Failure to reply to a Know Your Customer questionnaire: different consequences depending on whether the questionnaire is intended to assess the client or to combat money laundering

Facts

Mr L, who has a securities account with institution B, told me that access to his client area was suddenly interrupted.

He therefore approached his financial intermediary for an explanation.

The customer service department then told him that, as a result of failing to answer all the questions asked about his financial and personal circumstances, his access had effectively been blocked.

Based on the recommendations of the AMF and the Banque de France, Mr L argued that the client retains the right not to reply to the questionnaire and, where applicable, the financial intermediary has a duty to refrain from providing any advice.

However, institution B’s customer service department maintained its position by telling the applicant, during a telephone conversation, that his right not to reply was offset by the institution’s right to terminate the business relationship in the event of refusal to reply to the questionnaire submitted. In these circumstances, the institution confirmed to Mr L its decision to terminate the account without delay.

Mr L therefore asked me to take action against institution B to break the deadlock in this situation.

Investigation

I questioned institution B, which confirmed that it had deployed a new “investor questionnaire,” incorporating more detailed questions relating to the knowledge and experience of its clients, which must be completed in order to continue browsing the client area.

Institution B regretted that the customer service department had informed the applicant by telephone that the business relationship had ended. The bank acknowledged that Mr L’s request to refuse to answer the questionnaire assessing his profile should have been granted, and that referring to a breakdown in the relationship using this justification was inappropriate.

However, institution B told me that it relied on another basis, not disclosed to the client, to justify the very principle of its decision to terminate the business relationship.

In fact, the questionnaire submitted to Mr L had a dual purpose: to assess his investor profile, and to comply with the applicable anti-money laundering and terrorist financing (AML/CFT) provisions.

Institution B therefore told me that it considered it imperative to answer the questions Mr L had been asked to answer, failing which the relationship would have to be terminated in accordance with the regulatory obligations in force.

Recommendation

After a careful analysis of the file, I noted that the conduct of business rules for investment service providers therefore did not, as Mr L had rightly pointed out, form the basis for institution B refraining from giving him advice (pursuant to Article L533-12 et seq. of the Monetary and Financial Code) but rather, that basis was formed by the very strict obligations arising from the AML/CFT Directive that the bank set itself to assume that, in the absence of sufficient and comprehensive information on Mr L’s personal and financial circumstances, the business relationship should be terminated as required by Article L561-8 of the Monetary and Financial Code.

I therefore considered that contractual termination was well-founded in principle, especially as, in addition to AML/CFT obligations – which require termination – it is in any event always possible for a bank to terminate its relationship with a client without having to give reasons, as the banking contract is an intuitu personae contract.

However, the fact remains that, except in the case of grossly reprehensible behaviour, it is up to the institution to grant a period within which its client can find a new institution, which the bank did not do, since no period of time had been granted to the client before his securities account was blocked.

I therefore considered it imperative that during this notice period, the client should continue to enjoy all his rights, which naturally includes access to his securities account.

In this case, however, I regretted that the consequences of failing to answer certain questions – namely the termination of the relationship – had only been communicated orally to Mr L after the event, and that the termination of the contractual relationship had been decided without the usual period of notice.

I explained this argument to institution B during a telephone conversation with the investment services compliance officer (RCSI), who acknowledged that the contractual relationship had been broken off particularly abruptly and that the client had not been properly informed beforehand of the consequences of failing to reply to the client questionnaire.

In these circumstances and following my recommendation, once it had been established with both parties that it was in any case too late to reinitiate a calm business relationship, institution B sent Mr L a registered letter with acknowledgement of receipt stating that he now had 60 days to send instructions for his securities account to be transferred to the financial institution of his choice. Access to the client area was of course restored during this period.

The lesson to be learned

Financial institutions have strict obligations to know their clients, whether this involves assessing their investor profile in accordance with MiFID2 regulations, or verifying the identity and origin of resources – both at the outset and during the relationship – in order to comply with AML/CFT requirements.

Questionnaires are then submitted to clients to meet these two categories of obligations.

While in the first case (MiFID2), failure to respond means that the bank is no longer entitled to provide the investment advice service (see Ombudsman online diary - February 2018: If the client does not provide the information on the MiFID questionnaire, the bank must refrain from providing investment advice), the consequences are much greater when the institution is unable to collect the information required to conduct the AML/CFT due diligence, since the business relationship must then be terminated.

It is therefore vital that investors, who sometimes consider questionnaires intrusive, are fully aware at the time the questionnaire is submitted of the consequences[1] of failing to respond, especially when a single data collection exercise aims to satisfy both objectives at the same time, as illustrated in this file. It is therefore important for banks to be able to inform their clients of these different consequences.

Only under these conditions can investors make an informed decision about whether to receive the information they require, which in all cases is in their best interests: whether to receive informed advice about their planned investments or simply to maintain their business relationship with the institution.

[1] The obligation to inform the client of the compulsory or optional nature of the answers and of the consequences of failing to answer also stems from the principle of relevance and proportionality of the data collected under the amended law of 6 January 1978 relating to data processing, data files and individual liberties. See, in this respect: Position DOC-2013-02 (https://www.amf-france.org/en/regulation/policy/doc-2013-02)