A report criticising they way banks police the behaviour of staff and panning sale incentives is a wake-up call for the industry, says Westpac boss David McLean.
The Financial Markets Authority and Reserve Bank of New Zealand yesterday released a joint report on the conduct and culture of 11 banks who operate in New Zealand after a four month review spurred by Australia's Royal Commission into misconduct in the financial services sector.
It found "significant weaknesses" in the way New Zealand banks govern and manage conduct risks, and said changes need to be made.
The review revealed only a small number of issues relating to poor conduct by bank staff but 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 remediation 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 including the CEO.
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 to 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."
McLean, chief executive of Westpac New Zealand and chairman of the New Zealand Bankers' Association, welcomed the recommendations and called them "fair enough".
"It is a good wake up call."
But he was also quick to point out that the review had not found any systemic issues with the banking sector in New Zealand.
McLean said most of the banks here had already been looking at conduct and culture issues in light of the Australian inquiry.
Banks have yet to receive their individual report cards from the regulators but McLean said the changes already outlined would be a lot of work for the industry and would require customer outcomes to be prioritised.
"We may have to put some other things on the back burner."
In Australia the Royal Commission has cost the four major banks over A$1b combined but
McLean said the changes in New Zealand were unlikely to cost "anywhere near that size of magnitude."
David Hisco, chief executive of ANZ the country's largest bank, told staff that he and chairman Sir John Key were committed to moving promptly to implement the changes and it had already set up a group of management and the board to oversee the work.
Hisco said he believed the industry should go further than what regulators required of it.
"We should look at the lessons from Australia and implement any applicable laws/regulations from there in the coming years that might not already be in place here in New Zealand."
He said the New Zealand and Australian economies were so interlinked these days, particularly financially, and expectations from Kiwis of the way companies operate here is rightly very high.
"Banking is all about trust and we must do whatever is needed to maintain that in New Zealand."
Hisco said banks had to do the right thing by their customers and must never slip into the problems seen in Australia.
"As ANZ New Zealand CEO the buck stops with me and I take accountability and responsibility for doing that."
Angela Mentis, chief executive of the Bank of New Zealand, said the report was a timely reminder that banks needed to have a continual focus on putting customers at the heart of what they did.
"We have made good progress in many areas and still have work to do in others.
Mentis said BNZ did not take the trust of its customers for granted and was committed to delivering the best outcomes for them.
An ASB spokeswoman said it fully acknowledged banks would always need to work hard to exceed the high expectations of customers and other stakeholders.
"Trust is central to our relationship with our customers and we are committed to putting good customer outcomes at the heart of everything we do.
She said the bank already had a plan of work underway across a number of areas highlighted in the report.
"We will be working to review and implement all other recommendations from the report with a sense of urgency and will be allocating the appropriate resources to ensure this happens as quickly as possible."
The regulators have asked bank boards and management to put plans together by March next year to address issues raised for individual banks.
Paul Roberts, a partner at financial services firm EY, said the findings were not surprising but the banks should take them very seriously.
"The FMA and Reserve Bank have fired a shot across the bows of the banks, giving them an opportunity to address the issues arising in other jurisdictions, including those identified in the Australian Royal Commission's investigation, and putting them on notice that significant change is expected within a relatively short time-frame."
He said it was disgraceful that only six out of the 11 banks reviewed had measured their conduct and associated risk framework against the FMA's February 2017 conduct guidelines prior to the report.