FMA/RBNZ Report on Conduct and Culture in the Banking sector

  • Legal update

    05 November 2018

FMA/RBNZ Report on Conduct and Culture in the Banking sector Desktop Image FMA/RBNZ Report on Conduct and Culture in the Banking sector Mobile Image

The Financial Markets Authority and Reserve Bank of New Zealand have this afternoon released their Report into Conduct and Culture in the Banking sector.

The Report essentially confirms earlier indications given by the FMA and the RBNZ (the Regulators) that they had not seen evidence of widespread or systemic issues in the New Zealand financial sector. There are however a number of key areas outlined in the Report where the Regulators consider that banks have urgent work to do to improve aspects of their conduct and culture, with a focus on customers’ interests.

Who needs to read it? Why?

Bank directors and senior managers, as well as all those operating in the New Zealand financial services sector – and in particular anyone with any responsibility for an entity’s conduct and culture – should read this Report. It is likely that other financial services firms will be held to similar customer-focussed standards of conduct and culture, as the Regulators shift their focus to the life insurance sector review currently underway and the Financial Services Legislation Amendment Bill makes its way through Parliament.

What does the Report say?

As signalled, the Report covers general themes relevant to the banking industry taken from their review of 11 banks, rather than making any public findings about individual banks.

The Regulators consider that banks in New Zealand have been slow to react to changing expectations in relation to banks’ standards of behaviour.

The Report found only a “small number of issues related to poor conduct by bank staff”, with most issues arising from system or process weaknesses. The Report confirms however that “all 11 banks need to more effectively identify, manage, remediate and report on conduct risks and issues, to deliver consistently good outcomes for customers” and calls upon banks to “proactively” work to “achieve maturity”.

The Report identifies a number of areas for improvement by the banks, including:

Board ownership and accountability for conduct and culture
  • Boards must take ownership for driving conduct and culture change. They must proactively consider what information they need, and direct management to devise frameworks and metrics, to assess customer outcomes and standards of conduct.
  • Measuring and reporting on conduct and culture should include “lag” and “lead” indicators to allow banks to monitor and address emerging risks as well as identify past misconduct.
  • Banks must review how they define and record customer complaints.  It must be easy for customers to raise concerns.
Identify and remediate issues
  • Banks must proactively identify and remediate issues. Remediation must always be prioritised – this has not always been the case.
  • All banks are expected to review their conduct and culture against the issues raised in the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Australian Royal Commission). This must be a high priority and adequately resourced.
  • Where banks have not identified any issues requiring remediation, boards and senior management must “seriously challenge” whether there really are no issues.
Strengthen processes and controls
  • All banks need to focus on strengthening the systems that prevent, detect and manage conduct and culture issues. Banks will need to prioritise investment and this should be an ongoing focus.
Staff reporting channels
  • Banks must educate their staff on good conduct and culture, and have effective systems to allow reporting of conduct issues. Both formal whistleblowing and less formal reporting channels must be accessible, confidential and comprehensive.
  • Incentive structures must sustain good customer outcomes, and removing incentives linked to sales measures is a significant step towards this. Banks need to revise their sales incentive structures for all frontline salespeople, and through all layers of management.
  • The Regulators expect these changes to incentive structures by the first performance year after 30 September 2019. The Regulators will require banks to demonstrate in March 2019 how they will meet Regulators’ expectations in this area, and any bank that does not commit to removing sales incentives for salespeople and their managers will have to explain how their control processes will be sufficiently strong to address risks of poor conduct.

Overall, the Regulators are clear that good conduct must be led from the top and embedded across all areas of the business. It “requires ongoing focus and dedicated resources”. Banks must recognise and manage the conflicts of interest in both ‘manufacturing’ and selling financial products, as well as the information asymmetries between customers and the bank.

There is no indication however that the Regulators consider the situation warrants a Royal Commission inquiry similar to that underway in Australia.

Gaps in the regulatory environment

The Report also identifies some gaps in conduct regulation particularly affecting the FMA’s regulatory remit in relation to general banking conduct. These gaps include:

  • A lack of requirements for systems and controls relating to governance and management of conduct risk, and reporting on misconduct and remediation activity.
  • A weak legislative framework for products sold without advice.
  • A lack of any requirement to consider customer outcomes throughout a product lifecycle.

The Report provides a number of suggestions for government to consider (noting that further policy work will be required) to address these gaps, including establishing basic legal duties on banks to address the systems and controls requirements referred to above, and providing regulators with sufficient supervision and enforcement powers and resources to address these issues and incentivise appropriate behaviour, as well as clarifying accountability and individual responsibility for management of conduct.

Our view

Our initial reaction this afternoon is that the Report is largely as expected. Its overall tone is not as hard-hitting as the Australian Royal Commission’s Interim Report released on 28 September, because it has not identified systemic issues with the New Zealand banking industry.

While there is a list of items to fix, these are mostly as the banking industry would expect from the topics under investigation in the review and what has emerged from Australian reviews.  It should come as no surprise that matters like Board ownership and oversight of conduct and culture, faster remediation, and changes to incentives for bank employees are high on the Regulators’ list for improvement.

It is notable that the Regulators want banks to do more in relation to sales incentives: New Zealand banks had already committed to implementing the Sedgwick recommendations, but while the Regulators saw positive progress had been made, “none of the changes announced by banks to date go far enough to create a sustainable culture of good conduct”.  As noted above, the Regulators require changes to incentive programmes to be in place by no later than the first performance year after 30 September 2019.

Interestingly, there is also attention to assistance for vulnerable consumers (such as low-income customers or those unable to use or access technology) that may not have been anticipated, with banks encouraged to consider the needs of all of their customers and look for ways to provide banking services to accommodate vulnerable customers in a meaningful way.

The FMA has already signalled in their Annual Report that the tone for conduct regulation has shifted, and that they are determined to play their part “to ensure this opportunity for customer-centric conduct to be permanently embedded in the culture of the financial sector is not lost”.[1]  We expect a tougher stance from the regulator for non-compliance with existing obligations.

In addition, noting that the Regulators have identified a gap in the FMA’s regulatory remit with regard to conduct matters, the opportunity exists to address at least some aspects of this regulatory gap in the Financial Services Legislation Amendment Bill (and related regulations) and the reviews of the Reserve Bank of New Zealand Act 1989, the Insurance (Prudential Supervision) Act 2010, and the reviews of insurance contract law and consumer credit legislation currently underway.

The lack of a direct role for the Commerce Commission in the Report is notable, as the Report states the Commerce Commission is responsible for enforcing the law relating to consumer credit and finance.

What happens next?

Banks will soon directly receive from the Regulators individualised findings that have emerged from the review as relevant to them, and will have to deliver a plan to address any risks identified by the Regulators.  They will be required to report their findings on this by March next year.  The Regulators have signalled they will take further action if they are not satisfied with the outcome or level of urgency.

The Regulators will also consider responses to any remediation issues that warrant further investigation and enforcement.

The Regulators are due to report back on their equivalent Conduct and Culture review in relation to life insurers in January – the work in relation to the life insurance sector was staggered to follow on from the banking review.

The Regulators have also said they will report in to the Finance and Expenditure Select Committee on their findings from both the banking and life insurance reports.  It will be up to the Government (or Select Committee) thereafter as to whether or not an inquiry of any form is held, as some commentators have pressed for – but at present this seems unlikely given previous signals from the Regulators and the findings in the banking Report.


Meanwhile, across the Tasman, the Australian Royal Commission is finishing up its public hearings, with the last three rounds of hearings on insurance, superannuation and policy issues not having been covered in the Interim Report. (Our update on the Interim Report is available here.

The final report on the Australian Royal Commission is currently due by 1 February 2019.  With numerous questions having been posed in the Interim Report as to how best to address the misconduct found in Australia, many eyes will be on the answers ultimately proposed for Australia in the final Report – and their potential relevance for New Zealand too.

If you have any questions in relation to the Banking Conduct and Culture Review or the Reports mentioned here, please contact one of our experts.


[1] Rob Everett, Financial Markets Authority Annual Report 2017/18, page 7