FCA Research into the issue of de-risking
The FCA, along with fellow agencies and authorities, has a long-standing programme of work in place to ensure the UK financial system is a hostile environment for money launderers. The work not only continues, but has been reinforced by the Government’s recent action plan.
The firms we regulate have commercial freedom, subject to some restrictions, to choose who they do business with. Banks have always had to make decisions about whether or not to provide their services to a prospective customer, or maintain a relationship with an existing customer, whether that is an individual, a business or any other organisation. A number of factors will influence those decisions, ranging from the potential credit risk and profitability of a relationship, to concerns about the reputational consequences of providing services to certain customers.
The Bank of England and Financial Services Act 2016 introduced a requirement for the FCA to issue guidance on the meaning of Politically Exposed Persons (PEPs) for the purposes of money laundering regulations. We will work with HM Treasury to deliver this requirement alongside the transposition of the 4th Anti-Money Laundering Directive later this year.
In recent years, we have become aware that banks are withdrawing or failing to offer banking facilities to customers in greater volumes 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. This is 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.
Much of the information in this area is anecdotal. Accordingly, in July 2015, we asked a firm of consultants, John Howell & Co Ltd (the consultants), to research the nature and scale of de-risking in the UK. We wanted to understand what banks were doing and why, and to hear experiences from groups affected by banks’ decisions.
We have published the consultants’ report. The consultants undertook their fieldwork by collecting data on a voluntary basis from banks and from those who have been de-risked as well as reviewing existing reports and academic research. No firm, individual or business is named in the report.
Overall, the report finds 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 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.
- While the impact of de-risking on individuals or businesses can be acute, numbers 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. For example, the report highlighted that:
- in one bank, of the 2,500 charity bank accounts closed in 2014 only 59 were closed for reasons that might relate to compliance concerns, and
- one large bank said that only 0.013% of all its overall small business accounts had been closed for ‘AML linked reasons’
- The report talks about how consultants' research found instances where closure of an account had an impact on the customer, creating stress and inconvenience in having to secure alternative arrangements or make changes to the way they do business. This was compounded when there was a lack of communication from banks when closing an account or rejecting an application for an account.
The consultants undertook the study over a period of six months, seeking information on a voluntary basis. Inevitably this meant that they found they could not get a complete picture of account closures but nevertheless, we think that the data that was collected and the analysis within the consultants’ report together create a good basis for drawing some overall conclusions.
What the report demonstrates is that de-risking is the result of a complex set of drivers. As a result, the report recognises that there appears to be no ‘silver bullet’ to solve it. The report does note some potential pathways towards mitigating this 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 is tasked with ensuring an appropriate degree of consumer protection and promoting effective competition in the interests of consumers, while at the same time protecting and enhancing the integrity of the UK’s financial system. As part of that integrity objective, we are charged with supervising banks’ compliance with AML legislation and regulations.
In our Business Plan that we published on 5 April 2016 we identified that AML is one of our 7 seven priority themes. We stressed that the outcomes we seek are that the UK financial system is a hostile sector for money launderers but the unintended consequences of AML regulation are also minimised. We also stated that we would explore ways in which technology solutions can help to deliver effective and proportionate AML outcomes. Innovation may hold the key to reducing the costs of AML compliance for banks and we are committed to supporting it.
It is important that banks retain flexibility in setting up appropriate systems and controls to ensure they comply with legislation as well as in making commercial decisions on whether to provide banking facilities that are consistent with their tolerance of risk. However, banks should not use AML as an excuse for closing accounts when they are closing them for other reasons.
We note that banks, like all firms, are subject to competition law, in particular the prohibitions on anticompetitive agreements and abuse of market power contained in the UK Competition Act 1998, and in the Treaty on the Functioning of the European Union. They should be mindful of these obligations when deciding to terminate existing relationships or decline new relationships.
From 18 September the Payment Accounts Regulations 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 2ndPayment 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. While banks will still have to continue to meet their obligations under the Money Laundering Regulations 2007, these measures should help some sectors particularly affected by de-risking.
The FCA has also published an Occasional Paper today that deals with the reasons for access barriers and financial exclusion. This will aim to stimulate ideas and foster a culture of access and inclusion throughout retail financial services. This piece of work was commissioned to provoke debate among relevant parties, including firms, regulators, the Government and consumer organisations.
In addition to this we will continue to work with the banking industry to lessen the damaging effects of de-risking without constraining banks’ commercial freedom. This includes, for example, continuing to work on:
- Improving the way in which firms identify money laundering risk so that banks focus on those customers who genuinely present the highest risk of ML/TF. In doing this we will continue to work with the Government, law enforcement agencies and the Joint Money Laundering Intelligence Taskforce to reduce barriers to information sharing.
- Taking steps to foster innovation and reduce cost in AML compliance –
- As announced in our feedback statement FS16/2 in March, we will continue to work with HM Treasury and the Joint Money Laundering Steering Group to ensure the Fourth EU Anti-Money Laundering Directive is transposed into UK law in a way that is supportive of the use of digital solutions for customer due diligence (CDD), while remaining consistent with EU standards.
- We are also working closely with the Government Digital Service (GDS) to understand how a digital identity that meets high Government standards, such as that available through GOV.UK Verify, could be used within the financial sector.
- We will also undertake further work to research and promote innovations in technology which improve, speed up and reduce the cost of AML compliance.
- Delivering a global response to de-risking – we will work with international bodies such as the Financial Action Taskforce and the Financial Stability Board seek to ensure regulatory expectations on AML are made more consistent globally.
- How banks communicate with their customers – we propose to host roundtable discussions with banks to encourage better communication with customers when exiting or rejecting banking relationships and to see what more can be done to assist customers in this situation.
- Improving effectiveness of AML supervision – we will continue to work with the Government and other UK AML supervisors on how AML supervision across all regulated sectors can be made more consistent and effective.