US Scraps ‘Reputational Risk’ in Banking—Should South Africa Follow?

The United States has taken a bold step in banking regulation, one that is now sparking debate in South Africa: the elimination of ‘reputational risk’ as a factor in banking oversight.

The Financial Integrity and Regulation Management (FIRM) Act, passed this week, strips US federal banking regulators—including the Federal Deposit Insurance Corporation (FDIC)—of their ability to use reputational risk to justify account closures. The move follows high-profile cases of banks shutting down accounts based on politics, crypto involvement, or controversial affiliations.

With South African banks frequently citing reputational risk when debanking individuals and businesses, the question is: Should South Africa follow suit?

How ‘Reputational Risk’ Has Been Used in Banking

The US decision has been met with mixed reactions. Senator Tim Scott, who championed the FIRM Act, called reputational risk a weaponized strategy used by banks to avoid political backlash. He highlighted cases where banks shut down accounts for businesses dealing in cryptocurrency or controversial figures—without due process.

One notable example is former US President Donald Trump’s family organisations, which sued Capital One for closing their accounts after the January 2021 Capitol riots. The Trump Organisation argued the move was politically motivated and an attack on free speech and free enterprise.

In South Africa, reputational risk has played a significant role in major financial decisions.

• The Gupta empire collapsed largely because local banks severed ties, citing reputational concerns.

• PR firm Bell Pottinger lost its contract with HSBC after running a racially charged campaign in South Africa.

• Crypto businesses like Luno have struggled with banking restrictions, as South African banks remain wary of the unregulated industry.

• Sekunjalo Group, owned by Dr Iqbal Survé, has fought multiple legal battles against banks attempting to close its accounts, despite no proven wrongdoing.

• Duduzane Zuma and ex-Eskom CEO Matshela Koko have publicly condemned what they call unfair banking discrimination.

“The US has seen how banks used ‘reputational risk’ for political purposes and will now eliminate this from banking supervision. South Africa must follow through with similar legislation,” – Iqbal Survé, Sekunjalo Chairman

South Africa’s Banking Response—Silence from Regulators

Despite mounting concerns, South African banking regulators have remained silent.

• The South African Reserve Bank (SARB) has yet to comment on whether it would consider removing reputational risk from banking oversight.

• The Banking Association South Africa has avoided addressing the issue, stating:

  “The closure of bank accounts is a matter between individual banks and their customers.”

Crypto Businesses Hit Hard by Reputational Risk Policies

South Africa’s banking sector remains cautious when dealing with cryptocurrency businesses.

• Crypto exchanges like Luno have faced difficulties accessing banking services due to anti-money laundering concerns.

• South Africa was greylisted by the Financial Action Task Force (FATF) in February 2023, further complicating crypto-related financial transactions.

• Johan Hetzel, Luno’s global head of compliance, dismissed the notion that crypto is inherently risky, calling it “outdated and wrong.”

“The FIRM Act tackles a major issue: debanking. We’ve seen firsthand how ‘reputational risk’ can be used to deny banking services without due process,” – Nathan McCauley, CEO of Anchorage Digital (US-based crypto bank)

Should South Africa Follow the US in Scrapping Reputational Risk?

As the US moves to protect businesses and individuals from politically motivated bank closures, South Africa faces mounting pressure to re-evaluate its banking regulations.

With growing court challenges, accusations of discrimination, and unresolved transformation issues, local banks could soon find themselves in the same regulatory crosshairs.

Will South Africa continue allowing reputational risk-based account closures, or will it follow the US in implementing fairer banking policies? The answer may shape the future of banking in the country.

What do you think? Should South Africa remove ‘reputational risk’ from banking oversight?

{Source IOL}

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