Last year, Nigel Farage helped to get a new word into the dictionary.
This occurred when the former Brexit Party leader became embroiled in a dispute with NatWest over the closure of his accounts at its private bank subsidiary Coutts – a process known as debanking. The incident sparked a fierce debate over the ethical implications of what appears to be an increasingly common practice.
In February, a parliamentary inquiry found that eight of the UK’s biggest banks had last year closed the accounts of 140,000 small businesses – an increase of 44% compared to the previous financial year.
What is debanking – and what are the consequences?
Put simply, debanking is when a bank chooses to close the account of an individual or business. Financial institutions ultimately have the freedom to choose with whom they do business and can sever ties with anyone they feel presents a regulatory, legal, financial or reputational risk to them.
The debanking process can be triggered by several factors. Financial crime, failure to meet regulatory compliance, lack of information-sharing, account inactivity and a bank’s own risk management have all been cited as reasons for closing down an account. According to a recent investigation into debanking, conducted by the Financial Conduct Authority (FCA), the primary reason for business account closure was the commercial cost of complying with anti-financial crime requirements, which particularly affected adult entertainment, pawnbroking, and crypto businesses.
Banks are usually required to give a business or individual two months’ notice if they want to close an account. In the cases of suspected fraud there is no minimum notice requirement.
At a time when it is practically impossible to operate a business without a bank account, being debanked can cause significant upheaval and distress. Suddenly, routine activities such as paying employees and bills, or receiving money from customers are no longer possible.
Beyond the inconvenience of losing access to vital financial resources, debanking can also lead to long-lasting reputational damage and financial ostracisation. Banks have access to transactional and behavioural insights; data that could potentially be shared with other institutions and prevent that individual or business from being able to open an account or secure loans anywhere else.
How to prevent debanking
Luckily, there are steps that businesses can take to reduce the risk of being debanked. Prevention starts with transparency, so ensuring that compliant policies are in place and implementing good banking practices, such as diligent record-keeping and reporting on where funds come from, is key.
Businesses or individuals who feel they have had their accounts closed unfairly have the right to lodge a complaint with the Financial Ombudsman, a free services that settles issues between consumers and businesses that provide financial services.
Are businesses being treated unfairly?
Data published by the Treasury Committee shows the number of debanking-related complaints received by the Financial Ombudsman Service has increased by 81% year-on-year, from 367 in 2022-23 to 666 in 2023-24.
Such a spike in complaints raises concern over the treatment of businesses by major banks, and questions around whether some are being wrongly debanked.
Of course, the ability for banks to close accounts quickly and without reason is an important tool in the fight against fraud. The problem is that bank due diligence is not an exact science; what banks perceive to be a risk relies on information online that may not be accurate, complete or up-to-date.
Furthermore, it is not always clear why a bank has chosen to close an account as they rarely disclose details of their decision-making process. It can therefore be difficult for a business affected by debanking to prove their innocence.
The UK government has recently proposed tighter rules to protect businesses. Under these, banks will have to give at least 90 days notice before closing an account. They will also be required to give customers clear explanations for why they have chosen to do so.
The debanking debacle is, in many ways, a response to banks‘ more risk-averse nature today and, while tighter rules are coming down the line, businesses should still be aware of how they can protect themselves.
