Deconstructing the debate around bank account closures on the pretext of institutional reputational risk

Abstract

The Supreme Court of Appeal in Bredenkamp v Standard Bank found that a bank has a contractual right to close a client’s accounts on reasonable notice, and that a bank is entitled to exercise this right if it perceives that a continued relationship with the client may result in reputational and business risks to the bank (albeit may be premised on allegations which the client denies). Banks have regulatory obligations to (amongst others): (i) manage their reputational risk; and (ii) take steps to avoid their accounts being used by clients to facilitate the proceeds of unlawful activities. Banks are at the receiving end of scrutiny for the latter, including from the media. Banks’ actions of closing accounts for institutional reputational risk are however, often challenged by clients on the basis that these decisions are informed by untrue allegations and are contrary to public policy. A particular consideration is the potential consequences of the clients becoming ‘unbanked’. There are also other issues of contention including that reputational risk is an elusive reason. The competing interests and public policy considerations at play have not yet been adjudicated by our courts. This research report argues that the complexities involved necessitates legislative reform to ensure certainty and fairness on both sides.