There are “significant weaknesses” in the way New Zealand banks govern and manage conduct risks and changes need to be made.
That’s the view of regulators the Financial Markets Authority and the Reserve Bank of New Zealand after undertaking a four-month review of conduct and culture at 11 banks which operate in New Zealand.
A joint 37-page report has been released today, spurred by Australia’s Royal Commission into misconduct in the financial services sector amid calls for a banking inquiry to be held in New Zealand.
While the New Zealand review found only a small number of issues relating to poor conduct by bank staff, the regulators said a lack of proactivity in identifying and fixing conduct issues and risks meant “vulnerabilities remain”.
Rob Everett, chief executive of the FMA said the governance of conduct risk – how boards oversee and monitor conduct issues in the banks – required “serious attention”.
“Boards and senior management must address the recommendations and findings
from our review with urgency.”
Those recommendations include greater board ownership and accountability, prioritising the identification of issues and addressing them quickly, strengthening staff reporting channels including whistleblower processes and removing all incentives linked to sales measures as well as revising sales incentive structure for frontline sales people and through all layers of management.
Everett said despite it releasing a conduct guide in February 2017 some banks had only started to consider the issues now, with most of the initiatives not going far enough.
Reserve Bank governor Adrian Orr said banks had a responsibility ensure customers receive products and services they understand.
“These products and services must be suited to customers’ needs on an ongoing basis.
“Failure in this responsibility exposes customers, banks and the wider economy to unnecessary risk – as dramatically demonstrated by the recent Global Financial Crisis.”
The banks have been given until March 2019 to come up with a plan for how they will address their shortcomings.
Speaking to media in Wellington, Everett said this is the first time New Zealand’s two regulators have worked together on this sort of scale.
He said there is much work still to do in managing conduct issues.
“In our view banks do little to monitor long-term customer outcomes,” Everett said.
The risks of this are increased by sales incentives, which are typically focused on volume metrics.
All banks need to better manage their conduct around risk management, he said.
“Some backs have significant work to do in this [area.]”
He said there is a risk customers are not being served well.
The response to customer complaints was found to be more reactive, than proactive, Everett said.
Orr told a press conference that banks need to take this report seriously.
Orr said he expect banks to revise and implement any sales incentive they are currently using.
What the review found
The review found significant variation in the banks’ approaches to identifying, managing and remediating conduct risks and issues.
“While some banks have been thinking about conduct and culture for some time prior to our review, the approach of others can be described as reactive at best, and complacent at worst.”
While staff at some banks felt a strong connection to their community, it said a reliance on this culture alone was insufficient to insulate against conduct risks.
“In some banks messages about expectations for good conduct from the board, CEO or other senior leaders did not always appear to be reaching frontline staff, or mixed messages were being received.”
Banks were found to measure short-term customer satisfaction but were doing very little to monitor good long-term outcomes – whether products were suitable on an ongoing basis.
It found the risk of poor customer outcomes was increase by the incentives offered to staff where were typically focused on sales performance.
While banks have been moving to remove sales incentives from front-line staff the report said “none go as far as we consider necessary”.
The review also found regulatory issues and said the current settings did not provide sufficient scope for regulators to hold banks to account for their conduct.
ANZ, BNZ, ASB, Westpac, Kiwibank, TSB, Southland Building Society, Rabobank New Zealand, Heartland Bank, The Co-operative bank, HSBC.
What the banks need to change:
• Bank boards need to take ownership by deciding what information they need to know customers are having good outcomes. Management need to come up with framework and metrics to collect conduct data.
• Banks need to be proactive about identifying and remediating issues. Remediations should be prioritised.
• Strengthen processes and controls to prevent, detect and manage conduct and culture issues.
• banks need to educate their staff on what good conduct and culture looks like and have ways to report poor conduct.
• Remove incentives linked to sales measures.
• Banks have until the first performance year after September 30 2019 to implement changes to their incentive programmes.
When do they need to do it by:
• Banks will need to provide the regulators with a plan for how they will address individual concerns about them by March 2019.
• They will then need to report on their progress implementing their plan.
• Regulators will take action if they not happy with progress or urgency.