“De-banking” in good faith: when can a bank de-bank a customer?

“De-banking” - where a bank declines or withdraws services from a customer - has been a topic of interest for both banks and regulators in an environment where customer relationships have been the subject of increasing reputational and regulatory scrutiny. A recent decision by the Supreme Court of New South Wales offers guidance on what banks should and should not do when deciding to exercise their contractual power to end the relationship with a customer.

Closing a customer’s bank account: is a commercial justification necessary?

The relationship between a bank and its customer is contractual but also said to be “founded on trust and good faith in a commercial sense” (ASIC v Australia and New Zealand Banking Corporation Ltd (No 3) [2020] FCA 1421 at [13] per Allsop CJ). So what obligations or duties does a bank owe its customer when closing their account?

The Australian Government has recently expressed concerns that “de-banking” customers may stifle competition and innovation in the financial sector and drive businesses underground.^[1]

The issue received media attention recently when, in June 2023, a British bank closed its account with politician Nigel Farage without giving a reason for its decision. Controversy ensued when internal documents showed that the bank might have closed the account not for commercial but for reputational reasons.

The saga highlights two potential problems a bank may face when deciding to “de-bank” or end its contractual relationship with a customer. First, can a bank terminate its relationship with a customer pursuant to an express termination clause without having a commercial basis for the decision? And second, is a bank obliged to give reasons for its decision?

The Beyond Bank case study

Both issues were recently addressed by the Supreme Court of New South Wales (Parker J) in Human Appeal International Australia v Beyond Bank Australia Ltd (No 2) [2023] NSWSC 1161 (“Beyond Bank”).

In that decision, Beyond Bank Australia Ltd, a mutual bank, purported to terminate its banking relationship with Human Appeal International Australia, a charitable organisation, pursuant to a clause in Beyond Bank’s terms and conditions that gave the bank the right to close any customer account by giving 20 days' notice.  The clause expressly provided that the bank did not need to state a reason for its decision to close the account. The contract also expressly incorporated the terms of the Customer Owned Banking Code of Practice (“CoP”), a voluntary code of practice for Australia’s customer-owned banking institutions (i.e. mutual banks, credit unions and building societies). Relevantly, a clause in the CoP provided that the contractual terms between Beyond Bank and its customer had to be consistent with the CoP and “strike a fair balance” between a customer’s legitimate needs and interests as customers of the bank and the bank’s interests and obligations, including prudential obligations. The CoP also stated that the bank would “always act honestly and with integrity” and would treat customers “fairly and reasonably” in all dealings with customers.

For Human Appeal, the purported termination had the potential to cause significant disruption to their charitable operations, which included managing monthly sponsorships of 8,000 orphans. With around $6.1 million in total held in their accounts with the bank, Human Appeal considered it would take them 4 to 6 months to establish a relationship with a new bank.

Beyond Bank justified its decision to close Human Appeal’s bank accounts based “on a recent review” that concluded that Human Appeal’s banking business was “not suited” to Beyond Bank. However, at the hearing before Parker J, Beyond Bank conceded that it was obliged to provide a valid commercial reason for the decision, even though, under its banking contract, it had a broad discretion to close an account without providing any justification. As Parker J noted, the concession was likely based on the bank’s obligations under the CoP, which were expressly incorporated into its banking contract, that it “act honestly” and “fairly and reasonably” in all dealings with its customers.

At the hearing, the bank argued that it had a valid reason to close Human Appeal’s accounts. The bank relied on evidence from its Chief Risk Officer that the bank’s Financial Crimes Team spent, on average, one hour per day reviewing the transactions to and from Human Appeal’s account due to the complexity and volume of those transactions. The bank’s evidence was that these transactions were significantly higher than for other customers of the bank. However, Parker J observed that there was no reason why the bank could not have stated to Human Appeal that it had been disproportionately engaged in working on their accounts and that the bank had not wished to continue to bear that administrative burden. In any event, Parker J rejected the bank’s evidence for several reasons, including that it did not state that Human Appeal’s activities required the bank to put on further staff, incur extra staffing expenses, or distracted the staff from performing other necessary functions.

The Court having rejected its evidence, the bank then invited the Court to draw an inference that the bank’s obligations under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (“the AML/CTF Act”) prevented it from disclosing the reasons to the Court because of the tipping off offences in s 123 of that Act. Justice Parker refused to draw that inference, holding that the offence in s 123 did not prevent disclosure to the Court, in general terms, of the administrative burden that the AML/CTF Act, together with other reporting obligations, imposed on the bank. His Honour stated that even if he was wrong on this conclusion, there was no evidence that the bank made any request to the CEO of AUSTRAC (the entity responsible for administering the AML/CTF Act) to modify the application of s 123 to allow the bank to conduct its defence to Human Appeal’s claim. As a result, his Honour held that the bank’s closing of Human Appeal’s account was invalid.

His Honour went on to hold that the clause that purported to give Beyond Bank a discretion to terminate the banking contract without giving reasons or justification was inconsistent with the bank’s obligations under the CoP. Those obligations required the bank to “strike a fair balance” between the customer and the bank’s legitimate needs and interests. The Court’s conclusion meant that Beyond Bank could not rely upon the express discretion to terminate the contract without giving reasons for its decision to Human Appeal.

Lessons for banking institutions

As the Court observed, the scope of express and largely unfettered contractual powers to terminate the relationship between a bank and its customers may be influenced by voluntary codes that are expressly incorporated into the banking contract. If, for example, an incorporated industry code requires a bank to “act honestly” and “fairly and reasonably” towards its customer, this may require the bank to have a commercial basis for a decision to close a customer’s account. In some circumstances, this may require the bank to go further and justify that commercial basis by giving reasons to the customer.

The decision also highlights the difficulties faced by banks who wish to “de-bank” customers posing a potential risk under the AML/CTF Act framework. Banks, however, should heed the advice given by AUSTRAC on 27 June 2023 to be careful not to cite vague ‘AML/CTF obligations’ when deciding to end the contractual relationship as this may involve unlawfully tipping off the customer.^[2]

Although Beyond Bank was concerned with the rights and obligations of a mutual bank, the decision may be relevant to other Australian banking institutions that subscribe to the Australian Banking Association’s Banking Code of Practice. That code contains similar language to the Customer Owned Banking Code of Practice considered by Parker J in Beyond Bank, including language to the effect that subscribing banks will “act honestly and with integrity” and be “fair and responsible” in their dealings with customers. Those banking institutions should carefully consider how the interpretation of their terms and conditions may be affected by an incorporated industry code, especially when a decision is made to close a customer’s account.