïd