BANKING giants are paying out thousands of pounds in compensation after closing customers’ accounts by mistake, an investigation by The Sun has found.

We have found a number of cases where banks have shut customers’ accounts in error, but this has only come to light following intervention by the Financial Ombudsman Service (FOS).

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Known as “de-banking”, banks can close an individual or business’s account if they deem that it poses a financial, legal, regulatory, or reputational risk.

This can sometimes leave customers unable to access their cash for days or even weeks if the bank freezes the account or sends them a refund via cheque.

But the biggest kicker is that banks are under zero obligation to tell you why they shut your account, leaving many customers wondering what they did wrong.

The number of complaints received by the FOS related to de-banking has increased by 69% since the financial year 2020/21, rising from 2,281 to 3,858 in 2023/24 – although these weren’t all related to mistakes by banks.

But, it has emerged that some banks have closed customers’ accounts by mistake, but had refused to disclose this to the customer until the FOS got involved.

Sarah Coles, head of personal finance at Hargreaves Lansdown, told The Sun these findings could be “the tip of the iceberg” and that banks need to be quicker at putting things right if they make errors.

“There are plenty of examples in Ombudsman cases of errors that have meant accounts have been closed,” she said.

“This can be anything from an error of judgment to human error, or a fault in the systems which meant accounts were incorrectly updated.

“Given that most people give up fighting well before they involve the Ombudsman, this could be the tip of the iceberg.

“People make mistakes and we can’t expect them to be perfect, but we can expect banks to have processes in place to check these decisions and put things right as quickly as possible when things go wrong.”

THE CASES

The Sun trawled through dozens of entries on the FOS website and found a number of decisions showing de-banking errors over the past seven months, including from Barclays and NatWest.

In all of those cases, the FOS said the bank should pay disgruntled customers compensation for the inconvenience and distress caused – sometimes as much as thousands of pounds.

In several of those cases, the accounts were closed following what’s known as a KYC (Know Your Customer) review, where the bank can ask a customer for more information.

If a customer doesn’t return this information by a set deadline, the bank might react by shutting their account.

But some of these reviews have resulted in accounts being closed in error.

In one case we found, long-time NatWest customers known only as Mr and Mrs G complained to the FOS that their accounts were closed without explanation, causing them “inconvenience and worry”.

After initially refusing to provide reasons, NatWest later admitted it had mistakenly closed their accounts after the FOS intervened.

The FOS determined that NatWest had treated them unfairly, asking the bank to pay £350 and issue a letter of apology.

A spokesperson for Natwest said: “We are extremely sorry for the error we made in closing this account and have apologised and paid compensation to our customer. It is extremely rare for a customer’s account to be closed incorrectly.”

In another case, a customer known as “S” complained that Barclays wrongly closed their Business Premium account on 5 September, 2023 during a KYC review.

Barclays admitted the mistake, reopened the account after four weeks and offered £500 compensation for the inconvenience, but refused to cover the significant financial losses S claimed.

The FOS found Barclays should pay £3,850 for loss of profit, £500 for inconvenience, and 8% interest on the account balance.

Both parties partially accepted this decision.

A Barclays spokesperson said of these cases: “We are unable to comment on the details of these specific cases without the consent of our customers.

“However, we respect the decisions made by the Financial Ombudsman Service and are sorry for any occasions where we failed to provide the usual high levels of service that our customers can expect to receive.”

What is ‘de-banking’ and why might my account be closed?

De-banking is where your account is closed against your will.

Banks should generally allow customers 30 days to make alternative banking arrangements before axing their account, but in some urgent cases you may get no warning at all.

Perhaps one of the most well-known recent cases of de-banking is when Coutts Private Bank closed the account of Nigel Farage, the former UK Independence Party leader, in June 2023.

Lenders can suspend accounts if they detect any “suspicious activity”, such as sending or receiving large amounts of unexplained money or transactions don’t fit with the user’s typical spending pattern.

If a bank suspects a customer has been victim of a fraud – where large sums of money are sent – it will also close the account.

Which? Money editor Jenny Ross says: “Under some circumstances, banks are allowed to close accounts without notice and without providing a reason.

“This includes suspected fraudulent use of the account.”

Your bank could put an immediate freeze on your account if it sees spending or large transfers in or out that seem suspicious.

It might block money from leaving your account to help protect you if it’s worried that you’ve fallen victim to fraudsters.

Similarly, if a large amount of money is received, it might suspect you’ve been caught up in a money-laundering operation.

Fraudsters can manipulate customers into becoming so-called money mules.

This means that they might be helping crooks to move around cash earned from crime without even knowing it.

Sometimes victims believe they are helping out a friend or that they are being paid for a job that seems legitimate.

After putting a temporary freeze on your account, the bank will then investigate more thoroughly.

If it’s still not satisfied after this, it can permanently close your account.

Your bank could decide to ditch you as a customer simply because you don’t meet its terms and conditions.

For example, when you signed up you might have agreed to pay in a certain amount each month or to set up several direct debits.

In this type of situation, the bank would need to give you at least 30 days’ notice so you can move your money elsewhere.

In July last year, the Treasury confirmed it was looking into the rules surrounding closing bank accounts, such as upping the period to three months instead of 30 days.

But the government has not yet revealed any plans to enforce these proposals. The Sun has asked for an update when possible.

What you can do if your bank account is closed

Which? says that those who believe their bank account has been unfairly closed should attempt to make alternative arrangements for their payments to avoid fees or charges.

They should then make a complaint to their bank and make a data request to Cifas online to check for a marker, which they can then contest.

If that fails, customers could then attempt to make a complaint through the FOS.

Customers who successfully make a claim may not have their account reopened, but they could receive compensation and an apology.

But it’s worth bearing in mind that this can be a lengthy process and it might take a long time before you see any compensation.

Do you have a money problem that needs sorting? Get in touch by emailing money-sm@news.co.uk.

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