The financial arbiter has called for changes in the law to allow banks to confidentially disclose why they cannot submit certain evidence to justify closing a client’s accounts.

In a recent case, APS argued that if the arbiter upheld a complaint from a client who had her accounts closed, the bank would be forced to breach banking regulations.

The bank said the law prevented it from showing why the decision to terminate the client’s account was a fair and just one, in line with its regulatory obligations.

Banks often close client accounts as a result of internal risk assessments and suspicion of financial crime, as part of a strict regulatory regime.

A former APS client filed a complaint with the arbiter, arguing that her accounts had been closed by the bank “without any valid reason”. These included a fixed account that had yet to reach its maturity date, four savings accounts and a business account.

In 2021, the client was informed that, after a review of its internal policies and procedures, APS would be terminating all the bank accounts.

The client also complained that she was lumped with charges for closing the accounts and lost the interest due on her fixed account.

APS presented a timeline of the multiple requests for information and documents about the business account over a period of months, which included several reminders and chasers for information. It said there was a back and forth between itself and the client that lasted for almost a year prior to the account closures.

A bank representative said the decision to close the account was not merely based on the client’s failure to disclose certain information but also because of information provided by the client. When asked what information led the bank to terminate the relationship with its client, the APS representative said: “I cannot respond.”

In closing arguments, APS emphasised that the law places it in a tight spot when faced with such cases as the bank was not in a position to show why its decision to close the accounts was in line with the law and, therefore, reasonable and just.

The bank said the due diligence process is ongoing and that it is obliged to regularly update the information it holds on its clients, including reviews on their source of funds.

A bank's 'last resort'

In handing down his decision, financial arbiter Alfred Mifsud said a bank should only close a client’s account “as a last resort”.

Banks, he added, must not use a one-size-fits-all approach when conducting due diligence and client reviews and such exercises should be “transparent and proportionate”.

On the flipside, the arbiter said clients too have certain obligations, including providing documents allowing the bank to fulfil its onerous regulatory obligations.

Mifsud said that, in such situations, it does not help when bank clients drag their feet in disclosing requested information and adopt a confrontational approach when information is requested.

The arbiter said APS had “valid reasons” to close the client’s business account, however, from the evidence produced, it was less clear whether the decision to also close her savings accounts and her fixed account was justified.

Mifsud said the bank “probably” wanted to terminate the relationship in its entirety, even though there was no evidence that the personal accounts were as problematic as the business account.

The arbiter highlighted that the bank argued it was justified in terminating the entire client relationship due to regulatory reasons it could not disclose.

Mifsud ruled that, although the personal accounts did not appear problematic, based on the evidence presented, he does not feel he can ignore the bank’s assertions that the closures of all accounts were done for regulatory reasons that it cannot reveal.

The arbiter did, however, agree that the woman should be refunded the charges linked to the closure of her accounts and also be paid the interest due on her fixed account.

He said the case clearly showed a need to change the law to allow banks and other financial institutions to confidentially disclose to the arbiter and members of the judiciary why they cannot produce certain evidence as to the reason why an account was closed.