The Financial Markets Authority and Reserve Bank of New Zealand have told eleven New Zealand banks to remove all incentives linked to sales measures, after completing their joint Conduct and Culture review.
Removing sales incentives was one of five recommendations for banks in the recently released report, which claims to be the first of its kind in New Zealand.
The regulators are set to release a similar report on their review of life insurers.
The report found significant weaknesses in the governance and management of conduct risks and the regulators have concluded that the overall standard of banks’ approaches to identifying, managing and dealing with conduct risk needs to improve markedly.
Recommendations for banks and next steps include:
- Greater board ownership and accountability – including being able to properly measure and report on conduct and culture risks and issues
- Prioritising the identification of issues and accelerating remediation
- Prioritising investment in systems and frameworks to strengthen processes and controls
- Strengthening staff reporting channels, including whistleblower processes for conduct and culture issues
- Removing all incentives linked to sales measures and revising sales incentive structures for frontline salespeople and through all layers of management
The regulators noted that all banks reviewed will receive individual feedback and each bank must report back and provide plans to address regulators’ feedback by the end of March 2019.
However, based on their findings, the FMA and RBNZ stated they do not consider that widespread misconduct or poor culture issues currently exist across banks in New Zealand.
FMA Chief Executive, Rob Everett, said the banks’ boards and senior management must address the recommendations and findings from their review with urgency.
“The FMA published a guide to good conduct in February 2017, but some banks have only now started to consider these issues, with most of the initiatives not going deep enough,” he said.
Reserve Bank Governor, Adrian Orr, said the responsibility to ensure customers receive products and services they understand lies with the banks.
“These products and services must be suited to customers’ needs on an ongoing basis,” said Orr. “Failure in this responsibility exposes customers, banks, and the wider economy to unnecessary risk – as dramatically demonstrated by the recent Global Financial Crisis.”
The Financial Services Council (FSC) has welcomed the report and said it is an important step forward for the financial services industry.
FSC Chief Executive, Richard Klipin, said the FSC and its members are taking the findings of this report very seriously.
“Good culture and conduct are the responsibility of all including regulators, government and the sector itself and as such, the FSC welcomes and expects this kind of scrutiny given our members manage, build and protect the wealth of New Zealand,” said Klipin.
He added: “As a sector, we have started to make real progress in lifting standards and changing culture through the launch of the FSC’s Code of Conduct. We know that we still have much to do and look forward to the release of the second stage of the review focused on insurance and advice.”