Obstacles to financial inclusion
Society is becoming more sensitive to the unfairness of discrimination and exclusion of minorities from the full enjoyment of their rights. So, it is worrying that we still experience cases where financial institutions and their regulators create obstacles to the financial inclusion of vulnerable individuals.
A judge presiding over the Court of Appeal ordered Bank of Valletta to reopen the account of an octogenarian philanthropist who regularly sent money to the missions in Kenya.
This client has banked with BOV for 30 years but has not satisfied the bank that his financial transactions were bona fide. An appeal to the financial services arbiter failed to resolve the client’s dispute with his bank and the court finally settled the matter.
Efforts by anti-money-laundering (AML) organisations to curb illicit financial flows are necessary to increase the financial system’s safety and improve security. However, the policies to counter financial crimes may also have unintentional and unfair consequences, particularly for people not sophisticated enough to understand complex financial regulations.
In the last several years, there has been a trend toward de-risking of banking services. Low profit, reputational concerns and rising anti-money-laundering regulations have contributed to de-risking, with the consequences that some individuals now run the risk of financial exclusion as banks refuse to open or allow them to keep existing accounts.
De-risking represents a market failure. All invested stakeholders appear to be acting rationally and in their best interest but, in so doing, they have created unintended consequences for financial inclusion goals.
rather than manage the risk that every customer could pose, banks often opt to end relationships altogether, consequently minimising their risk exposure while leaving vulnerable customers bankless. Still, the goals of financial inclusion and anti-money laundering are not inherently in conflict.
However, tensions do emerge in practice. Overly restrictive anti-financialcrime measures may negatively affect access to financial services and lead to unfair treatment of and discrimination against sectors of the community. regulators must continue to emphasise that derisking is not in line with international guidelines and, in fact, is a misapplication of the risk-based approach, which must be the rock base of AML regulations.
So serious is the problem of de-risking that former Bank of England governor, Mark Carney and former chair of the US Federal reserve, Janet Yellen have expressed their concern that de-risking processes are “causing a great deal of hardships” to many individuals.
Policymakers, regulators, banks and other stakeholders have not shown the necessary accountability and leadership to address de-risking from a structural and systemic position. The ambiguity and complexity of the regulatory frameworks, coupled with banks not wanting to adopt a risk-based approach to AML processes, has allowed the responsibility of tackling the financial exclusion risk to shift continually.
De-banked customers are left without clear explanations and unable to anticipate and protect themselves against impending account closures. Vulnerable customers include migrant workers with little understanding of financial regulations, micro-businesses and older adults who struggle to understand how to manage their relationship with a bank.
regulatory authorities, banks, consumer protection organisations and other relevant stakeholders at the local and international levels must cooperate and coordinate more fully to develop streamlined definitions, standards and policies that reduce compliance burdens and improve accountability.
Banks must show their commitment to corporate social responsibility values by doing whatever is necessary to ensure that no one faces the risk of financial exclusions due to insensitive box-ticking risk-management processes.