Government's suggestion of establishing a legal duty for banks to consider customers' long-term outcomes would be a shift to a fiduciary duty of care from buyer beware

By Gareth Vaughan

The Government is considering establishing a legal duty to make banks consider a customer's long-term outcomes in what a senior lawyer says would be a profound change from a buyer beware culture to something more akin to a fiduciary duty of care.

In a point picked up by Finance Minister Grant Robertson, this week's Financial Markets Authority (FMA) and Reserve Bank (RBNZ) report on bank conduct and culture suggests basic legal duties to protect or enhance customer interests and outcomes could be foisted on banks. What would this mean, how could it be done, and how would it be enforced?

Commerce and Consumer Affairs Minister Kris Faafoi told interest.co.nz potential legislative options, including enforcement approaches, are still being worked through. Faafoi says government officials are looking at what legislative steps the Government could take, including addressing regulatory gaps highlighted in the bank conduct and culture report.

"Because this is a new area for the Government, we’re likely to consider what other jurisdictions have done or are doing," Faafoi says.

"We’ve considered, for instance, the interim report of the Australian Royal Commission’s discussion on how a short-term focus on profits came at the expense of long-term consumer outcomes. At the same time, we’re mindful of the need to see where Australia’s Royal Commission lands before we make any decisions. The Royal Commission is due to report back [its final report] by 1 February 2019."

"I note that duties to consider the interests of customers are not new. For example, the Financial Services Legislation Amendment Bill already includes a duty for financial advisers to give priority to a client’s interests," Faafoi adds.

'A profound change'

Minter Ellison Rudd Watts chairman and partner Lloyd Kavanagh says establishing a legal duty for banks to consider a customer's long-term outcomes would be a shift from the historic buyer-seller relationship. Kavanagh says he's not aware of anywhere in the world where such a duty has been imposed in terms of day-to-day banking business, at this stage. It would be "really interesting" to investigate how it could work. 

Transitioning the relationship, in relation to basic bank products and services from the historic legal approach of one of a buyer and seller with the buyer beware principle (assuming the statutory disclosure, and no misleading conduct),  to one with a fiduciary relationship where there's a form of duty of care in relation to “outcomes," would be a profound change, he says.

"It's good that the Government are looking at the responsibilities of major institutions. I'm just trying to get my head around how the transition from a buyer and seller relationship of a product and service, transitions to something where there's some form of duty of care in relation to outcomes, more like a fiduciary," says Kavanagh.

"In practice that might prove difficult to achieve. Especially where the customer hasn't engaged the bank to provide advice. [It's a] really interesting idea. [But] I suspect it may prove more challenging in practice than they might assume." 

"If they were to impose something along those lines it would be a fundamental change, transition, to the nature of the relationship," adds Kavanagh.

"Imagine you go to the bank asking for a mortgage because you'd like to buy a house and they say, 'let's investigate what the outcome of getting a mortgage would be versus let's say not buying a house, renting and investing the money in unit trusts,' for example. You'll probably turn back to them and say, 'listen mate, I've already made that decision, I just want to know have you got a mortgage that's going to enable me to do what I want to do?'," Kavanagh says.

He points out that under the current buyer-seller relationship, the lender has duties under the Fair Trading Act, and under the Credit Contracts and Consumer Finance Act (including the under the Responsible Lending Code) to not be misleading or deceptive, to disclose information, and to act responsibly. That includes clearly explaining the cost of credit in advertising, checking someone's financial position before finalising a loan, and acting ethically if a borrower falls behind on repayments.

"But to transform the relationship into necessarily one of being responsible for the customers “outcomes” is a big ask,  kind of like making financial advice compulsory. It would be a profound change. And it would be really important to understand whether that's something that the customers actually want and what would be involved in equipping people at the banks to be able to do that," says Kavanagh.

ComCom the conduct regulator for credit, lending and bank accounts

Separately Kavanagh points out the discussion in the FMA and RBNZ's report about conduct regulation gaps, highlights the absence of the Commerce Commission from the bank conduct and culture review. The FMA and RBNZ report notes neither of them has a direct legislative mandate for regulating the conduct of providers of core retail banking services such as lending, credit, and bank accounts. 

"To the extent that there is a regulator about conduct in relation to the provision of credit, lending and bank accounts, in New Zealand that's the Commerce Commission," says Kavanagh.

"And of course they [the Commerce Commission] weren't charged with undertaking the review. And instead you've got the Reserve Bank quite rightly pointing out they are concerned primarily about things which impact on the systemic sustainability of the financial system, which of course these issues don't go to that. And the FMA whose responsibility is primarily for entities licensed by them, in relation to the licensed activities. And of course, yes most of the banks will also have a licence for something from the FMA, but some of them don't. And they're not licensed by the FMA for their core business."

The FMA and RBNZ do say they will share information that relates to banks’ adherence to the Responsible Lending Principles with the Commerce Commission for its consideration. And any remediation issues warranting further investigation and potential enforcement action will be considered by the FMA, RBNZ or the Commerce Commission, depending on who is responsible for the legislation relevant to the issue, the bank conduct and culture report says.

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