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Alan Lakey: When well-intentioned legislation backfires

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The history of legislation in general, and financial services legislation in particular, is littered with good intentions gone bad.

Good outcomes more than offset by unforeseen consequences, almost like a successful surgical operation ruined by necrotising fasciitis.

The most recent example is the RDR but readers will be relieved to learn that this hoary old topic is not the focus of this particular column.

Philip Johnston, in his excellent book Bad Law, explores numerous examples of well-intentioned legislation that backfires or gets moulded into something very different by interested parties.

My thoughts returned to the subject recently during an animated conversation with a long-standing client who operates a chain of employment agencies.

Some years ago I introduced him to Kensington for a secured loan. It was always his intention to repay the loan early and two weeks ago he sent them a cheque for the balance figure having already established this over the phone.

A few days later he was disturbed to receive a letter from Kensington returning his £40,000 cheque and informing him that to comply with money laundering rules he must prove the origin of the funds before they can accept repayment.

Over the telephone he explained that the funds had been drawn from his company, the same company he owned and operated at the time of application. The cheque was drawn on the same account that was used for the monthly loan repayments.

However, it seemed this explanation was not sufficient for their purposes as they needed proof of how the sum was obtained.

Providing a bank statement showing the transfer of funds was deemed unacceptable and at the time of writing the matter remains unresolved.

Now consider, this lender undertook due diligence when the chap originally applied to them. He lives in the same property and operates the same business as he did at the date of application. He has not changed bank accounts nor has he a criminal record or bad credit history.

Money Laundering Regulations 2007 do not stipulate such actions by institutions. This seems a massively over-zealous interpretation by the compliance and/or legal departments.

Not totally dissimilar, perhaps, to the FSA’s repeated mantra concerning its legal counsel’s belief that it was Parliament’s intention that the 15 year longstop defence should be removed.

Vince Cable famously once boasted that red tape would be cut and unnecessary regulation curtailed thereby reducing the burden of bureaucracy. Truth is it is often not the laws and regulations themselves which cause the problems so much as the interpretation placed on them by empire builders and ladder climbers.

In this instance, whether these antics represent cautious and considered gold-plating, I will leave others to decide.

Alan Lakey is partner at Highclere Financial Services

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. Your clients’ Money Laundering issue is all too familiar and the FCA is ENTIRELY to blame. Too many institutions have been fined and told off for having procedures that MIGHT have let potential money launderers through the door, that they have evolved almost inpenetrable procedures that, from a beloved (of the FCA) consumer’s perspective make you give up, thereby causing huge detriment. The money is coming from the banking system, not a suitcase of used-oncers.

    Officious interpretation of the ML guidance has gummed up the system for everyone, whilst catching almost no-one. Indeed its failure is laughable. Near to my home is a small barbers shop, whose two proprieters drive a brand new Bentley Cont (cost £200K) and a Porsche Cayenne (nearly £100K), Well, we could all be in the wrong business, but I don’t reckon that the margins in the hair-cutting game support that sort of expenditure. Maybe, just maybe, the shop dealing in cash transactions is a front for, heaven forfend, some drug dealing money laundering? Or am I stupid and naive?

  2. Please forgive me if I have read the above comment from Bryan Jones incorrectly but isn’t the example of the small barber shop supporting the Bentley and Porsche exactly why Kensington have requested proof of funds in Alan’s column?

    Lets just invent a scenario in which Alan’s client had deviated into a less ‘legit’ venture to run alongside his business which supplied him with the opportunity to lay his hands on a sudden and not insignificant sum of £40,000…

    I am not for one moment suggesting that was the case, but the lender would have no way of establishing this without reassessing the clients business and current creditworthiness as it had based its original lending on, Alan pointed out that the loan was taken ‘some years ago’ and the lender would not be aware of the current strength of the business.

    Lenders can only protect themselves from the risk of laundered funds by operating a blanket policy as they do not have the knowledge of the client that we, and in this case Alan, has.

  3. I’m sorry but i have to agree with P J-Botham. When normal law abiding citizens come across rules that are designed to catch criminals it can seem that ‘the powers that be’ are putting more and more obstacles in the path just for the hell of it. Having spent a number of years working in a bank i have lost track of the amount of times that someone came into the branch having lost their bank card and not having any ID with them. The customers frustration at the counter staffs inability to accept their word that they are who they say they are is obvious. The response from the counter was always the same “How would you like it if you had money taken from your account because someone swore blindly that they were you and we believed them?”

    Money laundering rules are a pain in the arse but they are necessary pains and i believe that if the money has come from legitimate sources then their will be sufficient evidence to prove it.

  4. Is anybody aware of any other financial firms that money launder check at both ends?

    I cannot recall any apart from Kensington which opted to not respond when Money Marketing requested a comment.

  5. Sorry I agree with Alan on this one. Having been in branch banking for the first 6 years of my career (pre big bang).
    If the money was coming from his bank account fro which Kensington claimed the direct debit, then the BANK had already laundered the money if it was dirty. ML should have been done by the bank.

    Alan Lakey’s client has sent full and final payment at a fixed date and the lender has declined to accept payment. That is fine, provided they cease charging interest.

  6. I know we have to take anti-Ml seriously but I wonder whether Kensington would have granted the loan in the first place if Alan’s client had asked them to prove where they got the money from that they were lending to him?

    Might be interesting to ask a lender and see their response 🙂

  7. Hardly necessary, Nick – Alan’s client already knows *that* money is well dodgy. Cf HSBC, Standard Chartered, etc. etc…

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