U.K. banks' attempts to limit the £5 billion-a-year cost ofcompliance with anti-financial crime rules may lead them to fall foul of theregulator if they continue to prune whole categories of customers, includingforeign students, charities and U.S. citizens.
Compliance costs have soared under the impact of legislationagainst the estimated hundreds of billions of dollars laundered through theU.K. annually, with one foreign bank reporting an increase per customer from£60-£70 to more than £300 in less than two years, according to a reportcommissioned by the Financial Conduct Authority.
With IT spending set to rocket over the next two years,partly driven by compliance, banks are offloading riskier categories of clientswho don't justify the extra cost. Two large U.K. banks have been closing around1,600 personal and business accounts a month for such reasons, the report byJohn Howell & Co said.
But the FCA has warned banks not to use anti-moneylaundering procedures as an excuse for closing unprofitable accounts and wantslenders to look at each case on its merits. This will push up compliance costs,and banks could face fines if they fall short, Chrisol Correia, director ofglobal anti-money laundering at LexisNexis Risk Solutions in London, said in aninterview.
Categories of discarded bank customers have includedAfricans, people from the Caribbean, foreign students, charities and evendiplomats, the FCA says. Americans have been hit too, because of U.Srequirements which penalize banks judged to have assisted their citizens inavoiding paying tax on foreign assets.
"There's a feeling that banks took too many wholesalede-risking decisions. They dropped entire geographies and classes ofcustomers," Correia said, adding that the FCA might resort to consumerprotection regulation.
The Financial Ombudsman deals with 20 to 30 such de-riskingcomplaints per week.
Former bank customers have also tried to bring civil suitsagainst lenders, but these have been mostly unsuccessful, thanks to acontractual right to close accounts, one lawyer with knowledge of such casessaid. The lawyer did not want to be named because of his work with banks.
Banks tend to shed the least lucrative accounts, and have madecomplaints more likely by failing to clearly provide reasons to eithercustomers affected or regulators, said Ellen Zimiles, a former U.S. prosecutorand now a managing director specialized in compliance at finance consultancyNavigant.
"Generally [banks] don't like to say they are droppingthe account because it's unprofitable," she said in an interview.
"Usually if the account is profitable more analysisgoes into the decision to de-risk."
Wholesale de-risking has disproportionately affected small businessesand retail customers from disadvantaged backgrounds, John Howell & Cofound, warning of a possible "significant socio-economic impact."
Banks are aware they may be penalized, Zimiles said,although she didn't know of any fines levied as yet.
"I have heard talk of sanctions," she said."It's more of a threat."
While case-by-case examination of customers is in private banking andwealth management, replicating this in retail banking would cost a fortune,Zimiles said, adding that the precise impact was hard to quantify.
Currently, customers considered as overly risky aredischarged or their applications denied by computer algorithms, a cheapprocedure for banks. Moving to a case-by-case system would force banks toupgrade their computing power to process the additional data. Banks' ITspending will rise by 40% in the next two years, partly due to complianceneeds, PricewaterhouseCoopers said in a report. Anti-money launderingcompliance costs have already increased by 50% in the U.K. over 3 years,according to LexisNexis Risk Solutions.
Lenders would also require additional employees, Correiaexplained.
"Compliance is increasingly considered aprofession," he said. "Banks have an obligation to spot economiccrime and the number of institutions looking after that has grown."
"It's not easy to find the right people to do this sothere is also recruitment pressure."
Compliance already takes up 40% of a typical bank IT budget,Tommy Flynn, Rabobank's COO for Europe, told a London conference onJune 30, adding: "If we are spending a lot of money it is probably becausewe have a big problem."