A review of how to tackle the ongoing problem of de-banking in the fintech sector by the Council of Financial Regulators has produced four key recommendations for the Australian government, described by industry lobbying group Fintech Australia as “a good first step” on the matter.

In March, the former coalition government asked the Council, AUSTRAC, the ACCC and the Department of the Interior for advice on de-banking policy options when it comes to fintech companies, digital currency exchanges (DCE) and remittance providers. A working group, led by Treasury, with representatives from each agency, compiled the response after consulting with industry

The Council of Financial Regulators (CFR) released the 12-page report entitled Potential Policy Responses to De-banking in Australia this week.

The four main recommendations are:

1: Voluntary data collection on de-banking by the four major banks, after which a formal phase of data collection will be considered, subject to appropriate resources for relevant authorities.

2: That all banks implement five related measures to improve transparency and fairness regarding de-banking. These measures would apply to all cases of debanking.

3: That the four major banks be notified of the government’s expectation to publish guidelines applicable to the DCE, FinTech and remittance sectors regarding their risk tolerance and their requirements to bank on these sectors.

4: That the government is considering funding targeted education, outreach and mentoring for the FinTech, DCE and remittance sectors. If the government is interested in pursuing capacity increases, the participating agencies can advise on implementation options.

De-banking is where a financial institution withdraws its services, often at short notice and without explanation to a customer. The problem is widespread in the fintech sector and has happened to some of the largest and most successful fintech unicorns in the country.

Not adequately addressed

The CFR policy paper said de-banking is a global challenge driven by a number of interrelated causes, including anti-money laundering and terrorist financing (AML/CTF) laws, sanctions compliance, profitability and reputation risk considerations.

“Few affected countries have been able to adequately address the problem of de-banking,” the paper says.

“The systematic de-banking of legitimate companies across sectors can have significant impacts on affected companies and increase their risk profile by forcing them to operate outside the legal framework and transact exclusively in cash.”

While organizations such as Fintech Australia have been lobbying on the issue for some time, de-banking emerged as a major issue during a Senate Select Committee inquiry into financial services, innovation and digital, chaired by Senator Andrew Bragg, with Sydney crypto entrepreneur. Michaela Juric, founder of trading platform Bitcoin Babe, who told the committee she had been “debanked” by 91 financial institutions. The Senate report made 12 recommendations, including the need for a clearer process for companies written off from their banks to appeal to the Australian Financial Complaints Authority.

Treasurer Jim Chalmers said the government welcomed the follow-up document from the CFR and would respond to the recommendations “in due course”.

“The government is committed to fostering innovation and competition in financial services and will continue to work with affected customers,” he said.

“[De-banking] can have a devastating impact on businesses and individuals. It can also curb competition and innovation in emerging sectors of the economy.”

Simple measures

Fintech Australia GM Rehan D’Almedia said de-banking remains a major problem undermining the entire fintech industry.

“Some of Australia’s most innovative financial technology companies have been written off suddenly and without reason or explanation in recent years,” he said.

“The policy responses to de-banking recommended by the Council of Financial Regulators are a good first step. Improvements in data collection, guidance and transparency will begin to illustrate the enormity of the de-banking problem and provide some assurance.

“The transparency and fairness measures are a positive step, but must be implemented in a mandatory and enforceable manner to be effective. These measures should also be coupled with an external dispute resolution scheme that holds banks accountable and provides an opportunity to appeal.”

D’Almedia said his organization wants to implement the recommendations as a priority.

“Many of these are simple measures that can be quickly adopted and implemented by the banks,” he said.

But one area where the lobby group’s views diverge from the CFR is an independent Due Diligence Scheme (DDS), something recommended in the ACCC’s 2019 Foreign Currency Conversion Services investigative report.

The CFR paper said the major banks indicated that the proposed DDS is unlikely to affect their decision whether or not to bank a customer, as certification under the DDS would not protect against regulatory action.

“Ultimately, the participating agencies believe that a DDS would not succeed without banks giving weight to certification,” the FCR paper says, while the agencies involved do not support the idea.

“While FinTech Australia supports further consideration of an independent Due Diligence Scheme, we will work with our major banks to support the development of the proposed guidelines for fintechs, advise on required information and compliance standards that are expected to be met to achieve a banking relationship,” D’Almedia said.

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