DAM(L’d) if you do, DAM(L’d) if you don’t – What should regulated firms be thinking about now the PoCA consent threshold has been raised to £3,000?

What should regulated firms be thinking about now?

While reporting teams may be delighted that they no longer need to file DAMLs, this change may be less welcome for your financial crime legal and compliance teams.

The change affects the equilibrium between the ordinary rights of the customer and the desire to drive bad actors out of the UK financial system.

What are the ordinary rights of the customer?

As the Supreme Court recognised in Philipp v Barclays Bank UK PLC [2023] UKSC 25 (12 July 2023), while the relationship between a bank or payment service provider and their customer is contractual, these contracts are made and operate within a highly regulated legal framework. There is an expectation that customers will have access to services and that their authorised payment transactions will be executed promptly, amongst other things.

The imperative to execute the customer’s instructions is particularly important for banks offering current accounts or holding deposits via savings accounts. This is because, when the bank accepts a deposit, it becomes the debtor under a ‘repayable on demand’ loan that is owed to its customer. The account reflects the ledger balance of this debtor/creditor relationship.

What are the ordinary rights of the firm?

Firms have the right not to be required to act unlawfully.

For example, in cases such as Shah & Anor v HSBC Private Bank (UK) Ltd [2012] EWHC 1283 (QB) (16 May 2012) the courts have determined that it is an implied term of the contract between the bank and its customer that the bank may refuse to carry out a payment instruction if it suspects that executing the instruction could involve committing a criminal offence under PoCA.

Firms can also manage their relationship with customers through contractual terms for the product or service offered, provided these are fair and reasonable and within the permitted scope of laws on access to services or the prompt execution of transactions (such as the Payment Accounts Regulations 2015 and the Payment Services Regulations 2017).

Who else may have rights that the firm should consider?

Where the firm knows or suspects it may be holding the proceeds of crime, it should also consider the rights of the victim of the suspected crime even if the firm does not, and may never, know the victim’s identity. Once a suspicion is established, the firm holds the suspected proceeds of crime on constructive trust for the victim.

Impact of the change in the DAML threshold

Where the act is not unlawful, such as money laundering acts that fall below the new DAML threshold, the firm can no longer rely on the implied term that it cannot be compelled to undertake an act that would be illegal.

Banks and payments firms, in particular, will likely be managing a significant number of accounts or transactions that fall below the new threshold. This is important because many financial crimes that affect the general population, such as fraud or money mule activity, involve high-volume/low-value money laundering activities. Now that these accounts or transactions are no longer unlawful for the firm to hold or process, careful consideration will need to be given to the following:

• Are the firm’s contractual terms sufficiently robust to suspend or decline a transaction, refuse an application, or suspend or exit a customer relationship where the suspected money laundering activity is below the £3,000 threshold?
• Where the overriding principle of illegality is no longer in play, are the firm’s policies and procedures for decisioning its actions upon reaching the threshold for suspicion sufficiently nuanced and informed to balance the rights of the customer against any duties the firm may potentially owe to the victim?
• Where the firm is no longer able to point to an easily understood concept such as illegality, are the complaints handling teams (particularly those engaging with the Financial Ombudsman Service) able to explain complex legal principles such as constructive trusts to evidence the reasonableness of the firm’s actions?

How can Hogan Lovells help?

The combination of our legal and consulting teams provides you with a full range of services, and clear guidance on how the solutions can be applied within the business. If you would like help reviewing contract terms or policies and procedures, or developing tools to support your complaints handling teams, please reach out to any of the people listed in this article or your usual Hogan Lovells contact.

Authored by Ann Doan, Claire Lipworth, and James Black.