FSCA moves forward with COFI Bill as concerns mount over bank account terminations

The Financial Sector Conduct Authority (FSCA) has confirmed that it is moving forward with the Conduct of Financial Institutions (COFI) Bill, which aims to provide a fair process for bank account closures.

Following a series of delays that initially pushed the tabling of the Bill in Parliament to January, the FSCA announced on Monday that it is now set to submit the Bill to Cabinet for approval soon.

In response to a list of questions from Business Report, the FSCA said the Bill adopts a principle-based approach, in other words, it contains high-level principles that financial institutions must adhere to, to ensure the desired outcomes in the financial sector. 

“However, it reinforces and extends the principles of fairness for termination of financial products and services already contained in the Conduct Standard for Banks (2020). The Conduct Standard deals explicitly with bank account terminations, i.e. financial customers must have access to a fair process when products and services are terminated (this includes account closures),” said the FSCA.

“It falls short of explicitly prescribing a fair hearing, for various reasons, including that this would not be appropriate where there is suspicion of money laundering, terror financing and other criminal activity, and may actually conflict with other legislation that requires no notice.”

According to the current regulatory frameworks, banks are obliged to notify customers and provide them with the opportunity to make representations before terminating their accounts.

In South Africa, the Supreme Court of Appeal in Bredenkamp v Standard Bank set the standard for the unilateral termination of the bank-customer relationship on the grounds of reputational risks.

John Bredenkamp was a Zimbabwean-based business tycoon suspected of being involved in illicit business activities including tobacco trading, arms trafficking, oil distribution, and diamond extraction.

The judgement sets out several principles South African banks have relied on when terminating relationships with their customers.

According to the FSCA, the relevant provisions dealing with bank account closures in the Bill are contained in the Conduct Standard for Banks, published under the Financial Sector Regulation Act, 2017.

The Conduct provides that banks must conduct their business in a manner that prioritises the fair treatment of their customers; adopt and implement processes and procedures relating to the withdrawal or termination of a financial product or financial service, including closure of a bank account.

It also makes provision for reasonable notice of the intention to withdraw or terminate a financial product or financial service, including closure of a bank account by providing reasons for the proposed withdrawal, termination or closure, unless certain circumstances prevail. 

“The Conduct Standard furthermore provides that contractual agreements with financial customers must make provisions for circumstances in which the contractual agreement may be terminated or withdrawn by the bank,” said the FSCA.

“This implies that the closure, termination or withdrawal of a financial product must be done as part of an agreed process enforcing contractual obligations and remediating breaches. The circumstances in which terminations may occur must be disclosed to the customer in the contract.

“Both the existing Conduct Standard and the proposed COFI Bill require a fair process for account closures. What constitutes “fair” and whether this includes the right to be heard will depend on various circumstances that may not be best resolved through further regulatory amendments.

“Instead the FSCA is engaging with the sector to determine a more appropriate way of ensuring consistent understanding and application of “fairness” based on various scenarios. This will be based on a review conducted by the FSCA of the sector’s practices in this regard.”

In 2022, lawmakers have hauled the FSCA over the coals about the lax manner in which they were treating the unilateral and arbitrary closure of bank accounts.

In his final State Capture report, Chief Justice Raymond Zondo recommended that relevant existing legislation governing banks be amended to introduce a requirement of fairness or, if warranted, a new piece of legislation to be enacted to compel the banks to afford the client a proper opportunity to be heard before their accounts were closed.

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