A court has ruled that a bank must have a valid commercial reason to terminate a banking relationship and that it cannot always rely on contract terms to give a “bare termination notice” without reasons.
The ruling will add impetus to the Australian government’s recent call for banks to improve transparency and fairness in relation to decisions to de-bank customers.
Human Appeal International, a registered charity established more than 30 years ago that draws much of its support from the Muslim community in Australia, took Beyond Bank to court over the bank’s decisions to close its accounts.
Human Appeal established banking facilities with Beyond Bank in March 2021. In August the same year, the bank notified Human Appeal that it was closing its two accounts, declining to give any reasons.
The total balance in the accounts was A$6.1 million. Beyond Bank wanted the accounts closed within 20 days but then granted an extension until the end of September.
The case, Human Appeal International Australia v Beyond Bank Australia, went to the New South Wales Supreme Court in September 2021, with Human Appeal claiming that Beyond Bank’s decision to de-bank it was wrongful termination. The bank took the position that it was entitled to terminate without having a reason.
The court granted an injunction, ordering Beyond Bank to continue to provide services while the case was heard.
The case focused on the bank’s contractual obligations, in particular its duty of co-operation and good faith generally implied in commercial contracts, and the arguments that no reasonable grounds existed for the termination.
It also focused on the bank’s obligations under the Customer Owned Banking Code of Practice, with Human Appeal arguing that termination without justification, or reasons, was a breach of the code.
The bank argued that its decision to close Human Appeal’s accounts had to be understood in the context of its obligations under the Anti-Money Laundering and Counter-Terrorism Financing Act, which includes a requirement to report “suspicious matters” and “threshold transactions”.
The Act also requires reporting entities to “identify, mitigate and manage the risk that the entity may be used to facilitate money laundering or the financing of terrorism”.
Beyond Bank said its financial crimes team spent a significant amount of time reviewing Human Appeal’s accounts because of the steady flow of donations into the accounts and regular payments to the causes its supports, most of which are in developing countries.
It said the need to continuously monitor the large number of transactions into and out of Human Appeal’s accounts removed resources from other important monitoring activities.
The court rejected this argument, saying the bank did not present any evidence that this administrative burden required it to put on extra staff or incur additional costs.
Justice Guy Parker said in his ruling: “It is therefore questionable whether, of itself, it would have been a valid commercial reason for terminating the banking relationship.
“I find myself driven to the conclusion that the bank did not have reasons for termination which would sustain scrutiny. The purported termination was therefore invalid.”
The court said the termination clause in the bank’s terms and conditions cannot be used unless the bank has a valid commercial reason.
“If a bare termination notice is given, as in this case, the customer has no practical means of finding out the reason for the decision and challenging it, short of launching legal proceedings. Such a state of affairs seems to be highly un-businesslike.”
It also ruled that the bank contravened its obligations under the Customer Owned Banking Code. It said the bank’s code obligations were a factor in how it should act on contractual arrangements.
The case was complicated by the bank’s view that the secrecy obligations of the AML/CTF Act stopped it from disclosing its reasons. The court ruled that the Act would not have been an obstacle to giving at least some explanation in the present case.
In a note to clients on the case, King & Wood Mallesons said the contractual power a bank has to terminate a relationship with a customer may be influenced by voluntary codes that are incorporated into the banking contract.
“If, for example, an incorporated industry code requires a bank to act honestly, fairly and reasonably towards its customer, that 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 issue of de-banking has become increasingly contentious in Australia. Last October, the Council of Financial Regulators released a report recommending that banks document their reasons for de-banking a customer and provide a customer with those reasons.
It also recommended that banks give adequate notice before de-banking and that a de-banked customer who is an individual or a small business be given access to internal dispute resolution.
In June, the government responded to the report saying it supported the transparency and fairness recommendations and would work with banks and AUSTRAC to ensure they are implemented.
It also supported a recommendation that the four major banks publish guidance on their risk tolerance applicable to digital currency exchanges, fintechs and remittance companies.