This article seeks to determine whether the Conduct of Financial Institutions Bill (“COFI”) not only limits a Bank’s contractual right to close a customer’s account, but also whether Banks can be compelled to provide reasons for account closure.
In 2016 the right of a Bank to unilaterally close a customer’s account (with or without providing reasons for the closure) was challenged extensively and from various fronts – especially within the political domain. At the height of the political storm the former Office of the Presidency appointed an “inter-ministerial committee” to investigate certain controversial bank account closures. Without delving into the details and merits of the saga which unraveled (and continues to do so), it is worth noting that this resulted in parliamentarians and policy makers recommending a provision in law which has the potential to compel Banks to provide reasons for such decisions. The envisaged clause, compelling Banks to provide reasons for account closures, appropriate at the time, was dubbed the “Gupta”-clause.
While the above developments were unfolding, there were two important Bills before Parliament, both the subjects of heated debate, which needed urgent promulgation - these were the Financial Sector Regulation Act 9 of 2017 and Financial Intelligence Centre Amendment Bill 1 of 2017.
THE SOUTH AFRICAN CODE OF BANKING PRACTICE
The Code of Banking Practice is a voluntary code that sets out the minimum standards for service and conduct a customer can expect from their Bank with regards to the services and products it offers.
The Code of Banking Practice states that a Bank will not close an account without giving reasonable prior notice. A Bank however reserves the right to protect its interests in its discretion, and this might include closing an account without giving prior notice if a bank is compelled to do so by law (or by international best practice); if an account has not been used for a significant period of time; or if the bank has reason to believe that an account is being used for any illegal purposes.
LAW OF CONTRACT & CASE LAW
A Bank’s decision to terminate a customer relationship is governed by the ordinary rules of contract. Our courts have upheld a Bank’s right to close accounts on the basis that the agreement that establishes the banker / customer relationship constitutes a contract like any other.
A landmark case on the matter Bredenkamp provided clarity regarding the following:
The above principles were confirmed in a Gauteng High Court (2017) case, adding:
A bank is entitled to make business decisions. A bank, and not a Court, must decide to which extent it will allow its reputation to be tarnished by allegations of criminal activities made in the media which refer to its client and the fact that it is such client's banker.
FINANCIAL SECTOR REGULATION 9 OF 2017
The architecture for the Twin Peaks system is set out in the Financial Sector Regulation Act 9 of 2017 (FSR Act). With the FSR Act coming into effect in 2018, the FSCA has been given the explicit mandate of regulating and supervising the conduct of financial institutions i.e. banks.
The FSR Act formally entrenched the Treating Customers Fairly (TCF) approach in the legislative framework, by giving the FSCA an explicit objective to promote fair treatment of financial customers by financial institutions and empowering it to make conduct standards aimed at ensuring that this is achieved.
Section 106(3)(c) of the FSR Act, provides the FSCA with the mandate to implement conduct standards (through COFI) for the fair treatment of customers by financial institutions, in relation to:
Some have argued that a proper interpretation of section 106 implies that Banks can now legally be compelled to provide customers with reasons for withdrawal of services and/or accounts closures. I am however not convinced that that is the case.
CONDUCT OF FINANCIAL INSTITUTIONS BILL
Section 71(2) of COFI states that Banks should, after the point of contracting with a customer, continue to promote the fair treatment of a customer, including in relation to the manner in which the contract is terminated and after the contract has been terminated. This is echoed in section 73 referring to “the contractual relationship between a financial institution and a financial customer” which a Bank may only terminate in a fair manner and “in accordance with procedures and requirements that may be prescribed”.
As of date, no further standards, procedures and/or requirements have been issued by the Conduct Regulator relating to the termination of customer relationships by Banks, what exactly would constitute “fair termination” and whether reasons for termination should be provided to the customer (where the law permits).
FINANCIAL INTELLIGENCE CENTRE (AMENDMENT) ACT
To truly understand the conduct of Banks against a mass number of bank-customer relationships terminated, one must consider the implications of the Financial Intelligence Centre Act 38 of 2001 (“FICA”) (as amended in 2017), with supporting Regulations and Guidance Notes.
The key objective of FICA is to improve the protection of the integrity of South Africa’s financial system and strengthen its ability to prevent and punish financial crimes like money laundering, illicit capital flows, tax evasion, corruption and bribery, and financing of terrorism.
The termination of the business relationship does not terminate the bank’s duty to protect and to maintain the (former) client’s confidentiality. FICA excludes the duty of secrecy, confidentially or any other restriction on the disclosure of information to the extent that such a duty of restriction affects the compliance by Banks of their duties under FICA. FICA primarily requires that certain information must be reported to the FIC or a person who is designated by the Minister. The primary reason for the exclusion of the duty of secrecy is to enable the FIC to combat money laundering and/or the financing of terrorism.
FICA is clear that where a Bank is not afforded this right to perform the appropriate level of due diligence on a customer, the relationship should be terminated in the manner as described in the Bank’s Risk Management and Compliance Programme (RMCP).
In short, Banks are not legally obliged to provide reasons to customers for the closure of their accounts. Banks are however obliged to provide the customer with reasonable notice prior to the account closure (if not compelled by law to the contrary). Where a relationship is terminated due to the inability of a Bank to conduct appropriate due diligence in terms of FICA, the termination process in its RMCP should be applied.
With the limited guidance issued by the FSCA thus far, it is unknown as to whether they would wish to challenge the status quo and compel Banks, within the limitations of the law, to provide reasons for the closure of customers’ accounts.
Food for thought – Will the FSCA be able to approach our Courts to declare that the failure of Banks to disclose reasons to its customers to close their accounts (where permitted by law), is not only unfair in light of COFI but also infringes on a constitutional right and would potentially require that the common law be further developed?
Article written by:
ILZE CALITZCo-Founder & Chief Legal & Compliance Officer