The issue of “de-banking” – where a bank declines or withdraws services from a customer – remains a significant topic of interest for both banks and regulators. The recent Supreme Court of New South Wales decision in Merciful Group Incorporated v Norfina Limited t/as Suncorp Bank [2025] NSWSC 841 (Merciful Group v Suncorp Bank) provides guidance on the scope of a bank’s contractual right to terminate customer relationships, particularly in the context of anti-money laundering and counter-terrorism financing (AML/CTF) risk. In essence, it demonstrates the importance of contracting well and illustrates that courts will support banks acting reasonably when managing financial crime risks.
Decision at a glance
In Merciful Group v Suncorp Bank, Suncorp Bank notified its customer, Merciful Group (a registered charity), that it would close the charity’s transaction account and associated merchant facility because it lacked the risk appetite involved in continuing to operate the account. Suncorp Bank’s concerns included large, unexplained transactions, use of money remitters and links to high-risk jurisdictions such as Lebanon, Sri Lanka and the Syrian Arab Republic.
Suncorp Bank relied on a clause in its standard terms permitting closure to protect its “Legitimate Interests”, defined to include:
- legitimate business needs;
- prudential requirements; and
- any requirements reasonably necessary to protect the bank against a material risk of financial detriment.
Merciful Group sought declarations that the notice to close its account was invalid, the implication of several terms (including good faith, reasonableness, and an obligation to give reasons), and an injunction restraining the closure.
Justice Hammerschlag dismissed Merciful Group’s claim in its entirety. In doing so, his Honour:
- confirmed that a bank may rely on an express termination clause to end a customer relationship where it forms a bona fide view that the customer falls outside its risk appetite;
- dismissed Merciful Group’s argument that the bank’s termination rights required a “standard of reasonable compulsion” or that the termination must be “reasonably necessary” to protect the bank’s interests, noting that the clause imposed no such requirement; and
- rejected attempts to imply additional obligations, such as providing reasons, undertaking further investigation or engaging with the customer before exercising a termination right.
The Court held that the bank’s decision was rational, honest and a bona fide exercise of its contractual right, made in protection of its legitimate business interest and in accordance with prudential requirements (specifically CPS 220 – Risk Management) and the Bank’s risk appetite.
A different conclusion to Beyond Bank?
This outcome stands in contrast to the earlier decision of the same court in Human Appeal International Australia v Beyond Bank Australia Ltd (No 2) [2023] NSWSC 1161 (Beyond Bank). In Beyond Bank, the mutual bank sought to terminate its relationship with a charity under a clause allowing closure on 20 days' notice, without the need to provide reasons.
In that case the charity claimed that Beyond Bank had breached their obligations under the Customer Owned Banking Code of Practice, which required the bank to act honestly, fairly, and reasonably, and to strike a fair balance between the customer’s and the bank’s interests.
Justice Parker held that, in those circumstances, the bank was obliged to have a valid commercial reason for closure and to provide reasons to the customer. The bank gave no reasons or documentation relating to its decision to close the account but invited the Court to draw an inference that its obligations under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (the AML/CTF Act) prevented it from disclosing the reasons to the Court because of the tipping off offences in section 123 of that Act.
Justice Parker refused to draw that inference, holding that the offence in section 123 did not prevent disclosure to the Court, in general terms, of the administrative burden that the AML/CTF Act, together with other reporting obligations, imposed on the bank.
In contrast, Suncorp Bank provided detailed evidence of its transaction monitoring reports, risk assessments and internal decision-making records to justify its conclusion that Merciful Group was outside its risk appetite. This included:
- summaries of internal reports listing multiple risk factors associated with the account;
- testimony from the executive responsible for the decision, outlining the risk factors and compliance steps taken; and
- specifics on the nature of the transactions, risk ratings and links to high-risk jurisdictions.
Based on this information, the Court in Merciful Group v Suncorp Bank was satisfied that the bank’s decision was a bona fide exercise of its contractual rights.
Section 235 of the AML/CTF Act: No automatic defence to contractual claims
Section 235 of the AML/CTF Act protects reporting entities from liability for actions taken in compliance (or purported compliance) with the Act. However, Hammerschlag J expressed “significant doubts” that section 235 would have provided a defence to a contractual claim in this context. This was on the basis that Suncorp Bank’s actions were an exercise of contractual rights, not an act done in compliance with a statutory requirement under the Act. This suggests that section 235 may not shield banks from liability for breach of contract claims arising from the exercise of an invalid termination right (although it is not clear whether Suncorp Bank argued that the action was required under its AML/CTF Program and therefore done in compliance with the AML/CTF Act).
An injunction to compel continued banking inappropriate in the circumstances
The Court made clear that even if Merciful Group had succeeded on its arguments, it would not have granted a final injunction requiring Suncorp Bank to continue the banking relationship. His Honour was reluctant to compel a bank to continue a relationship once it had formed a bona fide view that the customer was outside its risk tolerance, particularly where the customer had secured alternative banking arrangements.
Lessons for banking institutions
The Supreme Court’s decision in Merciful Group v Suncorp Bank provides welcome clarity for banks seeking to manage risk in customer relationships. Express contractual rights to terminate, when exercised rationally and in good faith, will be upheld. Banks should therefore ensure their terms are clear and internal processes are robust, and be prepared to act decisively where risk appetite is exceeded.
We also make the following observations:
- Support for whole-of-industry de-banking? Not really. This case involved several factual elements that are routinely regarded by regulators and international standard-setters such as the Financial Action Task Force as being “red flag” risk indicators. These included large, unexplained transactions, use of high-risk intermediaries and links to high-risk jurisdictions. Extreme care is therefore needed before applying this case more broadly to support de-banking in circumstances where the facts particular to the customer do not support de-banking or are less clear. For example, de-banking entire industries is becoming increasingly less justifiable, particularly where those industries are themselves well-regulated (the burgeoning regulated virtual asset sector springs to mind here) or where the facts simply do not support it (such as a charity without such red flags).
- Unfair contracts regime remains relevant and supports clear contracts. A significant amount of effort has been expended by banks, other large institutions and advisors like KWM on ensuring contracts are not “unfair”, to meet the requirements of the unfair contracts regime under the Competition and Consumer Act 2010 (Cth) and ASIC Act 2001 (Cth). While this case did not grapple with the question of whether the terms in question were unfair, this remains a very important exercise. Indeed, Suncorp Bank’s use of the words “Legitimate Interests” suggests a nod to this regime, as terms that are necessary to protect a business’ legitimate interests are not necessarily unfair. Further, as a general comment, we have seen a significant uptick in banks more willing to deeply reflect upon and then clearly articulate their approach to exercising discretions to address the unfair contracts regime, rather than relying on very broadly worded unilateral rights. Merciful Group v Suncorp Bank illustrates the downstream benefits of clear and express terms.
Please contact us anytime if you would like to discuss your terms and conditions, your financial crime policies or a particular scenario. We would be delighted to help.
