In its own inquiry into banking, but without Australia’s dirty linen, New Zealand’s Financial Markets Authority (FMA) could be handed more direct powers to govern bank conduct in the wake a joint regulatory report released last week.
Following a nine-month probe into 11 NZ financial institutions – a collaboration between the FMA and the Reserve Bank of NZ (RBNZ) – the report calls for the Government to plug a number of regulatory “gaps” identified during the process.
However, all four of the recommendations to the Government would beef up FMA powers rather than the RBNZ where the review failed to pick up “any notable regulatory gaps”.
“The lack of conduct requirements in the delivery of banking products (particularly those distributed without financial advice) has hampered the FMA’s regulatory oversight and the development of consistently strong governance and management of conduct risk across the industry,” the ‘Bank conduct and culture’ report says.
Aside from a raft of more generic bank tidy-up suggestions, the report says the government could:
- impose a legal duty on banks to “protect or enhance customer interests and outcomes”;
- require banks to have “adequate systems and controls” to manage conduct risk;
- hand regulators more powers and resources to investigate banks for conduct risks along with greater penalties for breaches; and,
- clarify individual responsibilities for bank conduct with the option of “direct liability for senior managers”.
The regulatory review was triggered in March by concerns highlighted in the Australian Royal Commission (RC) into financial services.
But the review failed to uncover any RC-like major systemic issues in the NZ banking system. The report notes local industry feedback that NZ banks tend to be smaller and simpler than their Australian cousins (or parents); and, offer less complex products than in Australia where byzantine superannuation and tax laws underpin complicated structures.
“While we agree these features are present, we do not accept that the differences between Australia and New Zealand are sufficient to insulate New Zealand banks against all the conduct issues being identified in Australia,” the report says. “We expect all banks to proactively review the work of relevant regulators and related international examples to help identify potential conduct and culture issues here.”
The FMA/RBNZ review calls for NZ banks to improve behaviour across five broad areas: board accountability for conduct; problem identification and remediation; processes and controls; staff reporting; and, incentives.
“Overall, there are weaknesses in the governance and management of conduct risks, and significant gaps in the measurement and reporting of customer outcomes,” the report says.
All of the 11 banks have been handed specific recommendations along with generic self-improvement advice, which regulators will follow-up on next year.
In particular, banks have until September next year to remove staff incentives linked to sales volumes with regulators set to check on progress to that goal six months beforehand.
“Any bank that does not, at [March 2019], commit to removing sales incentives for salespeople and their managers will be required to explain how they will strengthen their control systems to sufficiently address the risks of poor conduct that arise with such incentives,” the report says.
As well, the banking review also found “50 remediation activities” were underway across the banks during the investigation, covering 431,000 customers and almost $24 million in make-good costs.
“The majority of issues appear to have been caused by system or process weaknesses, or processing errors. It is concerning how relatively commonplace these problems are,” the report says.
In a statement, FMA chief, Rob Everett, said: “The governance of conduct risk in the banks requires serious attention. Boards and senior management must address the recommendations and findings from our review with urgency.”
– David Chaplin, Investment News NZ