* HSBC said in September it had fixed flaws in programme
* Small businesses say their accounts are still being frozen
* Safeguard programme targets financial crime
* HSBC said number of firms affected a small part of client base
By Lawrence White
TUNBRIDGE WELLS, England, March 13 (Reuters) - Fitness instructor Ed Lumsden was trying to log in to his online bank account last week when he discovered HSBC had closed it without warning.
Lumsden, who counts British television presenter Davina McCall among the clients of his gym, TWPT, in the affluent spa town of Tunbridge Wells in Southern England, was unable to receive payments or pay his bills.
"I couldn't take payments, I couldn't pay my suppliers, all my direct debits would be rejected which could affect my credit rating and I had 16,000 pounds ($22,209.60)locked in the account that I couldn't access," he told Reuters at his gym.
He is one of hundreds of HSBC clients whose accounts have been frozen as part of a compliance crackdown called Safeguard aimed at fighting financial crime, even after the bank said in September it had addressed flaws in the programme.
Many of those affected run small businesses like Lumsden, who has 6 members of staff. The closure of the main business account can be critical for such companies.
HSBC reinstated Lumsden's bank account within hours of being contacted by Reuters to ask about the reasons for the closure.
Others have not been so lucky. Interviews with HSBC customers, letters and emails from the bank seen by Reuters, and a review of the lender's social media complaints channels show some problems continue, and in some cases are worse.
A spokesman for HSBC declined to comment on the Lumsden case but said there had been some mistakes in the Safeguard programme. He said the number of firms affected is a small percentage of the bank's overall customer base.
"Whilst the vast majority of the thousands of customer reviews we undertake proceed without incident, some mistakes are made and we apologise to those customers affected," he said.
The account freezes come at a particularly sensitive time for small businesses waiting to see what Britain's exit from the European Union will bring.
"As they look to increase day to day scrutiny, it's vital that lenders don't accidentally clamp down on innocent small business owners,” said Mike Cherry, chairman of the Federation of Small Businesses.
The Safeguard programme was launched in 2012 to gather more information about customers, such as who their own customers are and why they made or received certain payments. Complaints started to build up after they received a questionnaire in September 2015 presented by the bank as a routine check.
HSBC introduced the programme partly in response to scrutiny from the U.S. authorities who said that weak anti-money laundering controls had allowed Mexican drug cartels to launder hundreds of millions of dollars through the bank.
HSBC was under threat of prosecution for five years unless it tightened controls. That period ended in December without prosecution.
After Reuters and other media reported on problems with Safeguard's administration last year, HSBC said it had made a number of improvements.
But Lumsden, and other new examples uncovered by Reuters, show that the process still is not working for everyone.
British lawmakers said the bank still needed to take steps to improve.
"To see that this has failed on a number of occasions at a very basic level raises clear concerns, and we expect that these are being proactively addressed by the bank," said Kevin Hollinrake, British lawmaker and co-chair of the cross-party group on fair business banking.
World Merit Limited, a charity that works with the United Nations and helps young people to volunteer, said last month HSBC froze its bank accounts for three weeks.
It was impossible to pay staff and the freeze threatened the charity's reputation, Chief Executive Chris Arnold said.
"I'm shocked and mortified that we could be put through the wringer like this," Arnold said.
HSBC said it had sent letters as far back as a year ago warning World Merit that it would have to close the account if it did not provide the necessary information.
Arnold said the bank had been using out-of-date contact details, and had failed to follow up its misdirected letters with other forms of communication until this year.
Another customer, who runs a small furniture business in South London but did not want to be named, said he had tried to file the Safeguard paperwork at his local HSBC branch but staff did not know how to help him.
As he was unable to fill in the forms, he said HSBC also threatened to shut the account.
Personal trainer Lumsden said he understands the reasons for the Safeguard programme, but that his case shows the bank still has not fixed all the problems with it.
"A multi-billion pound bank like HSBC doesn't care if some gym in Tunbridge Wells moves its account somewhere else, but for a business like us these bank problems can have a massive impact. Whatever their system is, it isn't working." ($1 = 0.7204 pounds) (Editing by Anna Willard)