FMA's CEO Rob Everett & RBNZ Governor Adrian Orr tell NZ's big bank CEOs to prove their banks are different to their Aussie parents

FMA's CEO Rob Everett & RBNZ Governor Adrian Orr tell NZ's big bank CEOs to prove their banks are different to their Aussie parents

The Financial Markets Authority (FMA) CEO and Reserve Bank Governor have told New Zealand's big bank CEOs to prove their banks are different to their Australian parents in the wake of the damning revelations from Australia's Royal Commission on Financial Services.

FMA CEO Rob Everett told RNZ on Wednesday morning  he and Reserve Bank Governor Adrian Orr spoke individually to the big bank CEOs on Monday. ANZ NZ, ASB, BNZ and Westpac NZ, which dominate NZ's banking industry, are all Australian owned.

Everett said his and Orr's message was; "It’s not credible to just say that New Zealand is different. You have to demonstrate why either the business structures here, or your business practices here, lead to different outcomes. Now we at the FMA, we see some of that. But actually we think the banks need to front up and really explain why it should be different. And that’s the process that we’re going through with them now.”

In terms of whether NZ should hold its own Royal Commission, Everett said not at this point.

“I don’t think so at this point. The government is looking at insurance law, the government’s looking at consumer credit, there’s a financial advice bill going through select committee right now, we’ve got a very transparent work programme as to where in the industry we’re looking for issues. I would rather let that work progress before anyone leaps to any conclusions about whether or not to have an inquiry,"Everett told RNZ.

"We haven't seen systemic evidence along the lines of what has been highlighted in Australia," Everett added.

Below are excerpts from Everett's RNZ interview released by the FMA.

On the impact of the Royal Commission:

“What’s been highlighted in the royal commission in Australia is really ugly. I think it’s devastating for the industry, the stories that are being told. Most of the issues that we’ve heard are issues that were well known to the regulators, they are issues that have surfaced before. So we have been spending time here in New Zealand making sure that our work plans react to that and where we’re looking is somewhat driven by the experience in Australia.

To date we haven’t seen any evidence of systemic abuses along the lines of the Australian industry, but as we’ve said to the New Zealand banks, we can’t afford to be complacent, we really have to up our game to make sure that those same issues aren’t being replicated here.”

On the banks:

“I have spoken individually to all the chief executives of the big banks, Adrian Orr and I called the banks together yesterday to basically have this conversation with them. Which is really to say to them, it’s not credible to just say that New Zealand is different. You have to demonstrate why either the business structures here, or your business practices here, lead to different outcomes. Now we at the FMA, we see some of that. But actually we think the banks need to front up and really explain why it should be different. And that’s the process that we’re going through with them now.”

On what the FMA is looking to see from financial institutions:

“we’re asking them to give us assurances, including in writing, as to the processes they’ve followed to check themselves against what’s coming out of the Royal Commission. And as I say, a lot of those issues were well known so they’re not new issues, they should have been checking against them already, we’ve asked them to provide assurances to us, the RB and the FMA, that they have scrubbed their business models and that they have a basis for being confident that these issues don’t exist here.”

On how the FMA is responding to what’s emerging from the Royal Commission:

“There’s a balance for a supervisory regulator like us in terms of influencing the industry to do things better in the future and there’s a need as law enforcement agency to go in and hammer conduct that we think is beyond the pale or is a clear breach of the legislation. So I think it will depend on what we see. We’ve been doing this for a while now, the messages are pretty clear. I think the Australian RC ups the temperature for New Zealand, and puts people on notice that we really need to get this right. So if we see areas where we think the law has been breached or the conduct is really poor, we will go after it. We are also spending a lot of time pushing and influencing and urging the providers just as a matter of best practice to think harder about what the customers need and less about their bottom line.”

On whether we should have a Royal Commission/public inquiry in New Zealand:

“I don’t think so at this point. The government is looking at insurance law, the government’s looking at consumer credit, there’s a financial advice bill going through select committee right now, we’ve got a very transparent work programme as to where in the industry we’re looking for issues. I would rather let that work progress before anyone leaps to any conclusions about whether or not to have an inquiry. I’d also add the Australian inquiry has only been going a few weeks. The initial report isn’t out until September the final report isn’t out until February. I think rather than rushing to conclusions I’d like to let the work that’s currently underway make more progress before conclusions are reached.”

On the level of cooperation:

“Yes, they are. I think If the penny hadn’t dropped before yesterday I think with Adrian Orr and I it was pretty clear certainly to the banks we spoke to yesterday that this was a game changer. The royal commission, the stories that it’s telling people about what’s gone on in Australian financial services, as I said before really ugly, and I just don’t think NZ can be complacent just because we don’t think we’ve seen it here, I think we’ve actually got to be absolutely sure it’s not happening.”

On how the FMA might react to a poor response:

“If they do that, they’ll see more of us in court and less of us doing the education. I will say is that we have urged the bank CE’s and the insurers and the fund managers not to be complacent. Trust is absolutely damaged in Australia, it was damaged in the UK, you can see it is damaged in the US. To date the trust levels in NZ have been better, but it will only take one or two big blow-ups for that to be damaged beyond repair. So we are urging the industry whilst they have the chance to get this right.”

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11
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I can see it now.

RBNZ: Prove you are different!
Big 4: Ok, we ARE different.
RBNZ: Sweet as, carry on then.

I recently repaid to Westpac a fixed mortgage 40 days early. Despite repeated request they have not provided a detailed calculation of the penalty they charged. I had lengthy explanations, each one contradictory about changes in interest rates. Quite contradictory. Really I don't think the 'boys' at the bank understand it themselves.
On the other side of the transaction, which was quite large, somebody broke a term deposit. Strangely, using the same 'change in interest rates' vague discussion, they also paid a penalty. Funny that.
Yes I do understand what a fixed term contract is.
So I am still seeking the actual calculation - you know - something with numerals in it - written down. And some clear indication of which actual method they used - given the various contradictory ways they have discussed.

the Prepayment Loss calculation is complex. I suspect the average banker would struggle to explain it.

http://www.legislation.govt.nz/regulation/public/2004/0240/latest/DLM277...

I am not intimidated by the formula, but there is a huge gap in the rationale - that once paid back, early or otherwise, the Bank can then loan it out again to someone else. So this is largely a rort, where a bank claims losses that are not real, because they would immediately be able to put the paid back loan to use somewhere else. Smoke and mirrors!

Variance/risk has a cost.
The bank manages this cost by fixing a term of a contract. If the terms of this contract change, the variance of the position changes.
It doesn't matter if the variance is positive, or not, there is still a cost associated either in real terms or as an opportunity cost.

It is not a rort at all.
The (non-intimidating) formula and a bit of intuition highlights this.

Yes. We know all that Nymad. But it remains they that they bill me, but can't explain (or replicate ) the calculation. They in desperation offered to delete the 'administration fee'. I said I understand there is admin involved, so no need to delete it.
The boys can't explain it so at the moment it seems they use a big button that gives them some answer. I suspect the button is linked via the back room to the lotto machine, given that is underutilised most of the week.

It seems stupid to pay off a mortgage 40 days early if you had no idea what the early repayment penalty was going to be.
Maybe direct them to the same page that was linked - this should be their standard calculation framework. Hell, you have all the information you need to perform the calculation. Instead of devoting your days to cutting down poppies you could propose a commensurate charge.

Seems stupid Nymad to propose me not paying it off, when you know nothing else about it. But yes it is a good idea to work on a counter calculation.
Point remains though. They charged me, but can't provide me with the calculation. At least they should show me the dartboard they used to come to a conclusion.

The problem will lie in the interest rate(s) used.
No hocus pocus, just unsurity over the prevailing rate(s).

exactly Nymad. So I want to see what the assumptions are.

Interesting.. how come 40days early could cause any penalty? How did you end up 40 days early? U dint know when fixed term ends?
I never taken any mortgage or loan. So just got curious about these news

Sorry Nymad it is. The formula take no account of the cost of putting the money (or credit) back out available for loan, and in any event the administration costs of any loan are invariably charged to the borrower. Yes the settlement of a loan ahead of time does have a cost, although with modern computers I would expect that to be largely minimal, as they would do the computations and produce the documents. But these costs are not mentioned in the calculation. To argue that a bank is making a loss because the borrower is paying the loan off early is simply BS as I stated earlier, because once settled, the bank would promptly make that credit available to another borrower.

Have you looked at the second term in the function?

Yes, it allows the bank to calculate the interest it looses due to the early pay off. It does not place any assumption on the credit being available to being re-loaned immediately. (VFP)

No. The residual, u.
The difference of the VRP and that gives the present value of loss.

When this is not zero, there is a difference in expected and true variance. i.e. Risk.
It doesn't matter if the bank can re-loan that money quicker. Both the turn around and leverage margin are unknown on that.

Murray of course they can relend it, but at what rate ? The borrower breaks a loan at 7% when the market has fallen to 5% with say 2yrs to go - bank charges 2% * 2 to keep paying the depositors - bank relend at 5% - where are they being dishonest ? Please explain

the formula supposedly preserves interest margin, and compensates the bank for any loss. The rationale is entirely reasonable.

Thanks Kane

I believe that the banks operate on the principle that when they get a little stroppy, people just go away. Kiwis in general don't like to complain and this allows them to get away with their behaviour. It was complaints that drove the Royal Commission, and there is not a similar pattern to those complaints here, so I think you should complain.

Put yourself on the other side of the coin and see how you like it. a contract is a contract and if you break it there will be consequences. Wipe your tears and harden up

I have worked in a bank in home lending for a number of years, and while I cannot speak on behalf of Westpac and will not say which bank I work for, I agree with the comment that wholeheartedly that the common banker would not be able to explain the calculation. Our system for calculating early repayment costs is part of a larger tool, that we plug in the expiry date, amount, interest rate and other such figures in and it spits back a break cost as of that day.
When asked about how the calculation works, the general answer most customers accept (because to our knowledge as frontline staff it is true) is that it is the cost for the bank for the early cancellation of your contact. It is calculated by looking at how long you had remaining on your loan's fixed term, the rate you were fixed at, compared to current rates and the loss to the bank for this early break.

The few times I've been asked to provide an actual calculation I have requested it from a product manager who looks after home loan escalations and had a document I could provide in 1-2 days (probably delayed more by how long it took them to get to the request, than how long it took them to prepare the sheet).

The fallout of the Oz parents misbehavior has got to have some effect on lending patterns here. In Australia, client incomes were overstated along with valuations. Here, its hard to see how there would be the same degree of misrepresentation of borrower incomes but the continued feverish lending, secured by a commodity that was already overpriced in 2008, is simply not going to end well.

Overstated incomes are very common here as well. Saw it a lot when I worked in Payroll.

People work a few more hours. bonuses/commission payments get re-arranged, Cash out leave or take it in advance. This generates a couple of higher looking payslips to get sent off to the bank as evidence.

It also seems pretty common on P2P lending sites.

Yes, I am struggling to see how we got to the current level of household debt without a few fibs being told along the way

Yes, the recent trajectory of household debt to household income suggests that not only have a few fibs been told, but the banks have chosen to ignore those fibs (and the name for that is "accounting control fraud").

Anecdotally, purely from social conversations about buying, there's a ton of low-level scamming from people who were desperate to get in, but didn't really qualify. Payslips from short-term contracts being misrepresented as stable full-time jobs, that kind of thing.

Well, at least that is a turn around on Adrian Orr's position a week ago. I trust Kris Faafoi is also reviewing his shoot from the hip comments.
However, despite this development, the situation is still not good.
I find it difficult to believe that the Australian bank culture is not replicated in its subsidiaries through means such as implementation of performance expectations and processes. The increasing substantial record profits over the past few years is not about greater efficiencies as was reported by ANZ yesterday.
I also find it difficult to understand why the banks themselves are in position of refuting any suggestion; this goes against the norm of proof. Any investigation needs to be carried out by an independent body, and for public confidence, if the banks are clean, then the banks themselves have a vested interest in supporting a independent inquiry.

I can't understand how Orr can justify making such a dramatic U-turn.

It's not really a U-turn.

He came out effectively in support of the banks, and is now saying "back me up here buddies".

What scares me is that surely the RBNZ is best placed to determine this. If they are not - what is the point in them?

Ok. But in my view, to so publicly support the banks, from a position of being an outsider does not show good judgement in this instance.

simple really - his job could be on the line. why would someone in his position place himself in such an untenable position 1 week in to a new appointment. very amateurish.

If FMA/RB were truly serious about finding out what the culture is like at NZ banks, they’d create a whistle blowing system. Anyone with personal integrity at the banks would love a chance at unearthing what they’ve been up to.

Ceasing to work for a big four bank is basically like trying to exit a gang with a massive HR and legal team. Basically no one is going to speak out without a proper mechanism to protect their identity.

Whistleblowing is a hard one, as it really only works if it they are revealing something that is legally wrong.

The problem we have is that what we all deem morally/ethically wrong, is often legally OK in Business.

But we've created a society where financial gain is valued more than moral integrity.....so it would take some very couragous individuals (who don't have mortgages to service or families to provide for in case they lose their jobs) to become whistleblowers right?

From what I saw working at a couple of banks they’re just as bad here if not worse. There just doesn’t seem to be the public appetite here for a commission, yet.

*grabs popcorn*

A small step in the right direction but a weak one. Saying you're a good boy is very different from someone else having a good look at you and decide if you are, in fact, a good boy

what we are reading is the regulator (FMA), and RBNZ in damage control. these statement's are purely and simply to protect their backsides if the proverbial were to hit the fan.

Either they know of, or suspect that the same issues are endemic here, and its only a matter of time before NZ has a similar tsunami of complaints as is occurring across the Tasman.

Please explain "BS11" Mr Orr.......

The new investigative method of proof:
Police detective to hold-up suspect: "Prove you didn't do it.
Suspect: "I was with my girlfriend".
Police detective: "That's fine then."

ANZ's March 18 half year results released yesterday and they report Australia and NZ as separate operations:

Aust. NIM 1.30% vs. NZ NIM 2.37%
Aust ROA 1.13% vs. NZ ROA 1.31%
Aust ROE 11.90% vs. NZ 12.90%

There may be business units in the NZ numbers not in the Australian, or vice versa, but it would be at the margin. The NZ unit is more profitable, reporting higher net interest margins and returns on assets/equity. The BNZ CEO has gone on to run NAB for the last 11 years.

This is a battle the FMA and RBNZ have neither the stomach, nor resources, to fight. One of the key takeaways in the RC, and the source of senior politician anger, is the regret for having listened to Bank CEO assurances.

Good article thanks Gareth.

This is a joke. First part is David Hisco of ANZ saying we're all good in NZ, little angels. Then the next part says FMA has just caught them advising a customer to invest all of a $540,000 nest egg in ANZ products, and ANZ has to amend its disclosure documents.

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"To date we haven’t seen any evidence of systemic abuses along the lines of the Australian industry, ..."
Nor did the OZs until they started looking

Why are we needing to change legislation currently around financial advice if no problems. Rob Everett not sounding credible here. He should say, yes we've found systemic problems and are in the middle of fixing them up.

Clearly the FMA needs to investigate. Just pick a single day from april and audit every loan written that day, would soon get an idea whether all is well or its a case of liar liar pants on fire.

June 28 Interview with Gareth - Mr Orr: "There will be not a single bank in New Zealand that is not, at the moment, really checking every cupboard for skeletons here in New Zealand. That is without doubt. "
May 2 - above: "Adrian Orr and I called the banks together yesterday to basically have this conversation with them. Which is really to say to them, it’s not credible to just say that New Zealand is different."
Learning on the job?

Brent Sheather thinks a big part of the problem is the "corrupt bargain" between government and the finance sector, which is something of a revolving door as govt ministers leave office to enter banking. Also FMA board members being part of the funds/banking industry. https://www.noted.co.nz/money/economy/does-new-zealand-need-a-banking-in...

Same incentive structures as the Australian banking system and many of them even appoint senior management and directors from Australian parent companies to their New Zealand subsidiaries. It would be surprising to me if we didn't see the same issues as they have replicated miniature versions of substantially the same organisations with localised branding.

The OBN will soon circle the wagons, you think ?

Our Huang-Jiang-Chen-Zhang combo's mortgage fraud case should be read in this context. They didn't just cheat a honest and morally & ethically correct system. They just over exploited the inherently fraudulent system

https://www.interest.co.nz/news/91694/guilty-admission-mortgage-fraudste...