Debanking: Storm in a teacup or the next big scandal?

The culture wars have come to fintech.

In just a few weeks the Coutts saga - and it really is a saga - has claimed two top bank CEOs’ jobs and prompted a £1bn reduction in its parent bank NatWest’s valuation after a 10 day share price drop of 8 per cent. 

Other banks - whether incumbent or challenger - need to pay close attention. New legislation and regulations are on the way.

Whatever your political stripes or the side you take on Coutts' wrongdoing, it’s hard to deny ‘debanking’ - the process of apparent closing of personal or business bank accounts for reasons related to politics - looks set to be a growing problem for banks big and small.

Monzo today became the latest bank to be dragged into the story when it was revealed that Brexit activist Gina Miller - like her opposite number on that debate Nigel Farage - had an account closed in relation to her political activities. 

Monzo told AltFi that this was due to an error in Miller’s account categorisation when originally set up but it also chimes with comments from Chancellor of the Exchequer Jeremy Hunt that he had recently been denied an account with the app-only bank.

"Like lots of banks, we do not accept any political parties as Monzo Business customers in the same way that we don't currently accept trusts, clubs and a range of other organisations,” a Monzo spokesperson said.

Certainly, the reasons cited by Monzo make comparisons to the Coutts/Farage issue more tenuous. 

But the outward appearance of what is a delicate balancing act of banking risk management when it comes to certain customers feeds a narrative about banks that is causing the public to become increasingly hostile towards the financial sector.

This comes from both the cost of living crunch and a banking sector making huge profits from soaring interest rates. We're not quite back at the post-financial crisis era's popular pastime of 'banker bashing'...yet.

Exposed

Screening customers to find ‘politically exposed persons’ is of course a normal part of all financial services' day-to-day business. Bribery and corruption, despite being rarer in the UK than many other places is an omnipresent risk and banks need to manage it.

Banks are in fact under a legal obligation to do so but the UK’s regulator on such matters the Financial Conduct Authority (FCA) has been given three months to review rules.

Policing minister, Chris Philp, has weighed into the issue too saying dozens of MPs and their families have been turned down for accounts. 

“Banks have also more widely been overzealously interpreting the PEP rules, which meant many MPs have had trouble getting access to financial services. MPs’ families as well, spouses and children even, so they have been a bit overzealous,” Philp said earlier this week on BBC Radio 4’s Today programme.

The issue of apparently random and unfair account closing outside of the well-heeled political class is a bigger issue too says Sharokh Koussari, a discrimination lawyer at law firm Axiom DWFM, done under the pretext of “de-risking”.

Many individuals and companies whose shareholders are from particular ethnicities, he says, have been affected.

“This has been confirmed by a CAB report dated 2016 and a number of other anecdotal evidence in the press show that Iranians in particular have been victims of this. Very often when banks are questioned about the reason for freezing or closure of their customer’s bank accounts of particular nationalities they do not provide a reason at all,” he said. 

“It appears that many of their customers of Iranian origin have been forced to bring proceedings for discrimination on the grounds of ethnicity/nationality arguing that the banks have procedures,  criteria and practices which are discriminatory. None of these cases has led a to a precedent being established as most appear to have been settled by the banks,” he added.

As the situation continues to evolve, both incumbent and challenger banks will need to pay close attention to new legislation and regulations that may be introduced to address these concerns and ensure fair treatment of customers. Failure to do so could lead to further scandals and potential damage to the reputation and trust of the banking industry.