FMA Report on Bank Incentive Structures

The FMA released its Report into Bank Incentive Structures yesterday.

The FMA’s ongoing review of incentives has had a significant amount of media attention with banks being in the spotlight regarding the remuneration and incentivisation of their staff.

In the Incentives Report (available here), the FMA identified that existing incentive structures for salespeople are highly sales focused.  In the FMA’s view, this means that there is a high risk of inappropriate sales practices occurring (i.e. practices not aligned with customer interests).  The FMA also found that the banks are not yet adequately monitoring or controlling this risk. That said, many banks are already addressing these issues.

Who needs to read it?

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, and remuneration – should read this Incentives Report.

The FMA expressly notes that, while the Incentives Report and the expectations set out in it apply to banks, many of the issues are relevant to other types of financial services firms. Accordingly, the FMA recommends that all financial services firms consider this review, the issues raised, and how they relate to their business.

What does the Incentives Report say?

The Incentives Report outlines the FMA’s expectation that banks revise their sales incentive structures for salespeople and through all layers of management with a focus firmly on customers’ interests.  As set out in the earlier Financial Markets Authority and Reserve Bank of New Zealand’s Report into Conduct and Culture (our summary here), the FMA expects banks to implement changes to incentive schemes by no later than the first performance year beginning after 30 September 2019.

However, the FMA also found that banks are making significant changes to incentive schemes.  In particular, the FMA has noted that incentive schemes for sales people are generally becoming less sales focussed, and some banks are entirely removing sales-based incentives from salespeople and managers.

Scope of review

The Incentives Report reviewed incentive structures for salespeople across 9 banks, focusing on:

  • incentives structures for salespeople and their managers;
  • how risks associated with incentives structures are managed and controlled; and
  • internal reporting to the board and senior management regarding how risks associated with incentives are managed.

While the FMA states that it excluded Authorised Financial Advisers, Registered Financial Advisers, and specialist sales staff within banks for the purposes of the Incentives Review, the FMA further states that its expectations in the Incentives Report apply to these staff, as well as the salespeople in scope of the Incentives Review (noted at page 7 of the Incentives Report).


The FMA made four key findings:

  1. Incentive schemes are highly sales focusedThe FMA found that salespeople’s incentives are highly sales focused and that sales performance typically determines the majority of a salesperson’s variable pay.  In addition, it found that salespeople’s incentive schemes are structured to encourage high sales performance, and manager incentive schemes which are based on the sales performance of sales people is likely to add pressure on staff to sell.  The FMA concluded that the risk of inappropriate sales practices was high, but also that most banks have acknowledged the need to make significant changes to their incentive schemes.
  2. Controls appear to be ineffective at mitigating conduct risksThe FMA found that, overall, bank controls appear to be ineffective at mitigating the risk that sales incentives will lead to poor customer outcomes.  This is because controls are designed in a way that means that they are not likely to be effective at identifying inappropriate sales.  The FMA indicated that banks should consider several matters when designing controls, including the independence of those operating controls, and the ability of salespeople to manipulate those controls.  The FMA’s expectation is that banks have controls in place to detect inappropriate sales practices that are tailored to the specific risks of the business.
  3. Boards and senior management often seek and receive little information on the risks of inappropriate salesThe FMA found that there is some reporting on the risks and the outcome of controls that detect inappropriate sales practices, and it is positive that boards and senior management are engaged on incentive structures.  However, the FMA noted that this varied between banks with some boards and senior management receiving very limited information.  The FMA’s expectation is that boards and senior management should proactively request information on the performance of controls to give them confidence about the effectiveness of the bank’s control framework.  It also expects boards and senior management to question whether a lack of detected issues is as a result of issues not existing, or issues not being identified.
  4. Banks are making significant changes to their incentive schemesThe FMA found that significant (and positive) changes are being made to incentive schemes across the banking industry, with incentive schemes becoming less sales focused and/or removing sales performance entirely from incentive schemes.  However, similar to findings in the Conduct and Culture Review, the FMA considers that these changes do not go far enough yet to create a sustainable culture of good conduct.

Our view

As with the Conduct and Culture Report, our initial reaction is that the Incentives Report is largely as expected. It represents a toughening of attitude by New Zealand regulators in relation to conduct, and increasing emphasis on customer outcomes.

While there is more work to be done by banks, significant work and changes are already well underway as a result of the Conduct and Culture Report and what has been happening as a result of the Australian reviews.

As noted above, the FMA requires changes to incentive programmes to be in place by no later than the first performance year after 30 September 2019.  We expect that ongoing developments will be closely monitored by the FMA.

For other non-bank entities the concerns flagged in the Incentives Report, should be taken as an early warning indicator as to the attitude likely to be taken in other sectors by the FMA.  Our expectation is that the FMA will move on to look at sales incentives for other entities’ staff, as capacity permits.

Further, it is also potentially an indicator of the likely approach that will be taken under the new financial advisers’ regime under Financial Services Legislation Amendment Bill (FSLAB), currently before Parliament, and likely to come into force in mid-2020. The FSLAB will introduce a specific prohibition on financial advice providers giving incentives to nominated representatives which are likely to encourage breaches of duty under the regime.

What happens next?

The FMA will write to all banks included in the review setting out its expectations.  In March 2019 banks will be required to report to the FMA on how they will meet the FMA’s expectations regarding incentives.  If any bank has not committed to removing incentives related to sales measures, it will be required to explain how its controls will be strengthened sufficiently to address the risks of poor conduct that arise with such incentives.

If you have any questions in relation to the Bank Incentive Structures Review or the Reports mentioned, please contact one of our experts.

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