FMA's Rob Everett says review of bank conduct & culture shows plenty that could be done better but so far no evidence of systemic misconduct

Adrian Orr (left) and Rob Everett. Photo by Jason Walls.

The Financial Markets Authority (FMA) and Reserve Bank of New Zealand's (RBNZ) probe into the conduct and culture of New Zealand banks has so far turned up plenty of evidence of things that should be done better, but no evidence of systemic and widespread misconduct, FMA CEO Rob Everett says.

Everett, along with RBNZ Governor Adrian Orr, spoke to Parliament's Finance and Expenditure Select Committee on Wednesday afternoon.

The two were bringing MPs up to speed on their ongoing probe into the conduct and culture of financial services companies following damning revelations in Australia's Royal Commission.

"On the work to date I would say we've seen plenty that we think can and should be done better, but we have not seen evidence of systemic and widespread misconduct," Everett said.

In a joint press release the FMA and RBNZ said their preliminary monitoring work hasn't turned up evidence of widespread, systemic issues that warrant a commission of inquiry in NZ.

"However, the work we have initiated may test this view," the regulators said.

Responses from 11 banks have been received to a letter the regulators sent out earlier this month as they got their review underway, which has effectively demanded NZ banks prove they're innocent of the types of behaviour to emerge in Australia. Everett told MPs the regulators had called bank CEOs together for a meeting and "read them the riot act."

Smaller banks facing increased compliance 

Bank responses show a variance in the depth and maturity of conduct risk frameworks across the banks, Everett added, with a significant degree of difference between the bigger and smaller banks.

"I think for those smaller firms it's a great opportunity for us to push their base standard looking at conduct and behaviour forward," said Everett.

A joint working group of FMA and RBNZ staff is reviewing the bank responses, with the Commerce Commission also reviewing matters relevant to its role.

"Some responses indicate a proactive approach to conduct risk, while other banks have not yet begun to fully embed conduct risk, governance or oversight into their operations. We will be following up with all the banks on these aspects," the FMA and RBNZ said in a press release.

Report on findings expected in October/November

Thus far the regulators say they have taken "a very preliminary look" at the material provided by the banks to assess what has been submitted and in order to categorise it for further assessment.

"Next steps are to review all the material in more depth, testing the validity, comprehensiveness and adequacy of the material, identifying issues for deeper investigation, including testing the operation of key processes and governance mechanisms, which may include independent assurance and on-site reviews."

"We will examine the information under a number of key themes, including: Governance, risk management framework/risk culture, suitability of sales processes, channels and incentives, complaints and remediation processes/programmes, and conduct."

"As we progress our inquiries, we will also identify any areas within the framework for regulation of retail financial services where we consider there are regulatory or supervisory gaps or inefficiencies. This will include any gaps we find in the legislative tools or powers available to us to address any issues we find. We expect to report on these findings in October/November. This timing partly reflects the timing of the initial report from the [Australian] Royal Commission, which is expected by end September, 2018," the FMA and RBNZ say.

Here's their full press release.

Financial Services Conduct and Culture Review

The Reserve Bank of New Zealand (RBNZ) and the Financial Markets Authority (FMA) today briefed the Finance and Expenditure Select committee on the Australian Royal Commission (RC) into Misconduct in Banking, Superannuation and Financial Services Industry, and the response by regulators in New Zealand.

The Australian RC was established on 14 December 2017 in response to a series of known, misconduct incidents widespread within financial services over a lengthy period.  The RC is expected to issue an initial report in September 2018 and a final report, with recommendations, by February 2019.

New Zealand regulators’ response

New Zealand regulators have been monitoring the RC since it was initiated, and have discussed matters with Australian regulators on a number of occasions.  The FMA has been implementing and supervising conduct regulation in NZ since the passing of the Financial Markets Conduct Act in late 2013. This was followed by the publication of the FMA Conduct Guide in February 2017.  

Our concern about the RC’s impact on confidence in our financial institutions and the potential for complacency in the New Zealand industry led us to take action. On 30 April, the RBNZ Governor and the FMA Chief Executive met with 16 chief executives of New Zealand banks, including the four major Australian-owned banks. We sought assurance that the issues identified in Australia were not evident in New Zealand.

Following the meeting with bank CEOs, the RBNZ and the FMA, with the support of the Commerce Commission, wrote to 10 locally-incorporated New Zealand banks with major retail operations on 3 May, initiating a “review of conduct and culture by New Zealand financial services entities”. Banks were given a deadline of 18 May to respond.  Notwithstanding that insurance has not featured in the RC at this stage, we wrote similarly to 15 major life insurance companies on 23 May, asking that they respond by 22 June.

In our monitoring work to date we have not seen evidence of widespread, systemic issues to warrant a commission of inquiry in New Zealand. However, the work we have initiated may test this view.

Assessment of bank responses

11 banks provided their responses by the 18 May deadline. A joint working group of FMA and RBNZ staff is reviewing the responses. The Commerce Commission is also reviewing matters relevant to its remit.

Initial observations

·The submissions are generally extensive and for the most part appear relevant to our request.

·Preliminary assessment has identified some variance in detail and the extent of work already completed and expected to be conducted in the future.

·Some responses indicate a proactive approach to conduct risk, while other banks have not yet begun to fully embed conduct risk, governance or oversight into their operations. We will be following up with all the banks on these aspects.

·The responses also cover:

   a description of internal and external reviews conducted in recent years

   future programmes of work to address a number of areas and provide additional assurance

   examples of issues identified and their remediation processes.

Following the initial assessment, we will be requesting further information and verification where necessary.  A high bar will be set in meeting our expectations and demonstrating a sufficient level of assurance in regard to good conduct and culture.

Currently we consider it is appropriate to prioritise our work on banks and life insurers, we haven’t made any decision as to whether to expand that focus in the future.

It is important to note that a number of relevant legislative frameworks are already under review, and both the FMA and RBNZ have significant existing work programmes across a number of relevant sectors.

As we progress our inquiries, we will also identify any areas within the framework for regulation of retail financial services where we consider there are regulatory or supervisory gaps or inefficiencies. We expect to report on these findings in October/November.  This timing partly reflects the timing of the initial report from the RC, by 30 September, 2018.

Link to the joint FMA RBNZ briefing statement here.


Supplementary information on existing reviews:

·The Financial Services Legislative Amendment Bill currently before the Economic Development Select Committee will strengthen the financial advice regime.

·A review of Insurance Contracts law has been commenced by the Minister of Commerce and Consumer Affairs.

·MBIE is also undertaking a review of the regulation of consumer credit under the Credit Contracts and Consumer Finance Act that will address irresponsible and predatory lending.

·Bank incentive structures for sales are being reviewed by the FMA and will be reported on by the end of the year.

·FMA has just reported on its review of soft commissions offered to advisers by insurance providers. A report on the FMA review of insurance replacement business practices of authorised firms is to be published in early July.

·Last year the RBNZ undertook a thematic review of the bank director attestation regime. Primary responsibility of bank directors and senior managers for managing risks is a fundamental element of prudential regulation and supervision. As a consequence of the review RBNZ has adjusted its annual engagement plan to increase the number of director meetings.

·The RBNZ engages regularly with bank boards to discuss how they manage risk within their businesses.

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In some ways a pleasing outcome from the NZRB/FMA report. I am sure that this will provide some confidence for New Zealanders in our banking system which appears to have been the intent.
However a couple of points of concern:
Firstly, the briefing statement notes: "Some responses indicate a mature and embedded approach to conduct risk, while other banks have not yet begun to fully embed specific conduct governance and oversight into their operations." O.K some banks have embedded procedures, but clearly others haven't despite the situation in Australia been known for some time some banks have not yet done so despite it being fairly obvious that the issue was going to be raised and questions asked.
Secondly, The Australian Royal Commission received over 6,000 public submissions. I am not aware that any call for input from the public has been made or facilitated here so we are entirely dependent on the banks' responses. I also note that the Banking Ombudsman has been noticeably quiet; however as that is funded by the banks and may not necessarily truly independent in that it may be clouded by what is common bank practices. Likewise, there needs to be considerable encouragement for those who have approached the banking ombudsman to comment on their experience which hasn't happened.
A couple points on the positive side;
Firstly, there hasn't been comment on this site where people have felt disaffected despite the publicity this issue has had.
This week I attended a session for my wife with a bank adviser. It was pleasing that the advice was sound and to hear that the advice given was going to be at least peered reviewed.
However, as the report to the F&E Select Committee points out, it is important that New Zealanders have confidence in our banks and the advice given is in the customers' best interest and not that of the adviser's commission. As the report notes, some banks are currently falling short in ensuring this.

" the Banking Ombudsman has been noticeably quiet" Indeed and having just been through that exercise in futility I can tell you that they are likely to remain, quiet.
In our case, a modicum of contrition was offered "if we signed new loan agreements to 'redraw' the amount we had been inadvertently charged" ( a Variable Rate of 6.74% was charged when the prevailing current rate was/is 5.90%). That documentation came with all the usual provisos of "But we can, of course, change whatever we want without having to gain your agreement". Having had our confidence in the New Zealand banking system challenged, we shall not be signing anything further with the Bank that is not necessary. Who knows what future surprises that might conjure up!

Reading the Ombudsman reviews on Facebook suggests you are not alone.

Sounds like three letters? First letter B?
I'm thinking of taking out a construction loan with BNZ. Should I be looking elsewhere?
They should be able to give me a discount of X basis points, but it's all moot if they're a bunch of thieves that can't hold up their promises.

"Did you ever think that making a speech on economics is a lot like pissing down your leg? It seems hot to you, but it never does to anyone else."
President Lyndon B. Johnson

Well, my own experience has been that bank lending tightened up in 2017 considerably. In 2016 however, I was pretty shocked by what I considered to be a very lax lending environment. RBNZ had to wade in an implement LVR's but had they not who knows whether the banks would have reigned anything in voluntarily? I can't remember what/when but did RBNZ shoot a warning shot across the bows of NZ banks in 2016 or 17 about lending responsibly? I vaguely remember some statement.

Anyway, I suspect that there were some dodgy loans done, especially in 2015/16 but since then the banks have been less cavalier so that NZ is hopefully in better shape than Oz.