Online Challenger Banks

Question

Asked by

To ask His Majesty’s Government what assessment they have made of how online challenger banks assess and process new applications for accounts.

My Lords, the decision to provide banking services is largely a commercial one. Banks have strict obligations to ensure the legitimacy of a new customer and to protect against financial crime, and all new customers opening an account must be subject to due diligence under the money laundering regulations. The regulations are not prescriptive about how this should be done. The FCA expects banks to treat customers fairly and to take a proportionate approach commensurate with their assessment of the risk.

My Lords, I thank the Minister for that Answer. I welcome the support and the need for regulation of new challenger banks—and all banks—but, in my career of delivering public services with innovation, I have noticed the need to balance innovation with fairness. From personal experience, and more from what I have heard from a great many members of the public, this balance does not seem to be right at the moment in a sector that I really feel we want to champion: fintechs and challenger banks. So does the Minister feel that the balance between the innovation and the growth we are looking to see is right, when we see services providing no explanation or opportunity for engagement when making decisions such as offering banking services, especially as we are now looking at an era of digital assets and agentic banking, where we would like to see fairer digital services for all?

I am grateful to the noble Lord for his question and for our brief conversation last week about some of the issues he has experienced. He will be aware that many of the issues he raises are ultimately commercial decisions for individual financial institutions, and how they choose to communicate with their customers and potential customers are largely decisions for themselves. He will know that, where a bank decides not to allow an account, it can disclose why it has made that decision, but it is not generally required to do so or to provide detailed reasons. In some cases, banks are legally constrained in what they can or are able to say. I think the noble Lord is interested in the use of AI in some of these decisions. The FCA is clear that automation does not remove a firm’s responsibility; it must retain effective oversight of automated decisions and ensure that decisions are fair and made in accordance with regulatory requirements. But, as I say, the decision about how and whether to communicate that is largely a commercial one for the individual financial institution.

My Lords, has the Minister seen reports that members of defence companies are being refused accounts with challenger banks? The whole issue of de-banking, the difficulty that defence companies are having in finding suitable accommodation to rent, and the removal, with the assistance of the Edinburgh Council, of Leonardo’s recruiting advertisements from the city’s trams are all surely indications that ESG concerns are being used for overtly political purposes. Is this not yet another baleful consequence of the Government’s failure to lead a national conversation on defence, which they themselves admitted was so badly required?

I thought I was going to be able to agree with everything the noble and gallant Lord said—right up until the last sentence. I agree with 99% of his question, and I absolutely agree that access to finance for defence firms is incredibly important. The instances that he cites are troubling, and I share his concerns about them. Access to finance is a significant issue for defence firms, particularly SMEs. No company should ever be denied access to financial services solely on the basis that it works in the defence sector, and the banking sector should never take a blanket approach to any one sector. The Government are actively engaging with banks to ensure that they understand the importance of the defence sector and the FCA’s work to understand why banks might close or reject accounts. Where it has found areas in which firms need to improve customer outcomes, the Government expect firms to consider the FCA’s findings.

My Lords, does the Minister find, as I have done, in conversations perhaps not dissimilar to those with the noble Lord, Lord Ranger, that the challenger banks and fintechs are largely serving the same group—although perhaps more efficiently—that is served by the high street banks? Therefore, will he look much more seriously at the potential not just of banking hubs but of community development financial institutions and a way to combine them, so that small businesses can finally get access to the loans and services they need and that individuals who remain excluded finally have access to the banking sector?

I agree in large part with what the noble Baroness says. As she will know, as part of the small business strategy, the Government have introduced a range of measures to remove barriers to accessing finance for SMEs. She will know, too, that access to banking services is vital for businesses across the UK. While provision of financial services to companies is largely a commercial matter, the Government of course believe that all customers should be treated fairly.

On access to banking for consumers and banking hubs, we have set out an ambition to have 350 banking hubs. Cash Access UK will deploy a banking hub wherever the industry co-ordinating body responsible suggests that one is appropriate.

My Lords, during my time as a trade envoy to Rwanda and Uganda, I noticed first hand that UK businesses could open a bank account in those countries in less than five minutes, but it will take three months, if they are lucky, to open a bank account here. The Minister mentioned that it is a commercial decision, but is heavily legislated for through the Bribery Act, the money laundering Act and many others. Can the Minister please look into this, particularly for SMEs that are starting new businesses and are having real difficulty opening a bank account?

The noble Lord will know that the money laundering regulations rightly mean that, for new customers opening an account, banks are required to take due diligence measures to verify the customers’ identity, assess the intended purpose of the account and flag any suspicious transactions to law enforcement. The regulations are not prescriptive in setting out specific steps that banks should undertake to satisfy customer due diligence, but instead require them to take a proportionate approach, which I think is what the noble Lord is asking for. Each bank will therefore have its own policies and procedures, and those policies should be informed by each bank’s own assessment of the risk faced by its services and customers, based on sources such as the national risk assessment of money laundering and terrorist financing.

My Lords, this year has seen a massive increase in offshore unregulated betting. Are these challenger banks following the same procedures and checks as the normal high street banks?

Yes, they would be required to do so.

My Lords, the anti-money laundering regulations are imposed on people who are politically exposed without any nuance whatever, and not in accordance with the legislation or regulations, which require banks to assess people on a case-by-case basis—nor are customers told why they are being refused. There appears to be no mechanism for any kind of appeal or redress. Will the Minister talk with the FCA and the numerous ombudsmen who appear to work on this area and at least allow customers to talk to a human being rather than a computer that is programmed to say no in all circumstances?

I fully recognise and understand many of the things the noble Lord says. I understand that being a politically exposed person means enhanced scrutiny and administrative burdens and has impacted many noble Lords. Banks and other regulated firms must apply additional checks to customers who meet the definition of a politically exposed person, as well as to their relatives and close associates. That is to mitigate the increased risk that they are targeted for bribery and corruption attempts. While those checks are important, it is essential that they are proportionate to the risks posed; checks should account for the nature of the proposed business relationship and the potential for the product to be misused.

The noble Lord will know that changes to the money laundering regulations now require banks to treat domestic politically exposed persons as inherently lower risk and, in the absence of any other high-risk factors, banks should apply due diligence measures proportionately. In July 2024, the FCA also published its review of the treatment of politically exposed persons, which identified a range of required improvements by the firms that it assessed.

My Lords, I think we all recognise that there is a balance to be found between protecting the consumer and encouraging enterprise and growth in this area. But my observation, the observation of many Peers and my own experience of trying to open a new account with Metro Bank is that there is a vast bureaucracy around the FCA and money laundering rules and that that is disadvantaging our challenger banks. Does the Minister agree that the current system tends to favour incumbents, which obviously harms growth and consumers? What practical steps can the Government take to help challenger banks meet the standards efficiently and compete on a level playing field, which we need for innovation?

I do not think I agree with the noble Baroness on the question she asked about disadvantaging challenger banks. As I have said already, the regulations are not prescriptive in setting out specific steps that banks should undertake to satisfy customer due diligence; instead, they require them to take a proportionate approach. Each bank therefore has its own policies and procedures, which should be informed by each bank’s own assessment of the risks faced by its services and customers.