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IOL News
26-05-2025
- Business
- IOL News
Editor's Note: Cabinet must reform the COFI Bill to protect the right to bank
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. The Conduct of Financial Institutions (COFI) Bill, soon to be submitted to Cabinet, is a critical opportunity to address arbitrary bank account closures in South Africa. These closures threaten economic stability, undermine fairness, and grant banks unchecked power to act as de facto regulators of public and private life. However, the Bill in its current form fails to adequately protect the right to bank. I urge parliamentarians to scrutinise this legislation and demand reforms that enshrine procedural fairness, as recommended by the Zondo Commission and grounded in the audi alteram partem principle. Cabinet must address these shortcomings by ensuring the COFI Bill incorporates robust protections, including the right to a fair hearing, as recommended by the Zondo Commission and supported by the audi alteram partem principle. The audi alteram partem rule, a cornerstone of natural justice, mandates that individuals be given an opportunity to respond to allegations before decisions are made against them. In the context of bank account closures, this principle is critical. Banks currently rely on the Code of Banking Practice, which only requires "sufficient notice" before termination. This vague standard fails to ensure procedural fairness, particularly for public figures, large-scale employers, or influential stakeholders whose account closures can have far-reaching consequences The Problem: Arbitrary Account Closures South Africa's banking regulatory framework, including the Code of Banking Practice, allows banks to terminate accounts with minimal oversight. Banks often cite vague reasons like "reputational risk," a term so broad it invites abuse. This practice has far-reaching consequences, particularly for public figures, employers, or influential stakeholders whose closures can disrupt businesses and livelihoods. For example, Independent Media recently faced account closure threats based on flimsy reputational risk claims, while Nedbank, implicated in corruption by the Zondo Commission, faced no similar scrutiny. Such inconsistencies highlight the need for reform. As I've previously written, public outcry over these closures reflects growing frustration with banks' disproportionate power. I have written extensively on the subject: Public outcry over bank account closures due to unfounded 'reputational risk' Reputational risk is a red herring and violates my rights - Dr Survé Dr Survé welcomes FSCA's taking banks to task over bank account closures on basis of reputational risk Legal Context: A Flawed The case of Bredenkamp v Standard Bank (2010) illustrates the dangers of the current framework. The Supreme Court of Appeal upheld Standard Bank's right to unilaterally terminate John Bredenkamp's accounts based on reputational risk, setting a precedent that allows banks to act with minimal accountability. While Bredenkamp's alleged illicit activities raised legitimate concerns, the ruling failed to establish a clear process for customers to contest closures. This precedent empowers banks to target parliamentarians, ministers, lawyers, businesspeople, and academics without due process, effectively allowing financial institutions to influence governance and economic activity. Such power is antithetical to a democratic society and risks undermining public trust in both the banking sector and the state. The Zondo Commission said there was a need for stronger protections against arbitrary closures, warning that banks should not wield unchecked power. Internationally, jurisdictions like the UK have taken steps to curb such practices, prohibiting banks from closing accounts based on customers' political views. The US Senate Banking Committee is also moving to eliminate reputational risk as a basis for banking decisions. South Africa must follow suit. The COFI Bill, designed to shift South Africa's financial regulatory framework toward a principles-based, outcome-driven model, is an opportunity to address these issues. However, in its current form, the Bill falls short. The Financial Sector Conduct Authority (FSCA) and National Treasury, through Commissioner Unathi Kamlana and Ismail Momoniat respectively, have acknowledged the need for legislative reform to curb arbitrary closures. The COFI Bill: An Opportunity for Reform The COFI Bill does not mandate a fair hearing for customers, nor does it impose stricter guidelines on banks beyond the existing Conduct Standard for Banks (2020). This standard vaguely requires a "fair process" for account terminations but explicitly avoids prescribing a hearing in cases involving suspected money laundering or terror financing, citing potential conflicts with other laws. While these exceptions are valid, they should not justify blanket exemptions that allow banks to bypass fairness in other cases. Customers, especially those whose closures impact public interest - such as employers or influential figures - must have the right to challenge terminations in court. Without this safeguard, banks can arbitrarily disrupt businesses, livelihoods, and even political processes by targeting accounts without transparent justification. Recommendations for Cabinet To protect the right to bank, Cabinet must demand the following amendments to the COFI Bill: Enshrine the audi alteram partem principle: Require banks to provide customers with a fair hearing before closing accounts, ensuring procedural fairness. Limit vague justifications: Prohibit banks from using "reputational risk" as a catch-all excuse for terminations, mandating specific, evidence-based reasons. Ensure judicial recourse: Grant customers, especially those whose closures impact public interest, the right to challenge terminations in court. Align with Zondo Commission recommendations: Incorporate the Commission's call for stronger protections to prevent banks from wielding unchecked power. It is important that Cabinet demand amendments that align the Bill with the Zondo Commission's recommendations and the principles of fairness. By failing to act, Cabinet risks allowing banks to continue wielding unchecked power, undermining South Africa's economic and democratic fabric. BUSINESS REPORT
IOL News
20-05-2025
- Business
- IOL News
Understanding the Conduct of Financial Institutions Bill: A new era for financial regulation
The long-awaited Conduct of Financial Institutions Bill – which is set to strengthen regulatory power over financial institutions – aims to bring digital money into its ambit. Image: IOL The long-awaited Conduct of Financial Institutions (COFI) Bill – which is set to strengthen regulatory power over financial institutions – aims to bring digital money into its ambit. The new law, which has been in the works for more than a decade, will finally be 'submitted to Cabinet shortly for approval for tabling in Parliament,' the Financial Conduct Authority (FSCA) said in response to written questions. However, over the past 10 years, FinTech has dramatically transformed financial services, moving from a disruptive force to a mainstream innovation. And it has advanced faster than the law – with technology set to always be at least one step ahead of regulations. FSCA Commissioner Unathi Kamlana is on record as saying that 'as the financial sector continues to evolve, so too must the regulatory framework that governs it. Improving industry practices is essential to ensuring that financial institutions consistently deliver fair customer outcomes, regardless of the models or channels used to provide financial products and services.' In stating this, Kamlana was speaking specifically about the COFI Bill. 'The COFI Bill represents a legislative response to these challenges, aiming to transform the regulatory landscape into one that is more outcome-focused and principles-based,' he said. Kamlana also said that the rise of FinTech, digital banking, artificial intelligence, digital assets, and decentralised finance are reshaping how financial services are delivered and accessed'. He noted that these advancements offer opportunities for growth and inclusion, but also pose challenges, such as cybersecurity threats, algorithmic biases, unethical AI-driven decisions, fraud and even financial exclusion, that regulators and industry leaders must address. In response to questions, the FSCA added that 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'. The story of the Bill is, in itself, a long and complex one. In 2013, the draft of the Financial Sector Regulation Bill was published for consultation, followed by the release of a discussion document outlining the draft market conduct framework used for stakeholder engagement. Video Player is loading. Play Video Play Unmute Current Time 0:00 / Duration -:- Loaded : 0% Stream Type LIVE Seek to live, currently behind live LIVE Remaining Time - 0:00 This is a modal window. 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Advertisement Next Stay Close ✕ Ad Loading The Financial Sector Regulation Bill is closely related to COFI as they are both key components of South Africa's financial sector reform alongside the so-called 'Twin Peaks' legislation, which resulted in oversight of the financial sector being handled by two entities and not just one and was introduced in 2017. The FSCA was created in 2018 as a result of 'Twin Peaks'. As the FSCA explained on its website: 'The COFI Bill is a critical development that will shape the future conduct framework and many of the FSCA's current conduct regulatory framework projects have some dependency on the promulgation of the COFI Bill.' The Bill was approved by Cabinet for publication for public comment towards the end of December 2018 and published for public comment from a few days after that through to the start of April the following year. The FSCA explained that the next draft of the Bill was finalised and published on September 29, 2020, for a second round of public comments until the end of October that year. 'The Bill was revised to address comprehensive comments received from the public as well as from the State Law Advisers and resubmitted to the Office of the Chief State Law Advisers in December 2024. Once tabled in Parliament, the Bill will [be] published for public comment again by Parliament,' it said. The FSCA is not the only entity concerned with regulating the digital realm when it comes to financial services. In 2016, a FinTech Working Group was developed under the auspices of several regulators, including the South African Reserve Bank and FSCA, to 'work together as South African financial sector regulators to demystify the regulatory landscape, provide a space for safe experimentation and actively advance innovation'. It hasn't published any news since 2022 though, when it said its regulatory sandbox is open for applications. IOL
