Bank sales culture needs to change says review

Our banks have been told to change their sales culture by next March following a review of their culture and conduct by the Reserve Bank and Financial Markets Authority. But those that choose not to will face no penalty beyond a mandatory “please explain” letter from the regulator, Thomas Coughlan reports.

The RBNZ and FMA have released their report into our banking system, saying they found banks have a poor sales culture, which incentivises branch staff to sell customers products that may not be suited to their long-term needs. 

Today's report also leaves open the possibility that Australian-style abuses of conduct could occur in New Zealand. 

The six-month review by the two regulators followed the explosive Hayne Royal Commission in Australia, which found widespread evidence of poor conduct in the Australian banking sector. 

The local review, which was not a full inquiry, was established to discover whether New Zealand’s majority Australian-owned banking system sinned like its parent. 

Its conclusions are muted. It agrees with the banks’ defence that New Zealand’s smaller and simpler banking sector and simpler tax code allows for fewer abuses. It also agrees that Australia’s compulsory superannuation schemes creates a massive rewards for those clever enough to create and sell ethically dubious financial products.

While supporting the the banks’ conclusion that these features distinguish our banks from their Australian parents, the report notes: “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”. 

Speak loudly and carry a small stick

While the report leaves open the possibility there could be conduct abuses in the New Zealand banking system, it offers few sanctions for banks that fail to make its recommended changes. 

It says many banks are moving away from short-term sales targets to a more long-term focus and asks banks to “revise” sales incentive structure at all layers of the company. 

While noting that some banks have already begun reducing sales incentives, it says “none of the changes announced by banks to date go far enough to create a sustainable culture of good conduct”.

Sales structures were identified as a concern in the Hayne Royal Comission, which found an insurer selling financial products to vulnerable people, including a man with Down syndrome. 

The report says 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. But those who have not committed to removing sales incentives will only be required to “explain how they will strengthen their control systems to sufficiently address the risks of poor conduct”.

Poor reporting 

The report also flags that customers and employees are not raising concerns with banks, and that when problems are raised they are not conveyed in sufficient detail to senior management. 

“This was insufficient for directors to form a complete picture of conduct and culture issues present in the bank”.

It says banks need to create more effective ways of customer and employee reporting to management. 

More powers to the regulator?

The report also surveys New Zealand’s regulatory environment, which is currently under review.

Treasury launched the second stage review of the Reserve Bank Act last Thursday. It includes the distant possibility that the Bank’s responsibility for bank regulation and non-bank deposit takers could be spun-out to a separate institution. 

In its role as regulator the RBNZ operates alongside the FMA, which supervises banks in relation to specific products or services.  

Today's report says there are currently gaps in this framework, particularly for the FMA. These include a lack of enforcement tools and insufficient capacity to oversee the sector. 

Finance Minister Grant Robertson is known to prefer the status quo, but asked Treasury to report on different possibilities. Perhaps this report will encourage him to put FMA reform on his to-do list.

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