There are "significant weaknesses" in the way New Zealand banks govern and manage conduct risks, and changes need to be made.
That's the view of regulators the Financial Markets Authority and the Reserve Bank of New Zealand after undertaking a four-month review of conduct and culture at 11 banks which operate in New Zealand.
A joint 37-page report has been released today, spurred by Australia's Royal Commission into misconduct in the financial services sector amid calls for a banking inquiry to be held in New Zealand.
While the New Zealand review found only a small number of issues relating to poor conduct by bank staff, the regulators said a lack of proactivity in identifying and fixing conduct issues and risks meant "vulnerabilities remain".
Rob Everett, chief executive of the FMA said the governance of conduct risk - how boards oversee and monitor conduct issues in the banks - required "serious attention".
"Boards and senior management must address the recommendations and findings
from our review with urgency."
Those recommendations include greater board ownership and accountability, prioritising the identification of issues and addressing them quickly, strengthening staff reporting channels, including whistleblower processes, and removing all incentives linked to sales measures as well as revising sales incentive structure for frontline sales people and through all layers of management.
Everett said despite it releasing a conduct guide in February 2017, some banks had only started to consider the issues now, with most of the initiatives not going far enough.
Reserve Bank governor Adrian Orr said banks had a responsibility ensure customers receive products and services they understand.
"These products and services must be suited to customers' needs on an ongoing basis.
"Failure in this responsibility exposes customers, banks and the wider economy to unnecessary risk – as dramatically demonstrated by the recent Global Financial Crisis."
The banks have been given until March 2019 to come up with a plan for how they will address their shortcomings.
What the review found
The review found significant variation in the banks' approaches to identifying, managing and remediating conduct risks and issues.
"While some banks have been thinking about conduct and culture for some time prior to our review, the approach of others can be described as reactive at best, and complacent at worst."
While staff at some banks felt a strong connection to their community, it said a reliance on this culture alone was insufficient to insulate against conduct risks.
"In some banks messages about expectations for good conduct from the board, CEO or other senior leaders did not always appear to be reaching frontline staff, or mixed messages were being received."
Banks were found to measure short-term customer satisfaction but were doing very little to monitor good long-term outcomes - whether products were suitable on an ongoing basis.
It found the risk of poor customer outcomes was increase by the incentives offered to staff where were typically focused on sales performance.
While banks have been moving to remove sales incentives from front-line staff the report said "none go as far as we consider necessary".
The review also found regulatory issues and said the current settings did not provide sufficient scope for regulators to hold banks to account for their conduct.
Speaking to media in Wellington, Everett said this is the first time New Zealand's two regulators have worked together on this sort of scale.
He said there is much work still to do in managing conduct issues.
"In our view banks do little to monitor long-term customer outcomes," Everett said.
The risks of this are increased by sales incentives, which are typically focused on volume metrics.
All banks need to better manage their conduct around risk management, he said.
"Some backs have significant work to do in this [area.]"
He said there is a risk customers are not being served well.
The response to customer complaints was found to be more reactive, than proactive, Everett said.
Orr told a press conference that banks need to take this report seriously.
Orr said he expect banks to revise and implement any sales incentive they are currently using.
In terms of what's next, Orr said specific individual feedback will be given to each of the 11 banks surveyed in the report.
He said this is the "end of the beginning" in terms of banks revamping areas of their conduct.
The report confirm Orr's thinking that New Zealand's banking culture is not the same as what has found to be the issue in Australia.
He said it's complacency that is the issue in New Zealand.
The regulators were given all the information they asked for from the banks Everett said.
On sales incentives, Everett said the industry has already begun changing its position.
But if banks aren't willing to change, "our intention is to report on where that overall dynamic sits," he said.
This could mean naming and shaming banks that don't change their ways.
Orr said this report will be a "wake-up call" for banks, when it comes to sales incentives.
Everett said remunerations packages need to be more focused on customer satisfaction.
Everett said he hopes the Government is exploring legislative change as a result of the findings of the report.
No banks scored "tremendously badly, or tremendously well" across all metrics of the report, Everett said.
"We have seen a mixed bag from the banks."
Orr said he was disappointed with how slow and reactive banks have been in this space.
"The light has been shone, and this is our best opportunity to make the most out of it," Orr said.
Everett said banks understand they need to "up their game," in terms of some of the areas that had been identified in the report.
Orr challenged boards to be more proactive in looking after the interest of their customers
The review cost just over $2 million, Orr said.
In a statement, Commerce and Consumer Affairs Minister Kris Faafoi said banks must "lift
their game to ensure the rights of customers are protected."
He said banks are "on notice".
The New Zealand Bankers Association has welcomed the report and says it is pleased the review found no evidence of widespread misconduct and culture issues.
Antony Buick-Constable, acting chief executive, said it fully accepted the banks had work to do in many areas to ensure it continued to do right by its customer.
"We know we need to meet the high standards our customers expect. There's a sense of urgency about this and we'll be responding constructively and quickly." He said it would continue to work closely with the regulators to address the issues identified. "
That means each bank consulting further with the regulators, and delivering board-endorsed work plans by the end of March 2019.
"Our banks have already taken action on frontline sales incentives and targets, with some removing them."
He said despite the vulnerabilities identified by regulators it was clear that on the whole front line staff had been doing the right thing by customers. "As we implement the recommendations, we will make sure our staff's views are taken on board."
The Review of Bank Culture and Conduct
ANZ, BNZ, ASB, Westpac, Kiwibank, TSB, Southland Building Society, Rabobank New Zealand, Heartland Bank, The Co-operative bank, HSBC.
What the banks need to change:
• Bank boards need to take ownership by deciding what information they need to know customers are having good outcomes. Management need to come up with framework and metrics to collect conduct data.
• Banks need to be proactive about identifying and remediating issues. Remediations should be prioritised.
• Strengthen processes and controls to prevent, detect and manage conduct and culture issues.
• banks need to educate their staff on what good conduct and culture looks like and have ways to report poor conduct.
• Remove incentives linked to sales measures.
• Banks have until the first performance year after September 30 2019 to implement changes to their incentive programmes.
When do they need to do it by:
• Banks will need to provide the regulators with a plan for how they will address individual concerns about them by March 2019.
• They will then need to report on their progress implementing their plan.
• Regulators will take action if they not happy with progress or urgency.