Storm over Coutts memo puts lenders on tenterhooks pending regulatory clarity

27 July 2023
By Martin Coyle and Phoebe Seers

The continuing controversy over the Nigel Farage UK banking furor, which yesterday claimed the head of one of the country’s biggest banks, is likely to lead to lenders being more circumspect in their internal decision-making, despite hopes that the issue would lead to greater transparency for customers.

Farage, a pro-Brexit former politician, has whipped up a storm of controversy over private bank Coutts’ decision to drop him as a customer. This led to the departure of the chief executive of Coutts owner NatWest Group, Alison Rose, who resigned yesterday following pressure from senior UK government officials.

Rose’s departure followed her leak of details of Farage’s arrangements with Coutts to a BBC journalist at a dinner, suggesting that the decision to drop him was purely based on a commercial rationale.

The subsequent uncovering by Farage of an internal Coutts memo, which pointed to allegedly racist and xenophobic comments made by the former UKIP leader — as well as the bank’s concerns about his links to controversial figures including Donald Trump, and disquiet about his right-wing views — appeared to cast doubt on that explanation and led to Rose’s exit from NatWest.

Leaving aside the bank’s decision to expel Farage, it is this memo which has caused Coutts the most trouble in the whole saga. Farage claimed he was dropped due to his personal or political views, suggesting that he's a victim of a “woke” bank looking to impinge on his freedom of speech.

Banks are now likely to take greater care in their internal decision-making, and particularly, what they commit to record. Farage uncovered the material via a subject access request, a mechanism open to all individuals looking to see what records a company holds on them. Subject access requests are typically used in employment disputes, but can be used in other situations, as Farage has demonstrated. 

Banks in the UK are now going to be worried about the risk of another disgruntled high-profile figure asking to see records of decision-making. Only today, Alexandra Tolstoy, the former partner of Russian oligarch Sergei Pugachev, is reported by The Times to have used a data access request to obtain information from NatWest on why it closed her account two months ago. 

When writing about a customer, banks will be mindful that anything they say could end up on the front page of a popular newspaper, or be scrutinized in court or by a regulator. This is likely to lead to banks being less open about their decision-making — at least on paper. They may also be reviewing policy on deleting customer data to see if it's possible to reduce the risk of any potentially damaging documents making it into the public domain. 

The quandary that banks now find themselves in is exemplified by fine levied on Coutts 11 years ago by the Financial Services Authority, the predecessor of today's Financial Conduct Authority. 

In 2012, the bank was fined almost 9 million pounds (around $12 million) because it failed to gather sufficient information on high-risk clients and politically exposed persons, or PEPs. Coutts had failed to “keep the information held on its existing PEP and other high-risk customers up-to-date,” the FSA said. Farage was a PEP as far as Coutts was concerned, albeit one it had downgraded to “low risk.” 

In a high-profile UK civil court case from 2012, an HSBC money laundering reporting officer, or MLRO, was summoned to court to give evidence in a case involving a Zimbabwean businessman suspected of money laundering. HSBC had blocked four transactions totaling $38 million between September 2006 and February 2007.

The MLRO spent six days in the witness box explaining why he'd filed suspicious activity reports, which are sent to the authorities when a bank suspects wrongdoing, against this businessman. The bank eventually won the case, and no evidence of money laundering was found. But HSBC’s internal processes came under intense scrutiny. 

The media, together with some of the UK’s most senior government figures, has undeniably played the role of judge and jury in the Farage banking debacle, with Coutts, NatWest and Rose each found guilty, with no recourse to appeal.

However, the regulators themselves have until now been entirely non-committal. The Information Commissioner's Office has been explicit that it hasn't announced any investigation, but is following its “usual processes and procedures”. In terms of guidance, the ICO has merely said that banks shouldn’t hold “any more information than is necessary.”

The Financial Conduct Authority is waiting for the outcome of any investigation by the ICO or the Financial Ombudsman, before it decides whether to act. 

In Coutts’ case, it's still unclear whether or not the bank’s main motivation for closing the account was commercial. Farage, who hadn’t met the lender’s commercial threshold for some time, had a mortgage with it that expired this month. It also isn’t clear whether reputational risk is a valid reason for terminating a customer relationship — a concern that was also frequently cited in the Coutts memo. 

All that's been made explicit is that a bank cannot close an account just because it doesn’t agree with its customer’s political views. 

A provision in the Financial Services and Markets Act, passed last month, requires the FCA to review how banks are applying its guidance on PEPs. The regulator has said it intends to conduct that review by the end of September, after which it will presumably issue fresh guidance.  

Until then, banks remain at the mercy of data protection law and of media-savvy former clients.

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