SMEs, Charities and Fintech firm’s accounts affected by Banks red tape

Posted on 26 May, 2016 by Steph Cowie

According to a recent report by the Financial Conduct Authority, small businesses, charities and fintech firm’s accounts are being cut by banks, in order to ease the cost of regulatory compliance and anti-money laundering controls.

Fraud Prevention

With the ever increasing risks of money laundering and corruption, banks have been forced to heighten their security measures to eliminate the risk of inadvertently letting dirty money into the system.

A study performed by consultants at John Howell & Co highlights that the security threat, mixed with costs of other regulations, has had an adverse effect on potential new customers that are too small to be evaluated for financial crimes by banks, resulting in applications being rejected.

The red tape could see customers struggle for acceptance if their documentation is not accurate, they fail a background check or operate in sectors or countries deemed to be at risk of financial crime or terrorist financing.

This will result in charities that operate in troubled countries using cash to carry out their operations and businesses that offer money transfers to be at risk.

The investigation also found that “Two large UK banks are together closing around 1,000 personal and 600 business and corporate accounts per month for ‘risk appetite’ type reasons.”

These numbers tend to be overlooked due to new accounts being opened and old accounts being closed.

When larger banks decide not to deal with clients, this then has a knock on affect with smaller banks that provide services in other countries. In order not to lose business from the bigger banks, the smaller banks will seek to cut out SME’s or charities because of the fear of losing business.

Typically, the compliance cost of creating a new account for an individual with no risk is £1 to £2 for the admin’s back office, while for a small business, it raises to £6 to £7. When an account triggers an alert, the costs increases to £10 to £40, however, if a senior expert is required to oversee the process, the costs can exceed £100.

An extreme case could require an intelligence report which allows the bank to investigate the client fully. The costs for this type of case could raise to £20,000 which offset with the individual, charity or firm revenue, is not a worthwhile investment for the bank.

By enhancing the ability of information sharing between banks and the authorities, this communication would help identify potential risks before any progressing is required, reducing the costs. The City watchdog reported that this would help to highlight “those customers who genuinely present the highest risk of money laundering or terrorist financing.”

Other methods that regulators want to put into practice is ways to identify customers digitally, in a bid to reduce current costs and save valuable time.

The FCA stated that banks should still be on their best behaviour, saying: “Banks should not use AML as an excuse for closing accounts when they are closing them for other reasons”.

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