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Business Banking: Undesignated Client Accounts

Volume 738: debated on Wednesday 18 October 2023

It is a pleasure to speak under your chairmanship, Mrs Cummins, on an issue that is affecting many businesses across a number of sectors. It is an issue that is extremely important to the businesses that are affected, and one that could have a significant impact on many businesses and their customers in future. I want to raise the situation faced by a number of small businesses with ongoing struggles to get access to the bank accounts that they need to carry out day-to-day functions and protect their clients’ customer funds.

Over the past couple of years, I have heard horror stories from a number of reputable and long-established companies that have been driven to the brink of closure as a result of how anti-money laundering regulations, particularly the Joint Money Laundering Steering Group guidelines, are being understood and implemented by UK banks. Many small businesses that deal with large quantities of client money use pooled client accounts, also known as undesignated client accounts.

I have a background in the marine industry, so I have a good understanding of, knowledge of and relationship with the industry. That is why, when the Association of Brokers and Yacht Agents reached out to me to highlight its concerns, I understood that it was a real issue and that I needed to work with the association, along with the Treasury and other relevant parties such as UK Finance and the Financial Conduct Authority, to try to resolve it. Yacht brokers are a very resilient bunch and are a key part of the UK’s marine industry, so when I hear that they are facing challenges that threaten their businesses, it is something of great concern that we must take seriously.

Although I initially raised this issue on behalf of the yacht broking industry, I have since learned that it is an issue that affects a number of other industries and sectors, including letting agents, estate agents, jewellers, care homes and even solicitors. I suspect it affects many more. I have had recent engagement with Propertymark, the professional body for property agents, which represents over 12,500 member branches in the UK, some of whom are being affected in the same way.

I will briefly explain why the yacht broking industry has come to use those types of accounts, and where we are up to with getting this resolved. In the early 2000s, the yacht broking industry faced a severe crisis when yacht broker and new boat dealer BA Peters went into liquidation. This created shockwaves throughout the industry, as BA Peters did not have a pooled client account in place. As a result, clients’ money was not protected when the company collapsed. Numerous individuals lost their deposits and the proceeds of sales, with some receiving only 23p for every £1 they were owed. It also resulted in a massive bill for the Insolvency Service to conduct a thorough investigation to try to identify client funds and into which of the many accounts they had been paid. This devastating experience exposed the vulnerability of client funds and the need for urgent safeguards.

I congratulate the right hon. Lady on bringing forward this debate. We spoke beforehand. Does she agree that some banks are being accused of using the legislation she referred to as a way of closing accounts that are not profitable? I have several examples from back home in Strangford—I could read out two pages of them—of businesses being given no other reason for closure than this legislation. Does the right hon. Lady agree that the loophole must be closed?

I thank the hon. Gentleman for his questions. Something is going on, and it is worrying. Banks are there to help us with our personal finances, but they are also a key part of how all businesses operate within the UK. I would be very disappointed if they were taking a cynical approach to potentially reduce costs of applications. However, having heard that some organisations are now being requested to implement a number of individual accounts, maybe there is a business case for them to want to administer 1,000 bank charges rather than just one.

In the aftermath of this, the yacht broking industry came together to ensure that such a calamity could never occur again. It was unanimously agreed that all yacht brokers should establish pooled client accounts as a standard practice. The PCAs were designed to protect client funds and enhance transparency in financial transactions. That became industry standard practice and is a prerequisite for any business joining an association such as ABYA. It is now a requirement by many professional indemnity insurance providers to hold client funds in these accounts. To formalise those efforts, brokers that set up PCAs with banks obtained letters confirming that funds held in those accounts were exclusively client funds and not part of the broker’s trading capital. Thus, they could not be used to offset business loans or overdrafts with that bank. That strengthened the protection of clients’ interests and returned confidence to the marine sector.

In 2009, it was made compulsory for anyone acting as an introducer for marine finance or settling marine finance to be registered with the Office of Fair Trading. That was a significant step towards regulating the industry and ensuring that financial transactions adhered to established standards.

In 2015, the Financial Conduct Authority was formed. The FCA introduced the FCA Handbook, taking over regulatory oversight. In 2016, the FCA confirmed that yacht brokers did not fall within the scope of the FCA handbook for holding PCAs, but did need to be registered for acting as an introducer for finance and insurance.

In 2020, significant changes occurred to the anti-money laundering regulations. That was when I first heard of the struggles that the industry were coming up against. Anti-money laundering legislation was introduced in 2017, as were updated Joint Money Laundering Steering Group guidelines, but notably they did not mention yacht brokers being excluded from FCA registration, or that their PCAs could be assessed using a simplified due diligence approach. That led to confusion and concern within the industry. As a result, major UK banks such as Lloyds, HSBC, Barclays and NatWest started to refuse to open PCAs for yacht brokers and threatened a number of businesses with the closure of their accounts.

Over the following months, I heard numerous stories from businesses within the industry that were fearful that, should they have their accounts closed, they would be unable to trade. Reputable businesses that had been trading for decades were suddenly faced with that terrifying prospect. Many of those yacht brokers are small independent family-run businesses. Contrary to what often comes to mind when yachts are mentioned, they are not large businesses trading in multimillion-pound superyachts and they do not have thousands of pounds in capital behind them; they tend to be long-established reputable small businesses operating in our coastal communities, where the marine industry may be a key part of the local economy, selling smaller boats for UK leisure.

Some of those family-run businesses—registered UK companies—operate across borders to support UK clients to buy, sell or hire their boats. Many of their clients are repeat customers because of the great experience they have encountered and the reassurance and confidence that their funds are safe.

All ABYA-member brokers are required to abide by strict professional standards to minimise fraud and money laundering. Yacht brokers are required to complete “know your customer” checks to verify clients’ official documentation such as driving licences, passports and utility bills, to ensure that the documents are valid and that the person is not on the anti-money laundering or politically exposed persons lists.

Purchasers receive a legally signed sale and purchase agreement, and all transactions are done by bank transfer, so there is a full audit trail of the money. ABYA yacht brokers do not accept any form of cash payment. As I mentioned, brokers undertake their own checks and specific sale and purchase agreements for every transaction, and they rely on UK and EU banks to transmit funds to the PCA from their own bona fide and validated clients.

Despite the checks that brokers carry out and the detailed recording of transactions, the fact that UK banks now consider yacht broking to be a high-risk business might imply that UK banks are failing their customers’ AML and politically exposed person checks before opening their client accounts.

In January 2022, ABYA and I held a crucial meeting with the Chief Secretary to the Treasury, who was then the Economic Secretary to the Treasury, and UK Finance. Following that meeting, he agreed to issue guidance allowing banks to simplify due diligence for opening and maintaining PCAs. That decision was made to try to temporarily ease the conflict between banks and account holders, and to encourage banks to keep accounts open while a comprehensive review of the anti-money laundering regulations was undertaken. This review was expected in December 2022 but, to the disappointment of both me and the industry, it was pushed back a year until December 2023. I am grateful to the Chief Secretary for the action and the interim guidance he provided in his previous role, but unfortunately that did not go far enough to prevent many banks from closing some of those accounts, which had a devastating impact on some of our small businesses.

In May 2020, we witnessed Barclays close the first pooled client account of a yacht broker because it was not registered with the FCA and part of its business involved cross-border transactions. Members will be unsurprised to learn that cross-border transactions are a fairly normal part of yacht sales, given the nature of boats. The stress that caused the company, including its potential collapse, and the impact on clients resulted in the director of that small UK-registered company suffering a mental illness for which, 18 months on, he is still receiving medical treatment and support.

That move set a worrying precedent. In May 2023, Barclays blocked the accounts of another company without appropriate notice, preventing the company from accessing its funds for three weeks. Not only that, but the bank transferred the funds from a European pooled client account into pounds sterling and placed the funds into the company’s account, without the authority of the clients whose funds were in the pooled client account. I understand that ABYA has asked the FCA to investigate that case, as it believes that Barclays had breached the provisions of the FCA handbook. As an aside, I have been made aware of another case in which such action by a UK bank has affected personal bank accounts, so I am concerned about how widespread that type of action is among some UK banks.

The FCA has acknowledged ABYA’s concern but has refused to conduct a full investigation and take appropriate action against Barclays, which I believe sets a dangerous precedent by endorsing Barclays’s actions and destabilising the security of PCAs for all industries. The FCA has advised ABYA that its members should report the incident to the financial ombudsman, which they have done, but they have been advised that it could take up to 18 months for it to report back.

To enable their business to continue trading, the directors of the affected company had to personally fund their clients’ sales and purchases, while Barclays sat on its client funds. That has also had a significant impact on the mental health of the directors of those businesses. Only last week, HSBC approached yacht brokers to ask them to stop using their pooled client accounts. I have recently been made aware that marine insurance companies, which have thousands of clients, are also being asked to cease using pooled client accounts.

The consequences of those developments extend beyond the yacht broking industry. They are a concerning precedent, which indicates that funds held in PCAs for clients may not be as secure as was previously believed. The situation has implications not only for the yacht industry but for lawyers, estate agents and care homes, as I have mentioned. Only last week, Propertymark members reported that Lloyds had threatened one of their members with account closure if they continued to use PCAs. That forced the property agent to open and hold individual client accounts for the rents and deposits of every landlord they worked for, and this particular agent was working with over 100 landlords.

ABYA has been at the forefront of the efforts to address the issue. It has tried to push various individuals who have influence over the matter to work together and with the industry to find short and long-term solutions. The Treasury has met and been in communication with ABYA’s chairman, Peter Norris, and has agreed to meet him again. For that, I am grateful. I am also grateful for the continued engagement I have received from the Treasury and its Ministers over the last 18 months. ABYA has worked to strengthen its code of practice and engage with banks consistently over the past couple of years. ABYA has candidly and consistently said that it will put in place whatever measures and changes to its code of conduct are necessary to ensure that banks have confidence to offer these services to ABYA members.

Since the FCA’s confirmation that yacht brokers do not need to register to hold PCAs, one bank has asked its customers to register as a high-value dealer with His Majesty’s Revenue and Customs for anti-money laundering purposes. ABYA is currently in consultation with HMRC to see whether it is possible to register as a high-value dealer, as such registrations normally apply only to businesses that deal in cash transactions of over £10,000 or €10,000. I understand that HMRC is questioning whether that is a necessary registration.

It has been a particularly tiring and frustrating few years for the industry, and ABYA and other industry representatives can only do so much. They have shown their willingness to find solutions, but we need the same willingness and drive to find a solution. As I have mentioned, these are often long-established small businesses or sole traders. Like any businesses, these companies are lifelines for their owners, employees and local economies, and they rarely have significant capital reserves to keep them afloat while seeking a resolution with the banks. It has been heartbreaking to hear the panic and distress that some of the businesses have been put through. Some business owners have been driven to the point of illness or, in some cases, have wanted to take their own life because of the stress of the potential loss of their business. As someone who ran a business prior to becoming an MP, I can totally empathise and understand how those business owners may be feeling.

Can the Minister confirm that there will be no more delay in bringing forward the consultation on the review of the anti-money laundering regulations? Can the Minister also assure me and those listening that he and the Treasury are engaging with the banking sector to represent the views of these small businesses, which are struggling to survive as a result of the actions that have been taken? Will he commit to urgently finding a short-term solution for this very real issue, which is having a devastating impact on people’s businesses and livelihoods?

It is a pleasure to serve under your chairmanship, Mrs Cummins. I thank my right hon. Friend the Member for Rochester and Strood (Kelly Tolhurst) for highlighting this important issue. She has been tenacious, and I convey my distress at the frustration suffered. The industry is an historic one and is important to us. She and I have worked together in the past to support the small and medium-sized enterprises of this great nation, but not until today had I realised the importance of the yacht broking industry. I also know about her passion for sailing, which is reflected in her role as patron of the Medway and Swale Boating Association. I am sure that all her members are metaphorically, and probably physically, cheering her on today. I reassure her that I share her concern about the issue.

Earlier this year the Treasury requested that the FCA lead a review into the wider matter of de-banking, to ensure that the sector was not overreaching itself through the unfair denial of banking services—in one case, based on a customer’s political beliefs. That is not the matter before us, but it highlights my concern, and the action that I took then is replicated when we find other instances in the financial sector. A bank account, as we know, is a vital part of the way in which we operate in society.

We try to get the balance right with a commitment, which I know my right hon. Friend understands, to tackling illicit finance. It is important that we get that balance right and do not put a disproportionate burden on legitimate businesses and customers. Indeed, the world of financial regulation is fraught with well-intentioned regulations that nevertheless have deleterious unintended consequences. This is an example. Pooled client accounts have many virtues. They protect customers so that when a firm fails, their deposits and moneys are segregated. They are a vital part of how we protect consumers. It is a concern that we see banks perhaps having a misperception about the risk of those accounts and the regulation.

It is wrong—I am happy to share this with my right hon. Friend—to say that pooled client accounts are not eligible for simplified due diligence. Last year, my predecessor wrote to the chair of UK Finance, the relevant industry body, to reiterate the importance of that when it came to looking at the Joint Money Laundering Steering Group, the industry group that deals with that. My predecessor convened a roundtable with banks and the Association of Brokers and Yacht Agents to help to develop and improve mutual understanding and iron out the issues.

Banks can apply simplified due diligence to pooled client accounts where they assess the risk of money laundering and terrorist finance to be low. My right hon. Friend gave us some really good examples of that. I am not sure that there are many Russian oligarchs sailing up and down; delightful though Medway and Swale Boating Association is, I am not sure it is the destination of choice for illicit ill-gotten gains. We will, at my right hon. Friend’s urging, continue to work to improve the guidance notes and work with the industry to make sure we can achieve the objectives that she talks about.

I am also happy to give my right hon. Friend the assurance that she seeks. She has been very patient and tolerant. I understand her and her constituents’ frustrations, but there will be no further delays. After having consulted earlier this year, we intend to look at how we can improve and reform the anti-money laundering procedures.[Official Report, 23 October 2023, Vol. 738, c. 4MC.] As I say, we are dealing here with the law of unintended consequences. I believe that we can reconcile both objectives through better guidance and greater clarity and, where necessary, adjusting the regulations.

My message to those banks and financial intermediaries is that they should continue to engage. I know that they also do so with my noble Friend Baroness Penn. I hope that by so doing, and with that collaborative approach, we will “chart a route”—someone has been getting creative—to an effective resolution that steers us into calmer waters and that, once we are through this, it will be plain sailing.

Question put and agreed to.