Government could legislate if banks don’t act

Government intervention could be on the way if banks don’t make serious improvements to their conduct and culture.

The news followed the release of a report into banking conduct and culture by the Financial Markets Authority and the Reserve Bank, which found banks driven by a sales culture that had little regard for the long-term financial future of clients. 

FMA Chief Executive, Rob Everett said he could propose a “legislative intervention” to the Government if banks failed to significantly improve their behaviour. 

Prime Minister Jacinda Ardern later said she would would be open to a legislative response to the banking sector, if that is what the FMA recommends. 

But the process could take some time.

Banks are expected to implement wide-ranging changes to their incentives structures next year, and their commitments to change will be reviewed by the RBNZ and FMA in March 2019.

The findings of that review will be made public, effectively naming and shaming banks that fail to lift their game. Only after this stage, will the FMA consider recommending a legislative response to the Government.

Flocking together 

Monday’s review followed the explosive Hayne Royal Commission in Australia, which found widespread evidence of poor conduct in the Australian banking sector. 

Banks initially welcomed the report. Kiwibank CEO Steve Jurkovich told Newsroom he was not surprised the report found no evidence of Australian-style “systemic” cultural problems.

But he said the report gave banks “really clear steer on the areas they want us to work on”. 

New Zealand Bankers’ Association acting chief executive Antony Buick-Constable said it represented an “opportunity” to retain the confidence of customers.

The two most significant areas flagged for improvement relate to an aggressive sales culture at banks and issues around whistleblowing.

Banks have been told changes to sales incentives must be ready next year for review by the FMA and Reserve Bank in March. 

The report also said bank management needed to create a better culture of listening to concerns raised either from customers or from within the business. 

It found several instances where management was poorly informed about concerns raised from within the organisation. It also said banks focused too heavily on “lag” indicators, which highlighted problems that had already occurred, rather than “lead” indicators, which are forward looking.

Reserve Bank Governor Adrian Orr pointedly questioned why such an approach was acceptable in banking, when it would not be in other industries. 

He said it would not be acceptable for a company to have a health and safety policy that did not analyse future risks and only looked at the past.

The FMA's Rob Everett and RBNZ's Adrian Orr talk reporters through their findings. Photo: Lynn Grieveson

Orr has confidence in banks… kind of

When asked whether he still had confidence in bank management, Orr gave a lukewarm response.

“At the moment I don’t have the confidence that boards and bank management are willing to go above and beyond the call of minimum regulatory needs,” he said. 

But he stopped short of saying he had no confidence in local boards.

“Yes, [I have] confidence in local boards, it’s a challenge to them how they go beyond regulatory minimums,” he said. 

Where to from here?

The report puts the Government in a difficult position. With two banks, ANZ and Westpac, announcing record profits it doesn’t want to be seen as going soft on the sector at a time when our banks’ Australian parents ethically unsound practices have been exposed. 

At the same time, the Government doesn’t want to upset its already rocky relationship with the business community.

Appearing alongside Finance Minister Grant Robertson and Commerce Minister Kris Faafoi, Ardern called on banks to “lift their game to identify problems and risk”.

She also called on banks to remember their “social licence” to operate. 

“This is an issue of social licence here as well, and banks need to be mindful of that when interacting with customers,” she said. 

The Government signalled it would likely follow the reports advice and consider giving the FMA more powers to monitor banks. 

Currently retail banks are exposed to a lower-level of scrutiny than some other financial service providers supervised by the FMA. This means banks do not have to regularly report issues of their  own conduct and culture to the regulator.

Faafoi said he would be working with the FMA on addressing that particular regulatory gap. 

This could mean amending the FMA’s governing legislation to give it greater oversight over the banks.

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