De-banking - the termination by a bank of its banking arrangements with a customer - is becoming more prevalent around the world, including in the UK, the US and Australia, and was put under the spotlight here in the recent Gloriavale case.
The increase reflects the fact that banks are on the front line in implementing government policies in areas such as Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) and sanctions.
However, access to banking services is essential to participate in modern society and being de-banked could have potentially catastrophic impacts for stranded customers. This clash of competing social goals for banks is receiving significant attention by courts, governments and regulators.
The reasons banks might “de-bank” fall into two broad categories:
- De-banking specific customers (e.g., due to breaches of the bank’s financial crime or human rights policies); and
- Banks de-risking themselves (i.e., terminating or restricting relationships with categories of customers due to a risk presented by that sector as a whole, instead of in response to a specific customer’s risks).1
Below, we outline recent key developments in New Zealand, plus what has been happening overseas. These developments demonstrate that balancing the competing social goals is a difficult issue with no clear answer. Although a number of jurisdictions recognise that de-risking is an unintended, and undesired, consequence of regulation such as AML/CFT, there is no silver-bullet solution.
Banks in the UK are reportedly closing over 1000 accounts each business day – prompting the UK Financial Conduct Authority (FCA)2 to conduct a review, the initial findings of which were released on 19 September 2023. Among these were that the banks report that lead causes behind the account closures were concerns about financial crimes, or the account being dormant.3
Other findings, published by the FCA in a research note on de-risking internationally, were that:4
- Common triggers for de-banking were: the perception that certain sectors or groups present a higher individual risk; profitability concerns, particularly for money service businesses/remittance providers; increased compliance costs for AML/CFT regulation; increased fines and corporate accountability for AML/CFT regulatory breaches; and reputational risk from enforcement action.
- Many jurisdictions are attempting to implement measures that will encourage banks to undertake an assessment of risk on a case-by-case basis, without undermining the effectiveness of AML/CFT regulations. The FCA noted, “there is no silver bullet which will effectively solve the challenges faced by those being de-risked”.
As part of their initial conclusions, the FCA found that there may be a need for “greater strategic and cross-system response to addressing de-risking in the UK led by the Government”.5 Although there is a limited right for individuals to a basic bank account, the Chief Executive commented:6
“the time is also right for a debate on how we balance access to bank accounts with the threat of financial crime, as well as firms’ reasonable risk and commercial appetites. An important question for policy makers is whether all individuals, businesses and organisations should have the right to an account, as is the case in some other countries.”
The US Department of the Treasury’s recent inaugural “De-risking Strategy”7 observes that de-risking is not consistent with the individual risk-based approach that underpins its AML/CFT regulations. However, the US Government had limited authority to effectively address the drivers behind this de-risking, particularly to the extent business decisions drove behaviours. Accordingly, the Treasury recommended a raft of measures designed to produce a cumulative positive impact, such as clarifying and updating AML/CFT regulations and guidance for money service businesses.
Following a review by the Council of Financial Regulators, Australia is also implementing a number of policy responses to de-banking in relation to financial technology firms, digital currency exchanges, and remittance providers.8 These include collecting data on de-risking; implementing transparency and fairness measures that banks will be required to undertake when de-banking (such as documenting reasons, and giving customers certain information); and providing specific guidance and support to sectors most affected
New Zealand’s position
AML/CFT concerns have also led to de-banking in the digital currency and money remittance sectors in New Zealand. The difficulty of cryptocurrency firms obtaining banking services due to AML/CFT risks was recently discussed by the Finance and Expenditure Select Committee.9 The Select Committee recommended that the Reserve Bank develop a scheme to address due diligence requirements and that the Government ensure that organisations improperly de-banked can access banking services, either through a government entity, or through their previous bank.
Money remittance businesses have also claimed to have been improperly de-risked as an industry, although without success to date:
- In E-Trans International Finance Ltd v Kiwibank Ltd,10 E-Trans unsuccessfully claimed that Kiwibank’s decision to revise its policy towards money remitters, and de-bank those customers that did not meet its new risk appetite, was both a breach of contract and anti-competitive conduct under the Commerce Act 1986.
- More recently, in Ink Patch Money Transfer Ltd v Reserve Bank of New Zealand,11 several money remittance businesses unsuccessfully brought a judicial review against the Reserve Bank, seeking declarations that it direct trading banks to provide them with accounts, and challenging its guidance to banks on their money-laundering obligations in respect of money remitters. The Court of Appeal heard their appeal on 13 September 2023.
New Zealand courts also have been grappling more broadly with the question of when a bank can de-bank a customer. The classic common law position is that, unless there is a contractual or statutory restriction, “a contract by a bank to provide banking services to a customer is terminable by the bank upon reasonable notice”.12
However, in The Christian Church Community Trust v Bank of New Zealand (Gloriavale)13 the High Court recently challenged that position, upholding Gloriavale’s application for an interim injunction:
- Following an Employment Court decision that held that children as young as six were employees, BNZ had formed the view that providing services to Gloriavale was inconsistent with the National Australia Bank’s Group Human Rights Policy and sought to de-bank Gloriavale. BNZ’s standard terms and conditions provided that BNZ could close the customer’s account “for any reason” and gave a non-exhaustive list of examples.
- The Court found that it was reasonably arguable both that (1) there was either an implied term on BNZ to act reasonably, or that its discretion to terminate was restricted,14 and (2) that BNZ did not act reasonably. In forming this view, the Court considered the fact that Gloriavale would otherwise be left without banking services (as no other bank was willing to provide services to them) and raised the issue of whether banking was an essential service with public interest obligations. The Court observed:
“These submissions raise the question as to whether there should be protections for consumers of banking services by way of an analogous form of the doctrine [of prime necessities15] or a requirement on the banks to provide transactional services as a minimum.”
Chapman Tripp’s view
The question of when a bank can, or should, de-bank a customer or de-risk itself from certain sectors is only going to grow in importance in New Zealand. Banks are now firmly on the frontline in the fight against financial crime and have been made an integral part of our sanctions regime.
Further, banks are becoming subject to more ESG obligations, which are important obligations on banks and form part of their social licence to operate. It seems inevitable in the future that banks may consider that providing banking arrangements to certain customers clashes with their legal, regulatory or ESG obligations and policies. As outlined above, this issue is already being played out in the area of financial crime.
However, without a bank account it is extraordinarily difficult to participate in society in a safe and legal manner. Among the many vexed issues arising in relation to de-banking:
- Customers who operate in innovative fields, such as fintechs, may struggle to secure banking services, hindering innovation.
- If a customer is de-banked, they may find themselves having to operate via unregulated, or less regulated, channels (which shifts the AML/CFT risk).
- As the FCA observed, de-risking also has potential humanitarian concerns where non-profits are unable to operate in conflict areas and trade finance to developing countries is reduced.
These concerns are leading to increasing debate about whether access to banking should be a basic human right.
In our view, it will generally be impractical and undesirable to force banks to provide banking services beyond complying with their contractual and legislative obligations, including not to discriminate on prohibited grounds.16 This would compromise their ability to carry out their important frontline regulatory roles, such as combatting financial crime. Also, they are commercial enterprises with the right to manage their own risks and resources.
However, enlisting banks to implement social goals can have unintended and undesirable consequences. Care needs to be taken with government policies that could incentivise banks to de-bank people. The approach taken in the US and Australia, which put the focus on the drivers behind de-banking, may be appropriate here. Consideration may also need to be given to alternative ways to facilitate access to banking for individuals and sectors that the banks may consider to be inconsistent with their compliance obligations.
Regardless, any decision on restricting banks’ ability to de-bank customers is inherently a policy decision: any support for individuals/businesses must be balanced against the need to implement the social policies that various banking regulations are designed to help achieve. Accordingly, we consider that any debate on whether banks should provide banking services should be done at government/regulator level on a cross-sector basis.
1. A related, but separate, issue is customers who face obstacles to accessing to banking – for example, rough sleepers who may not be able to provide an address to open a bank account. This Brief Counsel does not address this, but we note:
a) It is receiving attention within the industry. Earlier this year, Westpac commissioned a report into Access to Banking in Aotearoa by ThinkPlace which conducted a thorough exploration into the barriers to obtaining banking services, as well as potential solutions: https://www.westpac.co.nz/assets/Personal/life-money/documents/Westpac-NZ-Access-to-Banking-in-Aotearoa-Report.pdf
b) It also appears to form part of the Commerce Commission’s ongoing market student into personal banking services: https://comcom.govt.nz/__data/assets/pdf_file/0032/324779/Preliminary-Issues-paper-Personal-banking-services-market-study-10-August-2023.pdf at .
2. https://www.theguardian.com/business/2023/jul/30/uk-banks-closing-more-than-1000-accounts-every-day (Accessed on 15 September 2023).
3. https://www.fca.org.uk/publication/correspondence/fca-chancellor-freedom-expression-provision-banking-services.pdf; https://www.fca.org.uk/publication/corporate/uk-payment-accounts-access-and-closures.pdf
5. At [7.12].
8. https://treasury.gov.au/sites/default/files/2023-06/p2023-404377-gr.pdf. The Government’s response followed advice from the Council of Financial Regulators, available here: https://www.cfr.gov.au/publications/policy-statements-and-other-reports/2022/potential-policy-responses-to-de-banking-in-australia/pdf/potential-policy-responses-to-de-banking-in-australia.pdf
9. Inquiry into the current and future nature, impact, and risks of cryptocurrencies (August 2023).
10. E-Trans International Finance Ltd v Kiwibank Ltd  NZHC 1031 at - and .
11. Ink Patch Money Transfer Ltd v Reserve Bank of New Zealand  NZHC 1340.
12. Targa Capital Ltd v Westpac New Zealand Ltd  NZHC 230 at . We have discussed this decision in a previous Brief Counsel – see here.
13. The Christian Church Community Trust v Bank of New Zealand  NZHC 2523 at .
14. The Court posited that BNZ’s discretion could either by restricted by the ‘default rule’, which provides that that a contracting party cannot exercise a discretionary power arbitrarily, capriciously or in bad faith, or unreasonably in the sense that no reasonable contracting party could have so acted. Alternatively, it could be restricted by the ‘expanded default rule’ which adds on a procedural review (i.e., whether the correct matters were taken into account).
15. The doctrine of prime necessities requires that the monopoly suppliers of essential services “must charge no more than a reasonable price”: at .
16. For example, s44(1) of the Human Rights Act which provides that is unlawful to discriminate on prohibited grounds, such as sex, race, political opinion or religious belief, in providing banking facilities.