The review of bank conduct and culture

This page contains information on the review of bank conduct and culture from the November 2018 Financial Stability Report.

The FMA and the Reserve Bank recently completed a joint review of the conduct and culture of the 11 largest retail banks in New Zealand.1

The objective of the review was to understand whether there were widespread conduct and culture issues present in banks in New Zealand. The FMA and the Reserve Bank are the two main financial market regulators.

The FMA’s core focus is to regulate the conduct of certain financial market participants. The Reserve Bank’s focus on conduct and culture reflects its mandate to promote a sound and efficient financial system. Undesirable behaviours and attitudes towards risk can undermine the viability of financial institutions, which in turn can impact financial stability. Poor conduct in banks can also lead to inefficiency or a loss of confidence in the banking system.

The review was based on interviews with almost 600 bank staff and directors, and more than 1,000 documents supplied by the banks. It also considered insights from key banking industry stakeholders, and a survey of more than 2,000 consumers.

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The review found weaknesses in the governance and management of conduct risks…

The review found significant variations in the maturity of banks’ approaches to identifying, managing and remediating conduct issues. While some banks had been thinking about conduct and culture for some time, the approach of other banks could be described as reactive at best and complacent at worst. Most banks are only at an early stage of embedding the necessary focus on long-term customer outcomes into their business strategies.

More broadly, weaknesses in the governance and management of conduct risks were identified, as well as significant gaps in the measurement and reporting of customer outcomes. If left unchecked, these weaknesses have the potential to lead to widespread issues such as those seen in other jurisdictions.

…but no widespread misconduct or cultural issues.

The review observed a small number of issues related to poor conduct by bank staff. Some of these related to inappropriate lending and sales, fees materially outweighing benefits, manipulation of customer records to influence satisfaction outcomes, and manipulation of branch sales records. Issues relating to system or process weaknesses were more commonplace. However, the FMA and the Reserve Bank do not consider that widespread conduct or culture issues are currently present in banks in New Zealand.

Any remediation issues that warrant further investigation and potential enforcement action will be considered by the FMA, the Reserve Bank or the Commerce Commission, depending on which is responsible for the relevant legislation. Banks must address recommendations by March 2019.

The review confirmed that all 11 banks need to more effectively identify, manage, remediate and report on conduct risks and issues to deliver consistently good outcomes for customers. The FMA and the Reserve Bank made a number of recommendations to improve oversight, controls and processes. Banks need to address these improvements with a sense of urgency. More broadly, boards and management should be focusing on generating long-term sustainable profits, not maximising short-term profits at the expense of good customer outcomes.

The FMA and the Reserve Bank will provide banks with individual feedback, along with general observations from the review. Each bank will need to produce a plan to address the feedback by the end of March 2019, then report on its progress implementing the plan. The FMA and the Reserve Bank will monitor progress and take further action if it is not satisfactory.

There are five key areas of focus from the review’s findings and recommendations that are common to all banks:

  • Greater board ownership and accountability – including being able to properly measure and report on conduct and culture issues.
  • Prioritising the identification of issues and remediation.
  • 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 incentive structures for frontline salespeople and through all layers of management.

The review identified gaps in the regulatory framework.

The principal responsibility for developing strong frameworks for conduct risk remains with banks. In the absence of confidence that this will occur, clearer regulatory oversight of bank conduct would be necessary.

From a prudential perspective, the review has not identified any notable regulatory gaps for the Reserve Bank. However, the review has highlighted that there is a lack of specific regulatory requirements in relation to conduct across the banking sector, particularly in respect of the delivery of products distributed without financial advice. The review concludes that this lack of specific regulatory requirements has hampered the FMA’s regulatory oversight and the development of strong governance and management of conduct risk.

The report sets out a number of options that the Government could consider in response to these gaps.

A review of life insurers is also underway.

The FMA and the Reserve Bank are currently undertaking a separate thematic review of the conduct and culture of life insurers in New Zealand. Onsite visits commenced in August and were completed in November. A report is expected to be published in late January 2019.

1 See the FMA and RBNZ report on bank culture and conduct.