Public outcry over bank account closures due to unfounded ‘reputational risk’

ATM' at the Waterfront, Cape Town. Photo: File

ATM' at the Waterfront, Cape Town. Photo: File

Published Jun 7, 2024


WHEN it comes to banks closing bank accounts on the basis of reputational risk, it was up to individual banks to manage their individual risks, National Treasury says.

It said this in response to questions put to it by Business Report (BR) as there has been a public outcry over the lack of standards and measurements applied to the metrics of reputational risk when closing bank accounts.

The ordeal of Dr Iqbal Survé, the Chairman of Independent Media and Sekunjalo, highlights the deficiencies in the current system.

Despite spending over R400 million on legal battles to keep Sekunjalo’s accounts open, he argues that reputational risk is often a pretext used by banks to close accounts without substantial evidence of wrongdoing. This experience demonstrates the disproportionate power banks hold and the challenges individuals and companies face in seeking fair treatment.

Treasury’s response confirmed that case law is the guiding principle in bank account closures.

BR also asked the Treasury if it had responded to the recommendations of the Zondo Commission on bank account closures in 2022.

Chief Justice Raymond Zondo had recommended that existing legislation be changed or that new laws be introduced that would require banks to allow clients to defend themselves before their accounts were shut down.

Vukile Davidson, the chief director of financial sector policy at Treasury told the Finance Standing Committee on September 7, 2022, that Treasury would be responding to the Zondo Commission recommendations in a comprehensive way later in 2022 regarding bank account closures.

The Treasury explained to BR why this had not happened. “In October 2017 the Minister of Finance responded by requesting the courts to provide a declaratory order, and the court found that the Executive may not interfere in the relationship between two private contracting parties as that would be unlawful.

“It should, however, be noted that the Financial Sector Regulation Act does have mechanisms (via, for example, sections 57 and 106) in place to ensure that banks treat their customers fairly, and the Financial Sector Conduct Authority has engaged with the banking sector to incorporate processes and procedures to be followed when banks close the accounts of their clients, as documented in the Conduct Standard on Banks (3 of 2020).”

Treasury said in terms of the above-mentioned standards, banks operating in South Africa were required to embed strong internal risk management and control frameworks, which set out their individual risk tolerance and appetite levels. This differed from bank to bank depending on various factors. Reputational risk was one of many risk categories contained in these frameworks.

“National Treasury cannot dictate how individual banks manage their individual risks, as has been established in various legal precedents. The financial sector regulators, the Prudential Authority and Financial Sector Conduct Authority (FSCA) are empowered to oversee the appropriateness of banks’ overall risk management frameworks through various legislative instruments,” it said.

The Conduct Standard for Banks, overseen by the FSCA, clearly sets out that banks must act fairly when, amongst others, closing bank accounts, it said.

Treasury said this included providing reasons unless there was a legal obligation not to do so.

“In terms of the Standard, if a bank’s reason for terminating an account is based on ‘reputational risk’, it is important for this to be communicated to customers in a fair and transparent way, including explaining the right of recourse for customers if they are aggrieved by the decision to terminate,“ it said.

In response to a question by BR on how bank clients that had their bank accounts closed down generally had to seek legal recourse and were powerless in the face of the massive financial resources of banks and their lawyers , Treasury disagreed that the average person had no recourse.

It said, “National Treasury does not agree with the assertion that the current application of regulatory measures makes it difficult for the average consumer.

“The ‘average person’, or normal financial customers, have free recourse to the National Financial Ombud Scheme ( ) if they are aggrieved by decisions of banks or other financial institutions. These channels are designed to be easy, cheap and accessible to provide customers with recourse.“

Last month the FSCA commissioner, Unathi Kamlana, in a speech to the Banking Association of South Africa’s Banking on Ethics Conference emphasised that closing bank accounts on reputation risk put banks on shaky ground.

Kamlana said: “While we understand that banks possess the legal right under contract law to terminate client relationships, questions have been raised as to whether the prevailing common law position is fair to customers, particularly in a context where access to banking is a gateway to broader economic participation?”

He also questioned the processes and procedures that banks undertook for bank account closures.

He said, “Banks should not simply cite reputational risk; reasons must be concrete and consistently applied to prevent what might appear as arbitrary account closures. Customers must also have the right to appeal or seek redress to ensure the process remains just and equitable.

“The mechanism for appeal and redress should be straightforward and accessible, enabling affected parties to challenge decisions they believe are unfounded or have been applied unfairly.”

Last month Pali Lehohla, the former statistician-general of South Africa, slammed the lack of methodology and transparency around clients’ bank account closures on the basis of reputational risk. It can’t just be public perception, it has to be backed by public standards.

“Allegations of corruption must be first ruled on in court. Following that the reason for closing the bank account by a perpetrator must be published due to public interest.The Banking Association South Africa must audit if the reasons for the bank account closures are valid or not to protect the public,” Lehohla said.