De-banking is becoming more widespread, particularly for businesses in innovative and novel industries. There are different views in the industry as to how and when banks are able to de-bank customers.
However, the recent NSW Supreme Court decision in Human Appeal International Australia v Beyond Bank Australia Ltd (No 2) [2023] NSWSC 1161 (Case) has provided clarity on what it means to act in good faith when dealing with customers and how this impacts a bank’s ability to de-bank a customer.
So, what is de-banking?
‘De-banking’ is where a bank closes or ceases to provide banking services to a customer. De-banking has become a key area for concern for many fintech and crypto businesses, who often find that their bank accounts have been closed without any explanation or right of appeal, leaving them with very little time to source alternative banking arrangements. The uptick in de-banking has come to the attention of regulators and, in June 2023, the Counsel of Financial Regulators released a Government Response for potential policy responses to de-banking in Australia.
Often scant detail is provided as to why the bank has de-banked a particular customer. Banks often refer to profitability, industry risk, suitable and reputational concerns as well as their obligations under the Anti Money Laundering and Counter Terrorism Financing Act 2006 (Cth) (the AML/CTF Act). Sometimes banks do not provide any reasons at all and simply rely on a termination right under the account terms of use. This practice makes it difficult to ascertain whether a bank has genuine and valid concerns, or some other factor drove their decision.
In the Case, Justice Parker was asked to consider whether a bank can validly close a customer account without a valid commercial reason. As part of this, the Case considered the requirements under a bank’s contractual obligations and what a bank’s evidentiary onus on a bank when seeking to rely on their obligations under the AML/CTF Act as a complete defence to de-banking without reasons.
What happened?
This Case concerned Beyond Bank Australia, which is a mutual bank and Human Appeal International Australia, a Muslim charity.
In 2021, Beyond Bank terminated Human Appeal’s banking facilities via email. Human Appeal applied to the Court for relief alleging that Beyond Bank wrongfully terminated their account by not dealing in good faith, and that there were no reasonable grounds for Beyond Bank to terminate the account.
It was further argued that Beyond Bank breached the Customer Owned Banking Association Code of Practice (the Code), which Beyond Bank subscribed to and was incorporated into Beyond Bank’s contractual terms. This is because it was contended that Beyond Bank’s ability to terminate without justification or reason would breach the requirements of the Code by not fairly balancing the interests of Beyond Bank and its customers.
As part of the decision, Justice Parker noted that Beyond Bank did not produce any evidence as to the reasons for terminating as part of the discovery process. The Court found this troubling, and counsel for Beyond Bank suggested that an adverse inference should not be drawn from this given Beyond Bank’s obligations under the AML/CTF Act. Justice Parker analysed the relevant provisions of the AML/CTF Act and was of the view that Beyond Bank may have a misguided view as to the scope of their obligations. However, nothing turned on this and Justice Parker nonetheless considered the case based on the evidence provided.
The Court found that there was no valid reason for termination and, as such, the termination letter provided to Human Appeal was invalid. As a result of the invalid termination, the Court also found that Beyond Bank had breached the Code as Beyond Bank’s contractual terms did not strike a fair balance between the customer and bank’s interests.
While this was a win for the customer, the decision does not clarify the boundaries of a bank’s ability to de-bank its customers for specific reasons including compliance with the AML/CTF Act. This is because these matters were not specifically argued as part of the Case. Justice Parker does provide some commentary in his judgment on these matters. It will be interesting to see what, if any, changes banks may make to their de-banking process as a result.
Key Takeaways
1. Banks are bound to act in good faith
Any bank who subscribes to a code of practice needs to be mindful that the terms of the code of practice are incorporated into their terms of service and become express contractual obligations.
In this Case, the express contractual obligation was to be fair and ethical in all dealings. Failure to provide a reason for terminating breached this obligation and Beyond Bank was required to provide a reason. Beyond Bank conceded this but was not able to produce any evidence as to the reason for termination. On this basis, Beyond Bank accepted that its purported termination was invalid.
2. Banks do not have a broad discretion to de-bank customers without reasons
Although Justice Parker was critical about Beyond Bank’s ability to terminate without reason, he did not conclude that the bank breached its contractual duty of good faith or contractual duty of cooperation. Instead, it was implied that a bank acting reasonably would, when identifying an issue with a customer, seek to raise the issue with the customer (where legally permissible) to seek a resolution rather than terminating without any reason. Issue was taken with the fact that identifying the reason for termination was only able to be determined by the customer commencing legal proceedings following the termination.
So, what does this mean for bank wanting to de-bank a customer? While banks have to date been vague and provide little to no reasons for de-banking in termination letters, we suspect banks will now start to provide reasons for any termination of service.
Despite this, it is likely any reasons will be generic to not fall foul of any of the tipping off provisions and any associated obligations under the AML/CTF Act. The Case does not address how much detail needs to be given for a bank to rely on a reason and the obligations under the AML/CTF Act do raise some complexity, which may be exploited by banks for de-banking.
3. AML is not a sufficient excuse
Although banks are restricted from providing information regarding a suspicious matter report to a person under the AML/CTF Act, the Court highlighted that:
- Merely citing the AML/CTF Act for not providing a reason is insufficient;
- Saying you may have had a reason, but you can’t adduce any admissible evidence to substantiate that reason because of your obligations under the AML/CTF Act, is insufficient; and
- It is doubtful that relying on additional costs associated with AML/CTF Act compliance for a particular client is a valid commercial reason for terminating a banking relationship.
Despite this, it is unclear to what extent a bank needs to describe the reason for terminating and what evidence a bank would be required to produce to evidence that reason considering their obligations under the AML/CTF Act. This is the sticking point, and it will be interesting to see how this impacts banks’ de-banking practices.
What’s Next?
The Case confirms that industry’s concerns about the validity and fairness of de-banking are valid. However, the Court did not make many determinations that provide a solid legal foundation to easily refute any decision made by a bank to terminate the services that they provide for other businesses who suffer de-banking. Rather, this Case raises further issues for consideration.
At best, businesses who are de-banked can raise the issues considered in the Case. However, it remains that businesses who are de-banked will need to pursue legal channels including complaints and legal action to review or overturn a de-banking decision. This is no small feat and can be an expensive exercise. It is also not clear what a customer’s chance of success will be where a reason is given. For this reason, we believe banks will continue to de-bank customers and it will continue to be difficult to refute the commercial and risk-based decisions of banks.
For more information, please contact Michele Levine, Jaime Lumsden, Nicholas Pavouris or Annabelle Parmegiani.
