Australian FinSec abuses were ultimately down to a failure of governance, says NZ financial sector chief.
The recent eye-watering revelations of unethical and downright illegal behaviour on the part of Australian financial institutions have prompted questions about their counterparts' conduct on this side of the ditch.
That's an inevitable outcome, given the largest banks here are owned by the "Big Four" Australian banks.
But although Australia's Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has exposed "myriad very poor behaviours", says Milford Asset Management chief executive Troy Swann, ascertaining whether the New Zealand market is subject to similar levels of shenanigans is "a very difficult call to make".
The Aussie abuses, Swann believes, are ultimately attributable to a failure of governance evident in two areas.
First, "there hasn't been an appropriate acknowledgement from any of these financial institutions that the rate of growth in their industries has slowed markedly", making it increasingly challenging for them to "present compelling financial outcomes to the shareholders and the market in a world where there was huge downward pressure on margins".
And second, "remuneration structures for senior executives have been highly skewed towards so-called "performance-based" outcomes".
The result: a curdling of the institutions' internal cultures "because the profit motive was driving both the boards and the leadership teams in a way that was not sustainable", Swann says.
However, the same market conditions don't necessarily apply in New Zealand — there's certainly plenty of opportunity for growth within the KiwiSaver landscape, for example.
There are also the differences in the two countries' regulatory regimes — as Swann notes, "Over the past few years in New Zealand we've undertaken very significant regulatory change on the basis of things like the Ross Asset Management ponzi scheme, with a significant focus on conduct as the overarching philosophy of that regulation."
Perhaps as a consequence of those changes, "we haven't seen a large number of complaints and issues coming through here as we did in Australia, where there was a massive body of evidence of misconduct".
Nonetheless, the mere fact New Zealand's largest banks have their objectives set in head offices in Australia provides a sufficiently strong case for a good, hard look at the practices of this country's financial institutions, Swann suggests.
"When you have a mothership, if you like, that's removed from a market and without a deep understanding of what's going on in it, there's a tendency for the targets that are set to be unrealistic," he says.
"And over a long period of time those targets can lead to some bad business outcomes — in particular, not truly acting in the interests of your clients."
Deciding on desirability of inquiry
On the issue of whether such an examination is best undertaken by the existing Australian inquiry or if New Zealand requires an investigation of its own — or at all — Swann argues that the regulators, the Reserve Bank of New Zealand (RBNZ) and the Financial Markets Authority (FMA), "are in absolutely the best position to make that call".
And he believes the way they're going about determining the appropriateness or otherwise of an inquiry is correct.
Having publicly acknowledged that the way in which the Australian organisations have demonstrably come up short is deeply concerning, the RBNZ and FMA have put the onus back on those institutions to establish there is no need for a similar inquiry in New Zealand.
"They've asked for hard, specific evidence that the sorts of behaviours occurring in Australia are not occurring here, which will put them in the position to really make the call as to whether a Royal Commission type inquiry is required," Swann says.
Thus far this approach has prompted a formal letter from the New Zealand Bankers' Association that seeks to assure the regulators there's nothing to see here, thanks to regulatory and other market differences between the two jurisdictions, and promises a number of initiatives intended to "maintain public trust and support". These include considering adopting an industry-wide whistleblowers' standard, creating a bad conduct register and providing further funding for the regulators.
Swann describes these as heading in the right direction while also observing that they don't address what he regards as "the fundamental issue of poor governance, target-setting and remuneration structures".
Indeed, the investment firm executive believes it would be possible and desirable to "very quickly complete the tidy-up of New Zealand's financial services industry" by outlawing the "conflicted remuneration" that has been the source of many problems in Australia — "and by that I mean commissions across all product types (mortgages, insurance, Kiwisaver and investments) and other arrangements such as buyers of last resort structures and soft commissions, like trips away with advisers, that act as incentives to advisers and can distort their behaviour."
Information is protection
In the meantime, Swann has some simple advice for how investors can avoid being gouged by banks and other financial service providers.
"Investors need to ensure they're fully informed," he says. "So when you're being advised you need to ask about the service fees, the real scope of the advice you're getting and the rules your advisers are using in terms of allocating products.
"You'll also want to be really clear on how the adviser is doing business — what are the commercial arrangements, what the breadth of offers they will use or not use are — just so you're clear and comfortable that it's consistent with what you're looking for as an investor."
And don't neglect to educate yourself around the performance of the products you're using, either.
"If you take the KiwiSaver space, for example, there is the FMA league table comparing different providers of KiwiSaver, then there's also Sorted's Fund Finder, a site where you can compare the performance and the fees of different providers."
Australian inquiry — main revelations to date
Established in December last year, Australia's Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry — which also goes by the less quaint, more pithy name of Financial Services Royal Commission — is expected to submit an interim report by the end of September, with a final report due on February 1 next year.
But even with eight months left to run, the commission has already exposed many squirmy things Australian providers surely would've preferred had remained hidden under their respective rocks.
Among a catalogue of bribery, false documentation, failure to verify customer income and to assess expenses, and fraud, some of the more egregious examples of misconduct revealed thus far include:
• Customers lost homes and retirement nest eggs because fees-focused advisers pushed them into inappropriate products;
• A Commonwealth Bank financial planning business continued to charge fees to customers they knew had died, in one case charging the deceased fees for over a decade;
• Westpac, National Australia Bank, and AMP have admitted to breaching a ban on paying kickbacks to financial advisers;
• AMP has admitted deliberately misleading regulators over charging customers for services they didn't receive, prompting the resignation of its CEO and chairman;
• A$216.4 million has been paid to approximately 306,000 customers of AMP Limited, ANZ, Commonwealth Bank, National Australia Bank and Westpac as a result of fees paid for no service;
• Some 90 per cent of financial advisers providing advice to self-managed super funds have failed to comply with the best interests of their clients;
• A total of A$383.1 million in compensation has been paid over the past decade to clients over who suffered financial loss as a result of financial advice or a failure to provide ongoing advice services.