Customers De-banked Over Reputational Risks Must Be Told of the Reason, Government Says

People maintain social distance while they queue outside a Natwest bank as the spread of the coronavirus disease (COVID-19) continues, in London, Britain, on March 26, 2020. (Hannah McKay/Reuters)

Banks that want to close an account over reputational risks will have to make the reasoning “specifically clear” to the customer, the government said on Monday.

It’s part of the planned regulatory change to make it harder for payment service providers to de-bank customers for primarily commercial reasons.

The plan was first announced in July after broadcaster and former Brexit Party leader Nigel Farage found out that his account with private bank Coutts had been closed because the bank’s Wealth Reputational Risk Committee decided his publicly-stated views were at odds with the bank’s “position as an inclusive organisation.”

Mr. Farage wasn’t told of the reason when Coutts informed him of its decision to close the account. He had to file a “subject access request” to obtain the details.

Under current rules, payment service providers can terminate a contract without telling the customer why. They are typically required to give at least two months of notice unless it’s unlawful to do so or when a customer behaves in a threatening way towards staff.

The notice period will be extended to 90 days and service providers will have to inform the customer of the reason for an account closure.

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In details published (pdf) on Monday, the Treasury said “clear and tailored explanatory reasons should be provided” except in limited scenarios including where to do so would be unlawful.

“Therefore, if a provider chooses to terminate the contract for primarily commercial reasons, such as due to a policy decision by the provider not to take on the cost or reputational risk of certain categories of customer, this should be made specifically clear to the customer,” the document reads.

However, the government doesn’t intend to define what constitutes clear and tailored explanatory reasons in the text of the law.

“What matters is the outcome of the communication: that the customer clearly understands why the contract is terminated and the information they receive regarding their terminated framework contract is adequately specific to their circumstances,” it said.

Ninety days’ notice of termination should be provided, with limit exceptions such as when it’s illegal to do so or when it poses a risk of “serious or significant harm to the customer, to staff, or a connected third-party to the framework contract,” the Treasury said.

Where the customer is not a consumer, a micro-enterprise, or a charity, a service provider and the customer can reach their own agreement on how long the notice period should be, but the government said providers should make 90 days a default offer.

The government has already asked service providers to begin implementing the new rules.

It will publish new draft guidance by the end of the year, and seek to amend The Payment Services Regulations 2017 to include the proposed changes “as soon as parliamentary time allows.”

Apart from Mr. Farage, his ally Richard Tice also said he had been rejected a loan because a bank considered him a “reputational risk.”

The Financial Conduct Authority has said it will take “prompt action” if a bank or financial service outright denies service to politicians rather than basing the decision on risk.

The proposed rule change on notice period extension and transparency will make it harder for service providers to unload customers over reputational risks, but it’s not expected to help those who are suspected—rightly or mistakenly—of fraud.