Cutting off the insolvent: NZ banks close accounts for bankrupts

By the time people need Marcela Mingoti’s help their finances are in crisis.

Mingoti is interim chief executive of Ngā Tāngata Microfinance, a not-for-profit organisation which aims to break the cycle of financial stress.

Ngā Tāngata offers low-income people who are working with a financial mentor interest-free and fees-free loans to help reduce expensive debt, and get them in a solid financial position.

Even those without a bank account or ID can tap into Ngā Tāngata’s services with the assistance of a budgeting service that provides Total Money Management (TMM).

Total Money Management means exactly that - money that is paid to a client goes into the TMM provider’s bank account and all payments are made from the TMM account too.

“[TMM is] highly effective to include people inside some sort of banking system,” Mingoti says.

Under Total Money Management someone with bad credit can then build up a history of financial transactions which they could then use to show a bank to open a traditional account.

It's already a busy year at Ngā Tāngata, Mingoti says.

February saw its highest number of applications for the month in five years. In the first quarter of 2023 the interest-free loan provider saw a 29% increase in applications compared with the same period last year.

That is very unusual, Mingoti says. 

Its clients are among some of New Zealand’s most financially vulnerable.

Those accessing Ngā Tāngata’s services are in the lowest income quartile, with 76% of its clients earning less than $36,500 each year.

And these vulnerable people are being hit by the rising cost of living, making their financial health even shakier.

Mingoti says research conducted in July 2022 showed its clients were six-times more likely to struggle to pay for basic living costs compared to the average New Zealander. 

At least 20% of those who use its services are in transitional housing, such as living in campsites, and don’t have a fixed address.

Some don’t have any identification, which is a common barrier to accessing banking and financial services, due to the requirement that banks meet strict anti money laundering regulations.

Working with a financial mentor or budgeting service works as a kind of de facto identification to get around an issue that can trip up the banks, Mingoti says.

How to bank account

How many New Zealanders can’t access a bank account? We don’t really know. 

Westpac NZ's recently published report into access to banking in Aotearoa relies on 2021 World Bank data which shows an estimated 1.25% of New Zealanders are “unbanked”. 

The report says while being unbanked affects only a small fraction of the population, it was evident a “high proportion of this small fraction is made up of people from vulnerable communities who have complex situations” and are faced with disadvantages.

Westpac’s research says obtaining identification is the most common barrier to a bank account, as well as showing proof of address.

Westpac chief executive officer Catherine McGrath says for most of us it's unimaginable to operate without a bank account, and we take it for granted. 

Not having a bank account can have a profound impact, McGrath says. She says it makes it hard to pay for a place to live and keep a job, and it can also leave people open to exploitation and disconnected from their community.

For its report, research agency ThinkPlace spoke to close to 60 different organisations including advocacy groups, government departments and budget advisors.

Rough sleepers, young people without family support, prisoners who have been released, refugees and sex workers were among those less likely to have a bank account, interviewees told researchers.

It recommended banks approach the vexed issue of identification with more flexibility, and apply that flexibility to those with bad credit or who have been insolvent.

The report highlighted that those with bad credit history, or a personal bankruptcy, can also struggle to keep, or open, a bank account.

The Westpac report says some banks may freeze the accounts of the insolvent, or close them altogether.

A 2022 survey from the Insolvency and Trustee Service found more than 45% of the 192 people surveyed said they faced having their bank accounts closed, while a further 21% said they had difficulty finding a new bank or credit union.

Earlier data from 2021 in the Westpac report found almost 50% of those who entered into an insolvency procedure (such as debt repayment  orders, no asset procedures and bankruptcies) had their account closed by their bank.

“This process can be long and difficult, and individuals may face numerous rejections,” the access to banking report says.

Westpac is one of the banks cutting off insolvent customers.

It says it has about 200-250 customers who become bankrupt every year, with banking services cut for about two-thirds of those people.

“Recognising the findings of the Westpac NZ Access to Banking in Aotearoa Report, moving forward we aim to continue offering transactional banking to a greater proportion of these customers. Lending services will be unavailable. We intend to start piloting our new approach in the coming months,” the bank says.

ANZ, New Zealand’s largest bank, says closing a customer’s account is a last resort and each situation is analysed on a case-by-case basis.

It says one reason why it might close an account would be if a customer posed a risk to the health and safety of its staff, or other customers.

The bank says it will open accounts for most people, except for those who are in the country on a short-term visa or where transactions involve sanctioned countries.

“... Other than this, we do not exclude any type of individual customer from opening an account with us.”

A Bank of New Zealand spokesperson says it doesn’t close bank accounts because of bankruptcy.

“There are no rules against holding a bank account while bankrupt, and it is important that people in these situations can continue to access essential banking services such as transactional accounts. However, being declared bankrupt does affect access to credit.”

BNZ says closing an account without customer consent is rare, and generally only happens due to factors such as violence or threats towards staff, or illegal conduct such as money laundering, fraud, or theft. 

The bank said account closures like this go through a comprehensive formal process, and it also works closely with the Insolvency and Trustee Service.

Pain yet to come?

New Zealand's economy is expected to decline in 2023 as a result of interest rates being cranked up by the Reserve Bank of NZ as it fights inflation, dampens consumption and pushes unemployment higher.

Corporate insolvencies are starting to tick up, and receivers say personal insolvencies could also rise as personal guarantees are called in and financial outlooks worsen.

Russell Fildes, national manager for the Insolvency & Trustee Services, says he's given up trying to predict insolvency trends after a disrupted few pandemic years.

"The story for us is that since the covid lockdowns, personal insolvency numbers have dropped dramatically."

For the year ended June 2022, there were 1,241 personal insolvencies, which was the lowest annual volume received in more than 30 years and a 37% decrease compared to 2020/21.

The Insolvency and Trustee Service's stats report for 2022 says interest rates increased significantly during the year which puts pressure on some borrowers, but personal insolvency numbers appeared to be tracking similarly to 2021/22.

Fildes says once the wage subsidy was announced people got used to the idea that business could continue, and most people wouldn't be losing their jobs.

However, because insolvency is a "last resort", Fildes says there is a "natural lag" in seeing personal insolvencies in the data.

For those who are concerned they are heading towards a financial crisis, Fildes says its important to seek independent advice, and get in touch with creditors.

"The earlier people try to deal with these issues, the more likely alternative arrangements are able to be made, and the more likely they'll be able to avoid coming through into into a formal insolvency procedure."

McGrath says Westpac is seeing a small increase in hardship cases from its customers this year. She says the key thing when working with those who are bankrupt or insolvent is that they get access to vanilla, or basic transaction accounts, and no access to debt.

McGrath says part of the insight Westpac has gleaned from the report is that it needs specialist teams and staff who its frontline staff can escalate queries to who can help the bankrupt work through their situation.

"That feels like the right thing to do."