At a dinner early in July the CEO of NatWest bank group (formerly known as RBS) Dame Allison Rose told a senior BBC journalist that the high-net-worth subsidiary of the group, Coutts Bank, was closing the bank accounts of prominent former politician and now media commentator Nigel Farage, for ‘commercial reasons’. The inference was clear, Mr Farage was not sufficiently wealthy to qualify for a Coutts account. The BBC contacted NatWest the following day to confirm they had understood Dame Rose correctly. Having obtained such assurance, they published. The subsequent story has dominated UK banking news this summer.
But Dame Rose only told the BBC half the truth. The complete story only emerged two weeks later after Mr Farage used a UK legal mechanism to obtain a copy of his personal file, and in particular a 40-page report which demonstrated that the true reason behind the decision was his political views, his “values” which do not “align” with those of the bank. The BBC immediately apologised to Mr Farage and made clear that they had relied entirely on their source. Dame Rose delayed a further week before admitting to being the source, apologising and trying to defuse the row by claiming that Mr Farage had not been debanked, he had merely been asked to switch from Coutts to the ordinary bank brand, Nat West. The board backed her but the government intervened and at the end of July Dame Rose resigned together with the CEO of Coutts.
The story then continued to grow as it emerged that multiple politicians, almost all from the centre right parties, had suffered problems ranging from accounts being closed, account opening requests from members of the family being refused, to loan applications being declined. In early August the UK’s Finance Minister, Jeremy Hunt, wrote to the relevant regulator, the Financial Conduct Authority (FCA), asking it “to urgently investigate how widespread this practice is, and put a stop to it1”. The FCA has written to the largest 25 lenders and will report back by mid-September. Mr Farage has, however, jumped ahead of the FCA, using his profile to attract popular feedback he estimates that some one million customers have been debanked for similar specious reasons.
Of course, corporations are increasingly adopting centre left values and advertising them; rainbow livery in coffee shops is not news. What is remarkable about this debanking story, however, is how NatWest and, it is believed, many other banks appear to have ignored some of the most fundamental banking laws let alone regulations, and made up their own rules to replace them. In summary:
- Customer confidentiality. A fundamental tenet of banking law is that discussing any aspect of a customer’s banking business with anybody, even close family members, is strictly forbidden.
- Dissembling to the media. Firstly, having decided to breach confidentiality by leaking the account closure to the BBC, why did not Dame Rose at least provide the true reason: values and views? It seems she wanted to disparage Mr Farage by implying he was insufficiently wealthy for Coutts. Secondly, the offer of a replacement account with NatWest. Dame Rose implied that this offer was issued simultaneously with the initial closure notice. Mr Farage disputes this and says it was only issued as part of the group’s damage limitation strategy. If NatWest are correct they would by now have produced documentary evidence.
- Corporate Governance. After Dame Rose admitted being the source of a pretty egregious leak, the Board convened an emergency meeting and backed her continued tenure unanimously. Only after the Government stepped in privately was she required to resign.
- Weak regulation. The Board and the two CEOs were doubtless encouraged in their hopes of riding out the storm by the deafening silence of the FCA throughout July, who only announced their investigation after the Finance Minister’s August 3 letter which he published on X (formerly Twitter).
- Deliberately misinterpreting regulations. In this case the Politically Exposed Person regulations, which we now explain in more detail.
Politically Exposed Person (PEP) Regulations
The term PEP was introduced within the UK’s Money Laundering and Terrorist Financing regulations of 20172. The specific rule places enhanced due diligence requirement on financial institutions dealing with individuals whose positions in public life may render them more likely to be involved in bribery, corruption and terrorist financing. The FCA’s helpful accompanying guide points out exactly what the regulations are designed to help banks identify and report to the authorities3:
- customers linked to higher-risk countries or business sectors;
- customers who have unnecessarily complex or opaque beneficial ownership structures;
- transactions that are unusual, lack an obvious economic or lawful purpose, are complex or large or might lend themselves to anonymity;
Taking merely the first bullet point illustrates the risibility of the widespread practice of banks debanking politicians. The FCA has published a list of 19 ‘High Risk’ jurisdictions, such as North Korea, Senegal, and the only European country – Albania. Further, the regulation and guidance is all about enhanced due diligence and, if suspicions arise, requiring banks to file Suspicious Activity Reports to the National Crime Agency. The regulation makes no mention of closing accounts, it merely directs not to open them in the first place.
Is Personal Banking Profitable?
Naturally the mainstream media have drawn the conclusion that banks are trying to impose their centre left views and values on customers. But is there something more to this? The vast majority of victims are personal customers. Is personal banking profitable for banks? Citibank of the US last year cited lack of profitability to drastically shrink its global retail banking operations4. Given the opacity of International Financial Reporting Standards bank accounting, given the ease with which UK (and European) banks are able to fund themselves through central banking facilities and programmes, it is quite possible that high street bank managements have concluded that personal banking profitability is at best marginal. Even branchless online banks are struggling. Globally there are 462 neobanks (fintech companies whose main business is banking), but only 13 are profitable5. Set against onerous retail regulatory obligations, banks appear to have decided that if the smallest doubt a customer arises, closing the account is the default next step.
However, UK interest rates have risen from 0.25% to 5.25% in 20 months, so after many years of being unable to make money from relatively idle accounts, banks can once again make money from ordinary customers by earning passive interest rate margin between the interest they receive via cenbank financing and that which they pay on deposits. Account fees and all other charges have been increased, so gross revenues from retail banking are at record levels. And yet now people are being de-banked who supposedly are not ‘commercially viable’? This is hard to believe.
If these fears are correct the outlook for personal banking is worrying. We support the classic capitalist position that freedom of contract is paramount, that banks are free to do business or terminate business with counterparties of their choice. If law abiding individuals are being debanked because of their values this should present a market opportunity for a competitor. But this does not seem to be happening; once debanked, red flags are being raised throughout the system and individuals cannot get rebanked with any firm, bricks and mortar or fintech. Living and functioning without a bank account is very difficult and getting tougher. It follows that if personal banking is not per se profitable, this UK trend may well spread to Europe.
1 Jeremy Hunt asks regulator to examine extent of debanking – BBC News
3 Enhanced Due Diligence for High-risk Customers | FCA
4 Citigroup ditches global consumer banking division after 20 years | Financial Times
5 LinkedIn posting 31.08.2023 Grant Halverson
Photo by Jason Dent
