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18 Sep 2021

Why banks are freezing accounts and what to do if it happens to you

Current accounts have been frozen for small £40 transactions and HMRC tax rebates

Over 1,000 banking customers have complained about their accounts being blocked, suspended or frozen for no reason, often without warning, new analysis shows.

Resolver, a complaints resolution service, studied 4,300 complaints made between July 2020 and July 2021 where people had selected 'account problems' as their main issue.

Banks are allowed to freeze accounts if they suspect fraud or money laundering, but Resolver's analysis shows people have had their accounts frozen for reasons such as transferring £40 to a friend, getting an HMRC rebate, or simply recieving their regularbenefit payments.

Here, Which? looks at why banks could be closing accounts in more detail and your rights if it happens to you.

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Why are banks freezing accounts?

Banks have legal and regulatory obligations to prevent accounts from being used for Terrorist Financing and Money Laundering.

If a bank has any suspicions it must report the account to the National Crime Agency (NCA) and freeze the funds in the account until it gets clearance.

This means banks aren't always able to explain reasons for account closures to customers as it risks 'tipping off' the account holder, which is a criminal offence.

Resolver's research found reasons can include:

  • suspicious transactions outside of the normal range in the account
  • lack of use
  • suspected fraud
  • personality clashes (you've been rude to staff repeatedly)
  • support for unlawful activities
  • reputational risk.

There is also a chance automated systems make mistakes or human error might be at play, according to the complaints service.

How do banks decide when to freeze an account?

Which? asked high street and digital challenger banks for their views and processes on freezing bank accounts. Just NatWest Group, which includes NatWest Bank, Ulster Bank and Royal Bank of Scotland told us its process.

NatWest said that its data tools pull out abnormal patterns, particularly unusual transactions that don't match up with that type of customer. After discounting the easily explainable, its analysts then manually review every case before making a decision on whether to close an account.

Some of banks' intelligence may come from other banks, police forces or government departments as well as their own monitoring. Systems used by banks to do this do occasionally detect things as being unusual which are in fact entirely genuine. This could arise for example if a customer receives a large sum of money or makes a very large payment.

Most of the time a bank will try to make contact with the customer if they suspect suspicious activity. However, they may not do this if they are concerned that the entire account and any linked phone numbers have been compromised, and doing so would only result in them speaking with the fraudster. In these cases, they may wait for a customer to contact them. When customers do reach out, banks may try to confirm their identity, ask for more information about recent activity and request relevant documentation.

Who's most at risk of having their bank account frozen?

Resolver found almost three-quarters of complaints about frozen bank accounts mentioned 'digital' banks, but anyone could be at risk of having their account frozen.

One person in Resolver's analysis said a £40 transfer to their account from a friend immediately caused account suspension.

Another experienced a 13-week freeze after three transactions (one of which was £50) from a relative triggered a red flag.

Other reasons Resolver picked up in its analysis included deposits of benefits like Universal Credit raising an 'alarm' with a bank, rebate payments from HMRC causing accounts to be put 'under review', and ordinary salary payments suddenly causing people to be cut off from access to their accounts.

What to do if your account has been frozen

If you believe your account has been wrongfully closed, here are some steps you can take provided by Resolver.

1) Ask your bank why your account has been frozen

If you still have access to online banking, go through your recent transactions and highlight anything that might be out of the ordinary, and note down where they come from.

2) Call your bank

Ask to speak to your bank's fraud team as they are more likely to have the power to take a pragmatic look at your account. Ask if a certain transaction has caused the problem and see if they can explain why. If the bank refuses to help then make a formal complaint there and then.

3) Complain to the Financial Ombudsman Service (FOS)

Unless you get a deadlock letter from your bank, you won't be able to escalate your case to FOS until eight weeks after you have made your complaint to your bank. This applies both if you are simply unhappy with the response or if you've had no response at all.

4) Set up a new bank account as soon as you can

You should still be able to do this despite the account freeze and switching your current account is relatively easy using the Current Account Switch Service.

Ask your new bank if you need to set up your regular payments again and make sure your cash is paid into the new account.

If you're on benefits, then ask if the provider can recall the money in the frozen account and pay it to a new one. You have a legal right to specify where your benefit money goes and in theory, the bank should not prevent you from accessing it.

Can I get compensation if my account has been frozen?

The Financial Ombudsman Service (FOS) told Which? it has awarded compensation in nearly 1,000 cases about current account closures so far this year, and that changing financial behaviours during the pandemic could be behind the spike.

It estimates around 100 complaints per week are related to account access, termination, closures or some aspect of administration or customer service that relates to account closures.

The FOS told Which? it can help customers in specific examples such as:

  • When the bank causes delays even if it deems the decision to close the account is fair.
  • If it believes the decision is unfair, depending on the impact it's had on the individual customer.

But whether you can get compensation or your account re-opened varies on a case-by-case basis.

The FOS told Which? it looks at the impact of the problem on the individual customer and decides what is fair and reasonable in the circumstances, which is why the level of compensation awarded can vary in different cases.