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Banking review finds weaknesses on conduct

New Zealand’s banks are not guilty of widespread misconduct or poor culture issues, an FMA and Reserve Bank review has found, but lenders have been criticised for “significant weaknesses” in the way they handle staff conduct risks.

Monday, November 5th 2018, 2:01PM

Adrian Orr, Reserve Bank

The review, covering New Zealand’s 11 biggest banks, was unveiled by the regulator and central bank today. The report states “conduct and culture issues do not appear to be widespread in banks in New Zealand at this point in time. However, we are concerned about banks’ lack of proactivity in identifying and remediating conduct issues and risks in their business”.

The review also calls for banks to remove volume and value-based sales incentives, and revise “incentive structures for frontline salespeople and through all layers of management”. It says "most banks have acknowledged the need to make significant changes to their incentive schemes". It comes as a separate FMA inquiry into sales incentives is due to be published on November 15. RBNZ governor Adrian Orr said banks would be asked to show how they had implemented suggestions. Banks need to address individual concerns about them by March 2019.  

Retail banks have avoided the most unfavourable comparisons to their Australian counterparts in the review, launched following Australia’s Royal Commission into financial services misconduct. The Royal Commission exposed misconduct within the country’s banking groups, including the owners of New Zealand’s “big four”.

The FMA and Reserve Bank found “significant weaknesses in the governance and management of conduct risks” at the banks and suggested there was a “lack of proactivity” identifying and remediating conduct risks and issues.

The report also found a “small number” of conduct issues across the 11 banks. Yet “oversight, controls, and processes” on conduct risk were viewed to be the main problem.

The report identified several key areas for improvement, including greater board accountability, prioritising identification of issues and speeding up remediation, investing in systems and controls, and improving reporting channels and whistleblower processes.

The FMA and Reserve Bank also proposed tougher bank regulation. They believe “current regulatory settings do not provide sufficient scope for regulators to hold banks to account for their conduct”.

Adrian Orr, Reserve Bank Governor, said: “To promote a sound and efficient financial system, banks have a responsibility to 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.”

Comments from our readers

On 5 November 2018 at 2:44 pm Paul J Burns said:

I'd not be surprised to sadly discover if large financial institutions (especially banks) are treating legal penalties (for their immoral and greedy self serving misdeeds) as the equivalent of a speeding fine. I.e as a result of their cost-benefit calculations, they've decided (and rationally so) that the risks (likelihood of being found guilty) and costs (the fines, sanctions etc) are minuscule when compared to the "upside"

On 6 November 2018 at 11:35 am TripleA said:

Its very interesting in this press release to see both the Reserve Bank and Financial Markets Authority talking about the need for banks to strengthen their "whistle blowing processes". In the recent review of the Financial Advisers Act the TripleA Advisers Association advocated that whistle blowing requirements should be embedded in the upcoming legislation and regulations. That suggested improvements to the proposed new regime didn't appear to be taken up by either MBIE or FMA at the time. It remains a glaring omission that employees in such large entities as banks have no protection for doing the right thing when they come under pressure to sell. Hopefully there is still time for this gap in the proposed legislation to be closed as clearly the issue has arisen again through this RB / FMA review.

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