FirstRand Group, which incorporates amongst others First National Bank, has become the first bank to publicly state the reasons for terminating all accounts belonging to Oakbay Investments, which is controlled by the notorious Gupta family. This blog post is an extract from the chairman's report in the group's annual report, in which Laurie Dippennaar explains the reasoning behind the move. - blogs editor
The turmoil of Nenegate was quickly followed by massive press scrutiny on the government's reaction to the termination of certain bank accounts. There was an unbelievable amount of misinformation swirling around at the time so I thought it would be helpful to explain to our stakeholders under what circumstances banks consider parting company with a customer? Given strict client confidentiality requirements, which for banks are set down in law, I am only commenting on generic frameworks and principles.
To provide some kind of context to the potential risks banks run if they fail to "do the right thing", $290 billion represents the approximate value of fines paid over the past few years by global banks that have contravened regulations, including those that relate to responsible customer conduct. This is an almost incomprehensible number but as a reference, it represents the total GDP of Angola, Morocco and Kenya combined.
These fines decimated banks' profits, deeply eroded their capital bases, permanently destroyed massive amounts of shareholder value and dramatically affected their reputations. One further downstream impact included the loss of thousands of banking jobs.
Everyone knows why customers choose to leave banks: poor service, unwillingness to grant credit or a better offering from a competitor. What seems to be less well known is why a bank would even consider parting with a customer?
This level of punishment should not really surprise anyone. Banks function on the back of customer trust and confidence, which comes with the role they play in the economy of taking deposits and transferring funds. Billions of people place their precious salaries and savings with banks, in return banks provide customers with safe and effective mechanisms to access or move these funds around or assist customers to leverage them through credit. Given this background banks have developed massive risk mitigation departments and processes and everything gets tested rigorously and this would include any decision relating to taking on or parting with a customer.
Everyone knows why customers choose to leave banks: poor service, unwillingness to grant credit or a better offering from a competitor. What seems to be less well known is why a bank would even consider parting with a customer? It seems very counter intuitive for a client-centric business to take such action.
In reality there are many, many reasons, some seemingly mundane such as accounts that show long periods of dormancy. However there are also instances where customer behaviour requires action or there is potential reputational risk for the bank. This is because South African banks operate in a globally integrated system. The South African Reserve Bank is a signatory to many international standard setting bodies such as the G20, the Financial Stability Board, the International Monetary Fund, the Bank of International Settlement and the Basel Committee. In addition, South Africa is a member of the Financial Action Task Force, a global body which develops international customer acceptance standards for regulators.
If the South African banks do not comply with local and global regulations and do not take principles regarding reputation risk management seriously, foreign investment flows to the country will be significantly reduced. This will be disastrous for the country's fiscal health which remains extremely reliant on these flows. International investors run their own risk dashboards for South Africa and responsible banking conduct is a key input. The South African banking sector scores very highly on every international governance index and should never ever compromise on this.
Watch: EXCLUSIVE: Guptas 'Laundered' Kickback Millions -- Here's The Evidence