I have frequently been critical of Ofgem in its regulation of the retail energy sector, advocating for the Financial Conduct Authority (“FCA”) to take over, so it has been deeply disappointing to see the extent to which the FCA has been asleep at the wheel over the Nigel Farage/Coutts debacle. Following hot on the heels of regulatory failures in the water sector, is it time to look at how we regulate the regulators and put in place formal oversight of these bodies?

Principles-based regulation only works if those princples are observed

I have bemoaned the lack of an equivalent to the FCA Principles within the energy sector, however, these Principles only have value if regulated businesses adhere to them, and the regulator enforces compliance. Our financial industry, despite years of regulatory pressure from the EU, continues to follow a broadly principles-based approach to regulation. This means it is not necessary to expressly forbid every type of action you wish to proscribe, but you can establish the principles you wish regulated firms to follow in order to behave appropriately.

Now, not only is the FCA under fire for its lax regulatory attitude – it has singularly failed to condemn the actions of Coutts in an unambiguous way (can you imagine Ofgem CEO Jonathan Brearley passing up this sort of opportunity to be at the forefront of “clamping down” on his own patch?) – it may now be subject of an investigation itself, potentially extending as far as its principles-based approach and the Principles themselves.

As someone who has been very involved in the topic of gender diversity in traditionally male industries and an active participant in events designed to encourage girls to consider careers in STEM areas, I obviously have strong views about the benefits of diversity in the workplace. However, despite disagreeing with a great deal of what Nigel Farage stands for, I have been horrified to read of his “de-banking” by Coutts and related stories about individuals being denied bank accounts on account of their own or their relatives’ political or social views. The children of little known Tory peers (less so peers of other affiliation) have also been denied bank accounts.

Coutts appears to have violated quite a few FCA Principles in its dealings with Farage.

  1. Integrity – lying both to Farage and apparently the press about the reasons for the account closures is not a shining example of acting with integrity. Discussing his situation with journalists is completely unacceptable, and the motivations for doing so must surely be questioned.
  2. Skill care and diligence – in all of its deliberations about whether or not to close Farage’s accounts, there does not appear to have been any consideration given as to whether the decision was consistent with the FCA Principles. There is a mention that Farage might complain it is “unfair” but since treating customers with fairness is one of those Principles, that point warranted wider consideration and not just a passing reference.
  3. Management and control – the requirement for a bank to organise its affairs responsibly and effectively creates an interesting question in this case – Coutts appears to have devoted considerable resources to its decision to close Farage’s accounts but did not consider compliance with the FCA Principles, or wider political risk with the situation sparking talk of urgent banking reform. The bank recognised its decision was likely to become public, but failed to properly consider the consequences of that.
  4. Market conduct – a firm must observe proper standards of market conduct. With politicians openly saying they think people making such decisions are not “fit and proper” one could argue that the actions were not consistent with proper market conduct.
  5. Customers’ interests: a firm must pay due regard to the interests of its customers and treat them fairly – is the denial of banking services for any reason other than criminality fair? Who determines which views should lead to an account closure? Coutts has had a lot of unsavoury clients in the past – Augusto Pinochet was OK, but Nigel Farage is not?
  6. Communications with clients are required to not be misleading – the information Coutts appears to have provided Farage in relation to his account closure looks to have been blatantly untrue, never mind mis-leading.
  7. Conflicts of interest – Coutts seems to have put its own political biases and preferences above its regulatory obligations and the interests of Farage as its customer. Coutts is also in part publicly owned, which means it is less entitled than a privately held business would be to choose to exclude certain customer groups, particularly those who are British citizens (the business being partly owned by the UK Government).
  8. Customers: relationships of trust – lying to customers and denying them services for spurious reasons, informing the press of the customer’s situation, and providing the press with mis-leading and potentially defamatory comments about the customer are completely inconsistent with a relationship of trust.

So that’s eight of the 11 FCA Principles Coutts appears to have violated, and it is rightly attracting wide-spread criticisms. It also appears to be in breach of GDPR – data regulations require (as the Information Commissioner has pointed out in relation to this issue) data minimisation – organisations are expected to collect the lowest amount of personal data necessary for the conduct of business. You could argue that trawling the internet for information about Farage in the way Coutts did was far in excess of what was necessary for the provision of banking services, particularly since his Politically Exposed Person status was being downgraded. And of course, the admission by Dame Alison Rose that she leaked information about Farage to a BBC reporter is a significant violation of data protection rules.

“Banks need to hold a lot of information about customers, to properly run their accounts, and to uphold the law around aspects like money laundering. But data protection rules still apply… Banks should not be holding inaccurate information, they should not be using information in a way that is unduly unexpected, and they should not be holding any more information than is necessary,”
– John Edwards, Information Commissioner

We should all be grateful to Nigel Farage for making this so public – the denial of banking services absent criminal or abusive behaviours is unacceptable, as it is almost impossible to participate in today’s society without a bank account. An energy supplier would not be allowed to disconnect a customer simply because they disagree with their political views – murderers, rapists and child molesters are all entitled to receive gas and electricity. This is probably a good moment to recognise banking as an essential service like gas, electricity and water, and make the withdrawal of banking services as difficult if not more so.

Coutts is clearly regretting its treatment of Farage. Dame Alison Rose has publicly apologised, resigned, and initiated a review and offered Farage alternative accounts at NatWest. Coutts chief executive Peter Flavel has also resigned and there is pressure for NatWest Chairman, Sir Howard Davies, ironically former head of the FCA’s predecessor the Financial Services Authority, to follow suit. That the NatWest board announced its full confidence in Rose without consulting its largest shareholder – the Government – speaks volumes. I agree that Davies should have known better and needs to go.

“I recognise that in my conversations with Simon Jack of the BBC, I made a serious error of judgment in discussing Mr Farage’s relationship with the bank… I was wrong to respond to any question raised by the BBC about this case,”
– Dame Alison Rose, in her resignation as CEO of NatWest

The banking group is reportedly now being inundated with subject access requests by those whose accounts have been closed – a Facebook group with more than ten thousand members is sharing tips on how to do it. So not only has this been a reputational nightmare, the bank will now potentially be buried in un-necessary additional admin, which carries penalties if not completed on time.

And of course, Farage is likely to use the Ombudsman Service and the courts unless NatWest adequately compensates him for his trouble, and restores not only his own access to bank accounts, but also those of his businesses, and relatives whose accounts have also been closed. He has also set up a website with the aim of determining the extent of what he calls the “de-banking” problem and has seen that many small businesses that rely heavily on cash are finding their accounts closed as banks try to move away from the use of cash, ostensibly due to money laundering regulations, but more likely because it is cheaper to service electronic rather than cash banking. The Government is considering extending the recently changed rules on closure of individuals’ accounts to small businesses.

What are businesses for and how should they be regulated?

There is a worthwhile lesson for the banking sector in this debacle: the FCA Principles are there for a reason. They provide a guide-rope for proper behaviours and a barrier against improper behaviours. Had Coutts examined its treatment of Farage through the lens of the Principles it likely would have come to a different conclusion about its desired course of action. But there are also wider lessons about the purpose of businesses.

I was challenged on BBC Radio last week (again) about energy company profits and asked to respond to the posturing of various politicians. My conclusion was that they are largely mis-understanding the point of businesses – this is to make money for their shareholders. Of course, this must be done within the law, but the drift in recent years to demonstrate some different purpose around social welfare is misguided since there are no uniquely identifiable criteria for what those might be. NatWest Group no doubt wishes to be an inclusive organisation, but in pursuit of that inclusivity, it tried to “de-bank” a person with whose views it disagreed, a move which is actually the polar opposite of inclusion.

Tomorrow BP will publish its results, and I have been booked to discuss them on BBC Radio. In the prep call, the producer asked whether I agreed energy companies have a moral obligation to help consumers with the cost of living crisis. But how would this work in practice? BP doesn’t sell gas or electricity to households. It is also a FTSE-100 company whose shares are widely held by pension funds, so any move to use its profits to “help” people would mean reducing the income of British pensioners.

In 2022, only 7% of BP’s revenues were earned in the UK (13% in 2021), so how reasonable is it for the company to “do something” about the cost of living crisis in the UK? Who would decide what the appropriate action would be? Why should it help consumers in the UK rather than those elsewhere, where the bulk of its revenues are earned? Should we also ask companies like Saudi Aramco or Exxon to “do something” for British consumers? Is wealth re-distribution not purely the role of governments?

Back to banking, the FCA seems to have misjudged the situation. Its initial reaction was that banks and other businesses can choose their customers. This is not universally true, for example, energy suppliers cannot disconnect households except in limited circumstances set out in their licences. Network operators similarly are not allowed to discriminate between those to whom it will or will not offer a grid connection. The Government is likely to impose similar restrictions on banks, since a bank account is a necessity in the modern world – arguably, the regulator should have already come to this conclusion, since unlike the Government, it spends 100% of its time thinking about the financial services sector.

“For banks as well as other commercial enterprises, it’s fundamentally up to them to choose who they do business with… I’m not aware of anything in the FCA rulebook that goes to the point around how banks judge their own attitude to reputational risk, if that’s what it comes down to,”
– Ashely Alder, Chairman, FCA

In this particular case, the business in question, NatWest, is 39% owned by the taxpayer, so arguments about choosing their customers are even less acceptable. Some people hold views with which we disagree. Some of those views are distasteful. But freedom of speech is a basic human right – it is not the job of a bank or any other type of company to decide to police thought or speech – with few exceptions (a printing company might legitimately decline an order to print neo-Nazi material for example, but such material is not necessary for daily life – having a bank account is). Banking executives behaving in a fit and proper way would realise this, and not try to do it.

Do we need better regulation of regulators?

There are calls for a review into the FCA itself now, as well as Coutts/NatWest. But with high profile regulatory failures within other regulated industries, notably water and energy, in recent years, perhaps this is the time for a wider review of the UK’s approach to regulation. One thing is clear, there is no room for complacency. Regulators need to be constantly alert to the next crisis, whether that is due to a lack of resilience, fraud or other malpractice, or the consequences of weak controls.

I am a firm believer in principles-based regulation – it avoids the need to anticipate and document every possible scenario and discourages businesses from scouring the rule-book for loopholes. But a principles-based approach only works if both the regulator and the firms it regulates put those principles at the heart of their activities, and in this regard, both the FCA and the banks appear to be failing.

The energy sector does not follow a principles-based approach, with Ofgem being keen to portray itself as a “watchdog”, “clamping down” on this, that or the other, but the result, particularly in the retail sector, is a stagnant market which serves neither customers nor companies well. There are few new entrants these days, little innovation and low levels of customer satisfaction, while profits continue to be low and regulatory burdens high. I will address the recent supplier “profits” in an upcoming post (spoiler: they are not true profits, just a timing difference).

Perhaps it’s time for Parliament, to whom these regulators are notionally answerable, to put in place a formal oversight mechanism that is consistent across the regulators, and not left to individual select committees as and when they get round to it. The Coutts/Farage debacle provides the perfect opportunity for this – I encourage the Government to take it.

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