UK banks will be subject to tighter rules for closing customers' accounts under changes designed to protect freedom of expression, the Treasury has announced.
It is a sensitive area of regulation. If someone has their bank account closed, it means they won't be able to pay their bills through direct debit and will even struggle to withdraw cash.
A closed bank account will affect credit score, making it more difficult for the person affected to borrow money or establish lines of credit.
In addition, if one account closes, it does not mean another opens – customers have often found that if their bank closes their account, other banks will be reluctant to take them on.
The revamp of regulations regarding what banks can and cannot do comes after Eurosceptic Nigel Farage had his account closed by private lender Coutts.
“The government has stepped in to address fears that banks are terminating accounts because they disagree with someone’s political beliefs,” the Treasury said on Thursday.
The UK's Financial Ombudsman Service states “businesses that provide bank accounts are generally entitled to close them – just as their customers are”, but adds that banks must treat their customers fairly.
“You shouldn’t close an account because of unfair bias or unlawful discrimination,” the FOS advises. “And you shouldn’t usually close an account without giving reasonable notice.”
Likewise the Financial Conduct Authority's “Principles for Business” set out best practices for the banks' relationship with their customers.
These range from integrity (principle one), to fair treatment (principle six) to clear communication of information (principle seven) and the fair management of conflicts of interest (principle eight).
An account is a business deal between bank and customer. In the similar way that the customer can take their business elsewhere, the bank is empowered to close accounts.
“A bank may decide to close a customer’s account because of how that person has been operating it, or because of regulatory requirements, or because the bank also feels the relationship has broken down,” the Banking Ombudsman Scheme says.
In the details
If you want to find reasons that your bank can close your account, take a look at the small print.
Most British banks will cite breaking the law, abusing staff and lying about personal information as reasons.
Some bank accounts will have thresholds. For example, many premier current accounts require the customer to have an income of more than £75,000 ($96,390) a year. If the customer's salary drops or they move to a lower-paid job, their account could be closed.
Sometimes banks reverse the right to close certain accounts that have been dormant for long periods of time.
However, in all these cases, the bank must provide clear and timely information to the customer. The FOS says customers should be given at least 30 days' notice of an account closure, except in cases of fraud or abuse aimed at the bank's staff.
In most cases, the banks should give clear reasoning as to why the account has been closed, but in reality there are no legal requirements for them to do so.
UK Finance, which used to be called the British Bankers' Association and represents the sector, says a lender “should tailor its communications with the customer, including setting out its reasoning clearly, so far as is feasible and permissible”.
No warning, no explanation
In a small number of cases, banks can close accounts without warning or explanation.
For example, if the account holder is being investigated by the police for money laundering, the bank would be obliged to close the account.
But if the bank then informs the account holder why they closed the account, it would be in breach of the Proceeds of Crime Act, because it would essentially be tipping off the customer about a police investigation.
However, UK Finance also advises that banks are not required to explain why a bank has closed an account if it is neither “appropriate nor permissible”.
Issue such as breaching terms and conditions, abuse of staff and even suspicious activity fall under this much broader definition.
The former head of the British Bankers' Association, Angela Knight, told the BBC the terms and conditions of accounts can vary from bank to bank, because no lender can claim to be all-encompassing.
“There are some banks that actually target certain sectors of society,” she said.
“There are those who do Sharia banking, for example. There are others, of which Coutts is one, who will only deal with – and they make it quite clear – people who have over a certain amount of money.
“So I don't think you can say that every bank should be there to universally bank all of us. They need to be clear who their target market is.”
According to the FOS, in the financial year 2022/23, a total of 1,389 UK accounts were closed for a variety of reasons. That compares to 1,305 the previous year.
“Account closures should always be carried out in line with the bank’s terms and conditions,” an FOS representative said.
“If consumers are concerned that they haven't been treated fairly, they should contact the FOS and we'll see if we can help. We are a free, independent service set up to resolve financial disputes informally and fairly. Each case is investigated on its own merits.”
Reputation considerations
The big question is … can my bank close my account because of my political views?
Technically they shouldn't, but as a representative for Coutts – owned by the NatWest Banking Group – said in response to such accusations from Mr Farage: “Decisions to close an account are not taken lightly and involve a number of factors including commercial viability, reputational considerations, and legal and regulatory requirements.”
Some analysts point out if you do not pay your water bill, the water company cannot simply turn off your taps. If you don't pay your rent, your landlord cannot immediately kick you out. But your bank has the ability to cut you off from your money at a moment's notice, because banking is not seen as a basic human right in the way water and shelter are.
Nonetheless, there are rules and regulations set down by the likes of UK Finance and the FCA and disputes can be brought before the FOS.
Talking directly to the banks from its web pages, the FOS says banks “shouldn’t” close accounts on the basis of unfair bias, nor should they do so without reasonable notice.
In the wake of the Farage saga, banks will have to explain why they are shutting down someone's account and extend the notice period for a forced account closure from 30 days to 90 days.
