But conduct and culture issues do not appear to be widespread at banks in New Zealand, the FMA and RBNZ said, citing only ‘a small number of issues’ related to poor conduct by bank staff.
The FMA (Financial Markets Authority) and RBNZ (Reserve Bank of New Zealand) have completed their first-ever joint review into banking conduct and culture, identifying significant weaknesses in governance and the management of conduct risks, a number of which require remediation.
The review covered eleven retail banks over four months that together account for 99 percent of household deposits, comprising 391 interviews with 572 bank staff in 13 towns and cities, including directors, managers and frontline workers. In addition, RBNZ and the FMA sought input from six banking sector stakeholder bodies and undertook a consumer survey of 2,000 banks customers.
“Banks’ lack of proactivity in identifying and remediating conduct issues and risks means vulnerabilities remain,” read a joint statement. “The FMA and RBNZ conclude that the overall standard of banks’ approaches to identifying, managing and dealing with conduct risk needs to improve markedly.”
However, given that only a small number of issues related to poor conduct by bank staff were found (inappropriate lending and sales, fees materially outweighing customer benefits, manipulation of customer records to influence satisfaction outcomes, manipulation of branch sales records) and issues relating to system or process weaknesses were more common, conduct and culture issues do not appear to be widespread in banks in New Zealand, the report said.
Some of the key areas identified as needing improvement included:
- Greater board ownership and accountability, including an ability to properly measure and report on conduct and culture risks and issues
- Identifying, managing and remediating conduct risks and issues, for which banks are described as reactive at best, and complacent at worst
- Prioritising investment in systems and frameworks to strengthen processes and controls
- Strengthening staff reporting channels, including whistleblower processes for conduct and culture issues
- Removing all incentives linked to sales measures and revising sales incentive structures for frontline salespeople and through all layers of management
- Regulatory issues in relation to conduct across the banking sector, particularly in respect of banking products delivered without financial advice
“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,” said FMA chief Rob Everett. “The FMA published a guide to good conduct in February 2017, but some banks have only now started to consider these issues, with most of the initiatives not going deep enough.”
Following this report, the FMA and RBNZ will expect to see deeper accountability of boards, executives and senior managers, and will be looking for progress and “clear evidence of change”. All 11 banks included in the review will receive individual feedback, and will have to develop a plan to address the feedback and report on their progress by the end of March 2019.
The review also identified that existing regulatory settings do not provide sufficient scope for regulators to hold banks to account for their conduct, and sets out options for the government to consider to address these issues.
The NZBA (New Zealand Bankers’ Association) released a statement acknowledging the report and accepting all its recommendations: “We are pleased the review found no evidence of widespread misconduct and culture issues across the industry here,” said NZBA acting chief executive Antony Buick-Constable. “We fully accept we have work to do in many areas to ensure we continue to do the right thing by our customers.”
The complete findings of the review are available here.