The genesis of the ‘Gupta clause’ within the financial regulatory framework of South Africa

March 1st, 2018

By Nkateko Nkhwashu

It is a trite principle of law in South Africa (SA) that banks are not legally compelled to give reasons for terminating relationships or closing customers’ accounts. This has been long established and settled in, both international and domestic case law. However, as of late there have been various policy developments within SA’s financial regulatory framework, which might necessitate a rethink thereof or pose a challenge to this principle.

Before we ‘go drilling for the meaning of words’ and start ‘connecting the dots’, it is imperative to briefly look at some of the key pieces of legislation, which are going to form the basis of the discussion. First is the Financial Sector Regulation Act 9 of 2017 (FSR Act), which seeks to establish a dual system of financial regulation in SA comprising of the Prudential Authority (PA) and the Financial Sector Conduct Authority (FSCA). Subsequent to the FSR Act and in order to give effect to the mandate of the latter, the central principle of which is the treating customers fairly initiative, a draft Conduct of Financial Institutions Bill (CoFI Bill) is currently before parliament and has not yet been finalised.

Secondly, the Financial Intelligence Centre Amendment Act 1 of 2017 (FIC Amendment Act) seeks to formally introduce a risk-based approach to customer identification and verification in SA. It further introduces certain concepts, which have been subject of rigorous debates during parliamentary processes leading up to its promulgation. One such concept is that of Prominent Influential Persons (PIPs), which is SA’s extended version of the international Politically Exposed Persons (PEP) concept. Both concepts include ‘family members’ and ‘close associates’ (which include business partners).

Thirdly is the Code of Banking Practice (the Code), which is a voluntary code that ‘sets out the minimum standards for service and conduct you can expect from your bank with regard to the services and products it offers, and how [the bank] would like to relate to you’. It also provides for a customer’s entitlement and responsibility, as well as issues around ‘closing an account’, namely, not to close a customer’s account without a reasonable prior notice to the customer. It further provides for exceptional circumstances under which banks may close a customer’s account without prior notice. Thus –

  • if compelled to do so by law (or international best practice);
  • the account is not used for a significant period of time; or
  • if there is a reason to believe that an account is being used for illegal purposes.

Mostly, the provisions of the Code resemble the ‘contractual’ obligations of both the bank and its customer, which emanates from the traditional bank/customer relationship. The relationship is a contract between the two parties and is only governed by the agreed terms (and conditions) inter partes. Thus, interference from outside third parties (including, eg, the executive branch of government) on this relationship is very restricted. This is one of the key reasons why I submit that the ‘inter-ministerial committee’, established in 2016 to look at issues of account closures (of a certain family) was ill-advised. This ‘inter-ministerial committee’ was established at the direction of the Office of the Presidency and ironically chaired by a minister, who had nothing to do with issues of finance or banks.

So begins the journey to the ‘Gupta clause’

Traditionally, and owing to the bank/customer relationship and the attendant contractual obligations between the parties thereto, banks are not obliged to give reasons for closing a customer’s account, even the motives thereof are irrelevant (Bredenkamp and Others v Standard Bank of South Africa Ltd 2010 (4) SA 468 (SCA)). A bank only has to give reasonable notice to the customer as per the agreed terms and then terminate the relationship. This is a settled principle in law and aligned with international best practice.

In 2016, however, this principle was challenged from various fronts, including by those in the political sphere. This followed the release of the then Public Protector’s report titled the ‘State of Capture’. This report implicated the Gupta family in various corrupt dealings together with President Jacob Zuma’s family. This led to the four big banks in SA communicating their intention to terminate relationships with the Gupta family and their affiliated companies.

The Gupta family sought reasons from the banks and assistance from the Minister of Finance. For some reason, they never sought redress from the Office of the Ombudsman for Banking Services (see Minister of Finance v Oakbay Investments (Pty) Ltd and Others; Oakbay Investments (Pty) Ltd and Others v Director of the Financial Intelligence Centre [2017] 4 All SA 150 (GP)). Some banks did provide reasons to the Gupta family, ranging from potential reputational damage to the need to ensure compliance with SA’s anti-corruption and anti-money laundering legislation, namely, Prevention of Organised Crime Act 121 of 1998, the Financial Intelligence Centre Act 38 of 2001 (FICA) and Prevention and Combating of Corrupt Activities Act 12 of 2004.

Owing to these developments, the Gupta family intensified their engagements with the then Minister of Finance, Pravin Gordhan, so that he could intervene and assist in resolving this situation. Commendably so, Mr Gordhan refused. He also refused to form part of the established ‘inter-ministerial committee’. The Gupta family persisted in pursuing the minister to intervene. This situation led to the minister approaching the court for a declaratory order to the effect that he had no legal obligation to interfere in the relationship between a bank and its customer (the Minister of Finance v Oakbay Investments case).

Was a compromise made, if so, what are the implications?

While the above developments were unfolding there were two important Bills before Parliament, which needed urgent promulgation. These were the Financial Sector Regulation Bill (FSR Bill) and Financial Intelligence Centre Amendment Bill (FICA Bill). The FSR Bill had been before Parliament for some time, while the FICA Bill had to be urgently promulgated in order to ensure that SA fulfills its international obligations and thus complies with international standards set by, inter alia, the Financial Action Task Force (FATF). SA had been under a targeted follow-up process by the FATF ever since deficiencies within its financial regulatory framework were noted during the 2009 mutual evaluation exercise. SA was under pressure to show some progress to the FATF.

To bring matters into context, when some of the banks were closing the Gupta family’s accounts, they raised the fact that due to the adverse media received by the Gupta family after the allegations of corruption in the State of Capture report, the family was now deemed to be high risk and put in the category of PEPs (and close associates). By then the PEP/PIP concept was not provided for in FICA itself. It was, however, provided for in some of the FICA’s Guidance Notes. Some banks went as far as to raise the fact that it was included in the FICA Bill, which was then about to come into effect. This is how the whole PEP/PIP concept and the FICA Bill itself became politicised and eventually, was the center of attention in various committee deliberations. I submit that many parliamentarians even lost sight of how the whole (South African PIP) concept came about in the first place.

Due to all the politicking around the closure of the Gupta family’s accounts and the attention now given to the PEP/PIP concept of the FICA Bill, the Bill’s process was stalled in Parliament. Other role players emerged from nowhere and criticised the Bill. The banking industry was against the PEP/PIP concept, as well, and argued that it went further than international standards as it also covered those in the private sector. For these and other reasons, the FICA Bill, when deliberated on in Parliament, was always tied to the issue of account closures. Due to the number of times this issue was raised at the Standing Committee on Finance deliberations, its chairperson dubbed it the ‘Gupta clause’. This further led to some parliamentarians and policy makers suggesting that perhaps there should be a provision in law, either in the FSR Bill, FICA Bill or CoFI Bill, compelling banks – when deciding to open or close accounts – to provide reasons for such decisions.

Needless to say, all these developments put pressure on National Treasury as the policy maker in charge of both Bills. National Treasury then embarked on a campaign to educate various stakeholders on the intentions of the FICA Bill. This was largely aimed at ensuring that there was a common understanding on the intentions of the Bill and that it urgently be signed into law. SA had to report to the FATF on the next plenary meeting, which was scheduled for February 2017. The fact that SA was given a grace period in 2016 after FATF had resolved to send a high-level delegation to SA made matters worse. To add salt to an already open wound, the president, in November 2016, decided to refer the FICA Bill back to Parliament citing certain potential unconstitutional grounds. The genuineness of this was doubted. This was a huge learning curve for policy makers as it showed the influence politics had on policy development and implementation.

Allegedly, National Treasury started writing to the president trying to clarify what National Treasury perceived to be sensitive and contentious clauses, which led to the FICA Bill being referred back to Parliament. Strategically, National Treasury singled out the PEP/PIP provisions of the Bill, inter alia, and tried to explain and plead with the president concerning the actual intentions of these. Furthermore, and taking into account the prevailing politically sensitive Gupta-charged environment of that time, National Treasury undertook to explore (other) regulatory measures under the Twin Peaks regulatory regime to ensure that financial institutions always treated existing and potential clients fairly when making decisions to open or close accounts, and should consider providing reasons for such decisions.

Apparently, National Treasury used the above undertaking as part motivation to have the FICA Bill signed into law urgently. Such motivation also took issues of financial exclusion as a result of account closures into account. The concept of ‘treating customers fairly’, which is central to the entire Market Conduct Policy Framework was also considered. The understanding within Standing Committee on Finance was that if such a clause was to ever materialise it had to be included within the CoFI Bill, as it involved conduct by financial institutions as against customers. This has, however, changed as seemingly the clause on account closures and the need to provide reasons have been included in the FSR Act. Furthermore, other factors came into play, which eventually forced the president into signing the FICA Bill into law.

Seemingly the clause is now captured under s 106 of the FSR Act, which requires the FSCA to make conduct standards for financial institutions, among others to:

‘(3)(c) …

(iv) the disclosure of information to financial customers; and

(v) principles, guiding processes and procedures for the refusal, withdrawal or closure of a financial product of a financial service by a financial institution in respect of one or more financial customers, taking into consideration relevant international standards and practices, and subject to the requirements of any other financial sector law or Financial Intelligence Centre Act, including –

(aa) disclosures to be made to the financial customers; and

(bb) reporting of any refusal, withdrawal or closure to a financial sector regulator.’

A proper interpretation of s 106 implies that banks can now legally be compelled to provide customers with reasons for withdrawal of services or accounts closures. Furthermore, the Code, as well as other literature on the very same subject needs to be revisited and revised. This also has huge implications on the wealth of case law already established and settled on the same issue. Finally, should this provision be brought before court it is going to be interesting to see how it will be interpreted and pronounced on.


In short, banks are never legally obliged to provide reasons for terminating business relationships. However, due to political dynamics and other policy developments within the financial regulatory framework of SA it seems as though this is about to change. I submit that it is doubtful whether the implications of s 106 have been really considered and thought through prior to including this clause within the FSR Act. On the other hand, one might argue that given mass closure of low risk accounts and the need to foster government’s objective of financial inclusion this is a welcomed development. Others, however, may argue that these challenges will be addressed under the new risk based framework of the FIC Amendment Act. Regardless of which argument carries the light of day, it is reiterated that the implications of this are huge.

Nkateko Nkhwashu LLB (University of Venda) LLM (UJ) Cert in Legislative Drafting (UP) Cert in Compliance Management (UJ) Cert in Money Laundering Controls (UJ) Cert in Policy Development (Pro Active College) is an advocate at Empowerment Dynamics Consulting in Centurion.

Mr Nkhwashu writes in his personal capacity.

This article was first published in De Rebus in 2018 (March) DR 26.

De Rebus