The Financial Markets Authority (FMA) and the Reserve Bank of New Zealand (RBNZ) published a long-awaited report on bank conduct and culture earlier this month.
The review, and the report, are interesting, if you’re into that sort of thing. But even then, the findings are probably fairly consistent with what you’d expect.
Putting the report into context
First, some context. This review was almost certainly prompted by Australia’s Royal Commission. But it is nothing like Australia’s Royal Commission. The FMA and RBNZ don’t have the same powers of investigation, nor the mandate, of Australia’s Royal Commission. Nor will anything like the same level of resources be dedicated to a review of this nature.
As a consequence, it would be extraordinary if the report had been anything other than a watered-down version of what is happening in Australia.
Which is exactly what we got. The report didn’t receive as much attention in the media as I thought it would. Probably because it was watered-down compared to the what we’ve been hearing in Australia, and because there wasn’t anything that was especially surprising.
The FMA’s and RBNZ’s criticisms of bank conduct and culture
Having said that, there were are some points worth emphasising:
- “the overall standard of banks’ approaches to identifying, managing and dealing with conduct risk needs to improve markedly.”
- “Most banks are at an early stage in embedding the necessary focus on long-term customer outcomes into their business strategy. Boards and management should be focusing on generating long-term sustainable profits, not maximising short-term profits at the expense of good customer outcomes.”
- “Most banks do not have comprehensive processes to systematically and proactively identify potential or emerging issues. To a degree, they rely on complaints from customers to identify issues.”
- “we do not accept that the differences between Australia and New Zealand are sufficient to insulate New Zealand banks against all the conduct issues being identified in Australia. We expect all banks to proactively review the work of relevant regulators and related international examples to help identify potential conduct and culture issues here.”
In the banks’ defence…
To my mind, the most notable statement in the banks’ favour was that the FMA and the RBNZ explicitly state that they “do not consider that widespread misconduct or poor culture issues currently exist across banks in New Zealand”.
In a report like this, word choice matters. The FMA and RBNZ could have said that they “did not see any evidence of widespread misconduct or poor culture issues”. This would have given them more wiggle room if contrasting information came to light. That’s the most positive sign I get out of the report.
Something positive for Kiwi consumers – changes to sales incentive structures on the horizon?
For me, the most positive thing for Kiwi consumers is nestled in the following statement:
“Banks’ incentive structures need to be designed and controlled in ways that sustain good customer outcomes. Removing incentives linked to sales measures is a significant step toward this goal. We expect banks to revise their sales incentive structures for frontline salespeople and through all layers of management.”
Soon after the report on conduct and culture was published, the FMA released a report titled “Bank Incentive Structures”. The FMA observed that “Incentive schemes [in banks] are highly sales focused” – and on top of this, “[c]ontrols [associated with these incentives] appear to be ineffective at mitigating conduct risks”.
Interestingly, the FMA states that although “[s]ignificant changes are being made to incentive schemes across the banking industry”, “none of the changes announced to date go far enough to create a sustainable culture of good conduct.”
The FMA has gone as far as saving that it expects banks to “revise their sales incentive structures for salespeople and through all layers of management. We expect banks to implement changes to their incentive schemes no later than the first performance year beginning after 30 September 2019”.
I’m not sure whether the FMA has any explicit authority to compel this action. Having said that, a good regulator should take a “risk-based” approach to supervising the organisations it regulates, and if an organisation doesn’t come to the party the FMA would probably be justified in directing more resources towards supervising organisations that are less cooperative. That’s a compelling reason for the banks to comply.
If nothing else comes out of this exercise, a positive change in incentive structures would be a great one for Kiwi consumers. If I’d said it once, I’ve said it a million times: “show me the consequences and I’ll show you the outcomes”. Changing bank employee incentives should go a long way.
- The issue isn’t “bad apples”. What New Zealand can learn from Australia’s Royal Commission
- Show me the consequences and I’ll show you the outcomes – why our financial services laws need to be enforced more aggressively
- “Sunlight is the best disinfectant”. Some thoughts on the Australian financial services Royal Commission
- The value of independence