THE global financial system is undergoing a subtle but profound transformation in how reputational risk is treated within banking policies.

In 2023, the United States — home to some of the world’s most influential financial regulators — signalled a decisive shift, deprioritising reputational risk as a standalone justification for denying banking services. This change addresses concerns that overly broad interpretations of reputational risk have led to de-risking, where banks avoid serving entire sectors or individuals deemed controversial, even if they are lawful and compliant.

While this development originates in the US, its influence will inevitably ripple across global financial systems, including South Africa’s. For South African banks, which often align their practices with international standards, this shift could spark a reevaluation of how reputational risk is applied domestically, particularly in cases like the Sekunjalo Group’s battle against account terminations.

In June 2023, the Office of the Comptroller of the Currency (OCC) issued guidance clarifying that reputational risk should no longer be used as a standalone reason to deny banking services. Instead, it must be assessed alongside specific, measurable risks such as credit, operational, or compliance risks.

This move responds to mounting criticism that excessive focus on reputational risk stifles innovation, harms financial inclusion, and disproportionately affects underserved communities. For instance, state-legal cannabis businesses and cryptocurrency firms have struggled to gain banking access due to vague reputational concerns, despite operating within regulatory frameworks.

Bipartisan efforts in Congress and advocacy from industry groups like the American Bankers Association (ABA) have driven this shift, emphasising the need for clarity and fairness in banking decisions.

While the US developments do not directly bind South African institutions, they set a precedent that South African regulators and banks cannot ignore. As major players in the global financial system, South African banks often adopt practices aligned with those of major financial centres like the US.

If US regulators adopt clearer guidelines on reputational risk, South African authorities may feel compelled to follow suit to ensure alignment with international best practices. This would reshape how South African banks approach contentious cases, particularly those involving politically exposed persons (PEPs) or controversial businesses.

South Africa’s banking system operates under strict anti-money laundering (AML) and know-your-customer (KYC) frameworks, where reputational risk is deemed to play a central role. Banks like Standard Bank and Nedbank have invoked reputational risk to justify terminating accounts for clients perceived as controversial.

However, this practice has drawn sharp criticism for being overly broad and lacking transparency. The precedent set in the Bredenkamp v Standard Bank case (2010) has been a cornerstone of South African banking law, upholding banks’ discretion to terminate accounts if they reasonably believe continuing the relationship could expose them to reputational harm or regulatory risks.

However, recent parliamentary discussions have highlighted growing unease with how this precedent is applied.

If the US trend toward stricter evidentiary standards gains traction locally, courts may demand stronger evidence of actual harm or specific risks before allowing banks to terminate accounts. This would constrain the broad application of reputational risk seen in various cases.

Legal scholar Professor Tshepo Mosala, writing in the South African Journal of Banking and Finance, argued that “the current reliance on reputational risk creates a chilling effect on legitimate businesses and undermines the rule of law by placing undue power in the hands of private institutions”.

South African regulators, including the SA Reserve Bank (SARB) and the Financial Sector Conduct Authority (FSCA), often take cues from global trends. If US regulators adopt stricter evidentiary standards, South African authorities may issue clearer guidelines requiring banks to demonstrate concrete compliance violations rather than relying on speculative reputational concerns.

This could reduce de-risking practices and promote financial inclusion, ensuring that lawful businesses and individuals are not arbitrarily excluded from banking services.

South African banks also rely heavily on correspondent banking relationships with US institutions to facilitate international transactions. If US banks adopt a more relaxed approach to reputational risk, it could reduce pressure on South African banks to overly restrict services to avoid jeopardising these relationships.

This could create space for South African banks to reassess their own policies, potentially leading to fairer treatment of clients.

The Sekunjalo Group has become a symbol of the challenges faced by victimised clients in South Africa’s banking system. Standard Bank and Nedbank moved to terminate their relationships with Sekunjalo and its subsidiaries, citing reputational risk concerns linked to baseless allegations of irregularities involving the group and its leadership.

Sekunjalo has consistently denied wrongdoing and challenged these terminations, arguing that they were based on unfounded reputational concerns rather than concrete evidence. The actions of South African banks in this case reveal troubling trends that demand critical scrutiny.

Banks have provided minimal explanation for their decisions, leaving clients unable to address alleged issues or refute claims. By invoking reputational risk broadly, banks have effectively acted as judge, jury, and executioner, bypassing established legal processes.

The move to terminate Sekunjalo’s banking services has had cascading effects, impacting its subsidiaries, employees, and stakeholders. This raises serious questions about whether banks adequately considered the broader social and economic consequences of their actions.

If South African banks adopt a more nuanced approach to reputational risk inspired by US developments, victimised clients could see significant benefits. Narrower interpretations of Bredenkamp could empower clients to challenge previous terminations and seek reinstatement of their accounts, provided they can demonstrate compliance with regulatory requirements.

Clearer guidelines from SARB or FSCA could constrain banks’ ability to terminate accounts arbitrarily, offering greater protections for businesses. This would mark a turning point in how South African banks balance risk management with fairness and accountability.

The Sekunjalo battle is not just a corporate dispute; it also has profound implications for media freedom and economic inclusion in South Africa. Sekunjalo owns Independent Media, one of the country’s largest independent news publishers.

The termination of Sekunjalo’s banking services has raised alarms about the impact on media freedom, particularly given allegations that the decision was politically motivated. Critics argue that targeting Sekunjalo undermines press independence and stifles critical reporting on corruption and governance failures.

De-risking practices disproportionately affect marginalised groups, small businesses, and emerging industries. Reducing reliance on reputational risk would promote financial inclusion for SMEs, emerging sectors such as cannabis and fintech, and underserved communities reliant on businesses affected by banking restrictions.

Several factors may compel South African banks to align with the US approach to reputational risk. Operating in an interconnected global financial system, South African banks may need to adopt practices aligned with major jurisdictions like the US to ensure compliance with international standards and reduce friction in cross-border transactions.

Regulatory pressure from SARB or FSCA could force banks to issue clearer guidelines on reputational risk, addressing public concerns about de-risking and financial exclusion. Legal challenges from clients could expose banks to mounting litigation risks if they resist change.

Public outcry has highlighted the need for greater accountability in banking practices. Banks that fail to adapt risk alienating customers and damaging their own reputations.

The US move to deprioritise reputational risk offers a timely opportunity to reassess how South Africa’s banking system balances risk management with fairness and inclusion. While the precedent set in Bredenkamp remains intact, evolving global trends could inspire narrower interpretations and stricter evidentiary standards.

This shift would empower victimised clients, promote media freedom, and foster economic inclusion. Achieving these outcomes requires concerted action from regulators, courts, and banks. South African banks need to abandon opaque and overly cautious practices that prioritise reputational risk at the expense of justice and equity.

By embracing transparency, accountability, and alignment with global best practices, they can build a banking system that serves all stakeholders fairly while upholding the integrity of South Africa’s democracy and economy.

financial inclusion

The impact of the US shift on reputational risk in South Africa's banking system