On 24 May 2015, the FCA published a report by consultancy firm John Howell on how banks have responded to rules intended to hold them accountable for money laundering offences (the “Report”). The message?: UK banks should not use anti-money laundering (“AML”) rules as an excuse to close clients’ accounts just because they perceive them as risky.
The Report highlights the exponential growth of de-risking – where banks withdraw or fail to offer banking facilities to customers driven by concerns about the money laundering and terrorist financing risks posed by certain types of customers.
But how is it that the regulator expects banks to respond when dealing with (as the Report describes it) the “perfect storm” of changes which have struck banks during the last decade? The Report cites regulatory reform, higher capital requirements, higher compliance costs, higher levels of sanctions, and less profitable relationships as just some of the contributing factors to the minefield that is the current AML landscape. All of this has been exacerbated by the very real and significant fines that have been levied for AML failures – Barclays’ £72 million fine in November 2015 the most penal example.
UK banks cannot be blamed for their reduced risk appetite as a knee-jerk reaction to the financial crisis, and all that has come since. Regulatory authorities have demanded that compliance functions stretch to near-breaking point to accommodate this new landscape on the one hand, whilst on the other hand expecting them to carry on with their business as usual with little or no transition period. The Report cites that one bank has tripled the number of staff working in compliance, whilst at the same time cutting accounts, thus having the effect of an increased annual cost of compliance from £60-£70 /customer to more than £300, all in less than two years. Something had to give, and for some, de-risking has been the answer.
Word of warning
A cautionary tone must be sounded when considering a policy of de-risking. A severe backlash has been evident as many legitimate banking customers have been cast aside by their banks as they are deemed inappropriate for their “risk profile”. Most noticeably, Wafic Said, the Syrian-born billionaire, had his relationship with Barclays terminated in March having banked with Barclays for over 40 years. Mr Said filed proceedings at the High Court against Barclays in connection with this move on 23 March 2016.
An example of de-risking gone-wrong has already been heard in The High Court in the case of N v S  EWHC 3248 (Comm). The claimant, having been “de-risked”, obtained a mandatory order requiring the bank to execute a number of “in limbo” transactions and thus setting a precedent for those clients that may stand to suffer prejudice in the name of de-risking.
The FCA has taken this opportunity to remind banks that they are also subject to competition law which could be relevant (in particular prohibitions on anti-competitive behaviour and abuse of market power) when ending banking relationships or declining new relationships.
In digesting the Report, the FCA has concluded that “there appears to be no ‘silver bullet’” to resolve the complex set of drivers that have led to de-risking.
That said, AML is one of the FCA’s seven priority themes for the current year, which includes seeking to minimise the unintended consequences of AML regulation. The FCA has suggested that technological solutions may hold the key to reducing the costs of AML compliance – it seems we can expect more from the FCA on this front in the coming months. We can also expect to hear from the FCA as its look to encourage better communication with customers when exiting or rejecting banking relationships.
The de-risking debate comes at a time when the UK is grappling with how best to transpose the Fourth EU Anti-Money Laundering Directive (“4MLD”) into UK law, the deadline for which is 26 June 2017. The extent to which the de-risking agenda is considered when transposing 4MLD remains to be seen.
If you have any questions on this then please contact Tony Woodcock or Richard McGarry.