[Banking] The significance of de-risking for financial services firms

De-risking itself is the term given to the closing of bank accounts or accounts where the perceived financial and reputational risk of operating the account outweighs the overall benefit. Some banks, on removing themselves from ‘more risky’ segments of the market (including those in the developing world), have had their names splashed across the press and accused of employing unbalanced risk avoidance techniques to save cash and avoid fines. In defense these banks blame their decision to ‘de-risk’ on increased scrutiny from the regulator, hefty fines and the requirement to implement a risk-based approach to their Anti-Money Laundering (AML) systems and controls. However, the regulators position on this is quite clear, for example in a release made earlier this year the FCA stated:

‘While the decision to accept or maintain a business relationship is ultimately a commercial one for the bank, we think that there should be relatively few cases where it is necessary to decline business relationships solely because of anti-money laundering requirements. As a result, we now consider during our AML work whether firms’ de-risking strategies give rise to consumer protection and/or competition issues’.

A key aspect which should be considered is the impact on competition, for example, the impact of de-risking on smaller Banks such as UK and Overseas Challenger Banks and remittance firms. Such Banks and remittance firms are reliant on bigger banks for accounts that enable them to reach other financial markets and jurisdictions. From Mazars experience, it is these firms in particular, who are struggling to operate given the current environment in which the decisions of these bigger banks will leave them with no choice but to exit the market completely.

In light of this, the results of the FCA study on competition in the investment and corporate banking sector which was launched during May 2015 will be an interesting one to watch here; especially as this coincides with the regulator recently being granted powers to enforce against breaches of the Competition Act and to refer markets to the Competition and Markets Authority. It will be particularly interesting to observe whether the de-risking activities of bigger banks are considered as a potential anti-competitive movement.

It may be that the FCA can use their powers to address any future cases of de-risking and take action where these are considered un-justified. Alternatively, as suggested in a speech from Martin Wheatley (Chief Executive Officer (CEO), FCA) during February 2015, it may be that the FCA wait and take lead from the US. Some may argue, however, that the ability of an international response to effectively manage competition issues here in the UK will be limited.

To close, we would like to draw your attention to the direct impact de-risking has on individuals and communities both here in the UK and abroad. For example, there is significant discussion over the impact on individuals in war torn countries such as Somalia, Iraq and Syria who rely on the transfer of funds from relatives in countries, such as here in the UK, to survive. In addition, many charities use remittance firms to transfer aid to support developing countries which means that when bigger banks close accounts in this way they are having a direct impact on the support these communities receive. However, it leads to be seen whether such a holistic analysis is completed by the banks prior to the decision to close an account in the name of de-risking, for example consideration of whether it is a human right to have access to financial services. This will be particularly important in countries such as France, Belgium and Italy where laws are in place that ensure people have access to a basic bank account.