Banks should ensure their processes are fair and transparent when they decide to close a customer’s account, says FSCA Commissioner Unathi Kamlana (pictured).
Derisking was one of the issues that Kamlana raised on 17 April in his keynote address to the Banking Association of South Africa’s “Banking on ethics” conference.
“Derisking” refers to financial institutions’ terminating or restricting their relationships with certain customers or categories of customers, particularly those considered to be high risk. This is often done to comply with anti-money laundering (AML) and counter-terrorism financing (CTF) regulations.
Kamlana said widescale derisking is considered an undesirable approach to risk management for the purposes of AML/CFT compliance, and the guidelines issued by the Financial Intelligence Centre caution against excessive derisking.
A balance must be struck between preventing illicit activities and the moral obligation to ensure access to financial services.
“So, as banks, you need to ask yourselves if you are succeeding in striking this balance – is your risk management approach not overly stringent? Instead of managing the risk, are you not taking the easy way out?” he asked.
Banks have the right under contract law to terminate client relationships, but questions have been raised as to whether the prevailing common law position is fair to customers, particularly because access to banking is a gateway to participating in the economy, Kamlana said.
“The lack of a bank account can severely limit an individual’s or a business’s ability to engage fully in the economy, affecting everything from receiving and making payments to accessing credit.”
Kamlana said the FSCA’s primary interest is to ensure that the banks employ fair and transparent processes when closing accounts.
“So, what do we envision when we talk about a fair and transparent process? In accordance with our conduct standard for banks, we mean fully engaging with customers and providing them with reasonable notice and clear reasons for the closure of their accounts.
“Banks should not simply cite reputational risk; reasons must be concrete and consistently applied to prevent what might appear as arbitrary account closures.
“Customers must also have the right to appeal or seek redress to ensure the process remains just and equitable. The mechanism for appeal and redress should be straightforward and accessible, enabling affected parties to challenge decisions they believe are unfounded or have been applied unfairly.”
Kamlana said the issues he raised about derisking are important and require further reflection.
“I hope that during the course of the conference, you will address these issues and discuss solutions for how to deal with suspicious bank accounts from the perspective of money laundering/terrorist financing risks, while safeguarding customer rights and financial inclusion.”
