The US has taken a bold step that South Africa’s banking regulators can no longer ignore: stripping "reputational risk" from federal banking oversight.
The US Banking Committee announced this week that the Federal Deposit Insurance Corporation (FDIC) will eliminate reputational risk as a factor in bank supervision, following the passage of Senator Tim Scott’s Financial Integrity and Regulation Management (FIRM) Act. The legislation aims to scrap this concept across all federal banking regulators.
The move comes as two of US President Donald Trump’s family organisations sue Capital One for closing their accounts after the January 2021 Capitol riots. The Trump Organisation called it an assault on free speech and free enterprise, alleging the decision stemmed from Trump’s political views. On FOX News, Scott labelled reputational risk a “playbook strategy” and “hogwash”, arguing it’s a tool regulators use to claim banks might lose market value by associating with crypto or prominent political figures. “It’s merely a weaponisation of their rules,” he said.
In South Africa, reputational risk has been a go-to excuse for banks shutting down accounts of individuals and businesses. The Gupta empire crumbled largely because local banks cut ties with their businesses, leaving India’s Bank of Baroda as a temporary lifeline. Bell Pottinger, a controversial PR firm, lost its HSBC contract after running a racially charged campaign in South Africa. Yet, South African banks faced Parliament’s wrath last month over lack of transformation, discriminatory practices, and account closures.
Ongoing court cases see individuals and businesses challenging account closures based solely on reputational risk, arguing it’s applied unfairly. High-profile figures like Duduzane Zuma, son of former President Jacob Zuma, and ex-Eskom CEO Matshela Koko have publicly decried being debanked.
Sekunjalo Group, despite no proven wrongdoing, faces banks attempting to sever ties amid legal battles. “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,” said Sekunjalo chairman Dr Iqbal Survé on Wednesday on X.
The South African Reserve Bank, which oversees the industry, offered no comment on potential regulatory changes. The Banking Association South Africa also dodged the issue, stating, “The closure of bank accounts is a matter between individual banks and their customers. Any queries should be directed to the individual banks concerned.”
Crypto-related businesses, like Luno, have borne the brunt of this practice. South Africa’s lack of cryptocurrency regulation, compounded by its Financial Action Task Force grey-listing in February 2023 for weak anti-money laundering and counter-terrorism financing measures, hasn’t helped. Luno declined to comment on the FIRM Act, but its global head of compliance, Johan Hetzel, recently dismissed the notion that crypto is for criminals as “outdated and wrong”.
He argued crypto platforms face scrutiny akin to traditional finance, even leading in areas like the Travel Rule regulation.
Nathan McCauley, the CEO of US-based Anchorage Digital, posted on X: “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. This bill is a crucial step towards fair access to banking.”
South Africa’s banking sector remains under scrutiny. While the US moves to curb reputational risk as a weapon, local regulators and banks stay silent, leaving individuals, businesses, and crypto traders in limbo, battling closures they see as unjust.
BUSINESS REPORT