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High-street banks’ continued reluctance to open accounts for payments and e-money firms is a cause for concern and should perhaps spur new regulation, the head of the UK’s financial regulator has said, prompting experts to call for more official guidance.
At a hearing in parliament’s Treasury Select Committee meeting earlier this month, the chief executive of the Financial Conduct Authority, Nikhil Rathi, told lawmakers that the “question of de-banking and de-risking across the financial system is a concern”.
During the hearing, Rathi urged the government and parliament to consider deeming banking a fundamental service with associated rights. He noted that other jurisdictions have established backstop mechanisms to ensure entities and enterprises can secure bank accounts, but the UK has not adopted such measures.
Rathi highlighted the critical role bank accounts play in business operations, noting that a diverse range of businesses, including pawnbrokers, crypto-asset firms, charities, cash-intensive businesses, adult entertainment sites and defence firms, face challenges in obtaining banking services. Despite operating legally, these businesses often struggle to secure the bank of their choice, he said.
Payments and e-money institutions face similar issues. Banks or other financial institutions might de-risk from these firms due to concerns about regulatory compliance, financial stability and reputational risk.
"Concerns about money laundering, reputation, and safeguarding practices are key reasons why high-street banks are cautious and wary,” said Heather O’Gorman, head of authorisations at fscom, a payments and e-money consultancy.
She said that banks need to consider the potential risks if a firm fails to safeguard properly. “Additionally, conducting thorough due diligence to ensure a firm can be onboarded is a challenging and resource-intensive process,” she said.
The UK has long upheld commercial freedom in banking, allowing banks discretion to choose their clients. But growing concerns from various business sectors indicate a need to potentially re-evaluate this approach to ensure all legal enterprises have access to essential banking services.
"The UK now has a number of providers of safeguarding bank accounts. However, it has been noted by some payment and e-money institutions that the process of finding and establishing relationships with banks can be challenging at times,” said Max Savoie, a partner at Sidley Austin. “Banks understandably conduct thorough checks on their customers, including corporate customers, and assess risks before deciding whether to onboard them.”
Savoie pointed out that although banks cannot generally discriminate against payment and e-money institutions, they do have a margin of discretion in determining whether or not to provide them with bank accounts for these reasons, particularly if they perceive that an e-money or payments institution lacks robust financial crime, safeguarding or broader risk management policies and procedures.
“Running a business as a payment or electronic money institution requires both safeguarding accounts and operational bank accounts,” he said. “However, from the banks' viewpoint, they face mounting scrutiny in the event payment and electronic money institutions fail to meet applicable regulatory requirements, potentially exposing the banks to risks. It's a challenging balancing act.”
Time for more guidance?
Experts have called on regulators and policymakers to issue more guidance, believing it could improve the situation.
"There are regulations in place to prevent de-risking from happening in the payments fintech market,” said O'Gorman.
She pointed out that there is a requirement under the Payment Services Regulations for banks to review payments and e-money firms on a periodic basis and to inform the FCA when they reject an application.
This applies to individuals and entities identified under specific categories of payment service providers, as well as applicants seeking authorisation or registration as such providers.
The regulation also covers instances where access to payment account services is withdrawn or terminated, ensuring comprehensive reporting to the FCA.
According to James Borley, managing director of payment services at Cosegic, understanding remains murky in terms of regulations. “Regulation 105 [of the PSR] stipulates the necessity to grant access. However, even if an account is successfully onboarded, it's subject to the discretion of the bank's systems and controls, which assess risk appetite.”
“For e-money firms, this means adhering to due diligence and monitoring requirements aligned with the bank's systems, not just their own. This discrepancy raises concerns, particularly regarding transparency friction when issues arise that are genuinely related to e-money firms, as banks cannot disclose the problem to the firm, leading to opacity."
O'Gorman, meanwhile, noted that this process is already heavily legislated, making it difficult to add more regulations. “Perhaps what is needed is more guidance and learning,” she suggested.
Savoie agreed that one potential solution is for regulators and policymakers to offer clearer guidance on banks' responsibilities and liabilities, particularly on the limits to those under customer due diligence and FCA Consumer Duty requirements.
“This would help delineate the boundaries of accountability and could benefit both banks and non-bank payment service providers,” he said.
Additionally, O'Gorman said there are reasons to be positive about the market stepping in.
"An interesting development is that banks are entering the market and attempting to pick up and service e-money and payment firms,” she said. “Conversely, while we haven't witnessed a mass exodus akin to previous de-risking phases, there has been an increase in firms restricting their services and implementing stricter due diligence processes."
O'Gorman said that products from new banks demonstrate a clear appetite for providing these accounts, with many of them specialising in their specific niches.
“In contrast, major banks remain cautious, particularly in light of recent fines and the need for stringent oversight of their due diligence processes,” she said. “While large high-street banks are selective about their partners, there has been an influx of new players entering the market. It's a story of two halves."
