Banking review says 'significant' process weaknesses

Published: Mon 5 Nov 2018 05:06 PM
NZ banking review says 'significant' process weaknesses must be addressed
By Rebecca Howard
Nov. 5 (BusinessDesk) - New Zealand's banks need to "markedly" improve the way they manage risks of misconduct and poor culture, the Financial Markets Authority and the Reserve Bank say.
A four-month review found none of the widespread misconduct seen in Australia's financial sector but did identify "significant weaknesses" in the processes New Zealand's 11 largest banks have for monitoring conduct within their organisations.
The review found "significant variation" in the maturity of banks' approaches to the issue. While some had been thinking about culture and conduct for some time, it said the approach of others ranged from "reactive at best" to "complacent at worst."
"The overall standard of banks’ approaches to identifying, managing and dealing with conduct risk needs to improve markedly," the report stated.
“The governance of conduct risk in the banks requires serious attention. Boards and senior management must address the recommendations and findings from our review with urgency," said FMA chief executive Rob Everett.
The regulators also want greater powers to be more active in this area, given that the banks themselves have the primary responsibility for developing strong governance and management frameworks for conduct..
"The current regulatory settings do not provide sufficient scope for regulators to hold banks to account for their conduct," said Everett. "We want to address regulatory settings to enable us to respond more effectively to retail banking misconduct and its drivers. We are recommending that the government look at options for addressing the current framework."
The investigation by the RBNZ and FMA followed Australia's Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which found widespread abuses across the Tasman. Given that New Zealand's four largest banks are Australian-owned, questions were raised as to whether the same failings exist here.
The New Zealand review was based on interviews with bank staff and directors and documents supplied by banks. It did not include an audit nor detailed investigation of each bank. Nor were individual transactions, accounts, credit decisions or product sales reviewed.
In a survey commissioned for the review of 2,000 New Zealanders aged 18 and over, two-thirds of people trusted their own banks to meet their needs but only 42 percent trust the banking industry as a whole. Also, 24 percent agreed their bank's staff had offered them products they didn't want or need; 15 percent said bank staff had tried to pressure them into buying unwanted financial products.
The two agencies said that, if unchecked, the significant weaknesses they found in governance and management of conduct risk could lead to "widespread issues."
"Banks’ lack of proactivity in identifying and remediating conduct issues and risks means vulnerabilities remain," the regulators said.
The review noted that many of the issues detected appear to have stemmed from weaknesses in systems and processes. Processes for recording complaints had serious weaknesses in some cases. Processes for staff to raise issues were also generally poor.
"Banks need to review how they define and record customer complaints and make it easy for customers to raise concerns," it said. "Combined, these factors limited the ability of banks to identify and deal with issues in a timely manner."
The review said banks need to educate their staff on what good conduct and culture looks like and have effective mechanisms to allow staff to report on any deviations. It underscored that formal whistleblower policies and other reporting channels must be accessible.
On sales incentives - a key issue in the Australian review - it said removing incentives linked to sales measures is a significant step toward the goal of sustaining good customer outcomes.
"We expect banks to revise their sales incentive structures for frontline sales people and through all layers of management," it said,
While banks are on board with the changes, none of their changes announced to date "go far enough to create a sustainable culture of good management."
The review It said it expects banks to implement changes to their incentives programme no later than the first performance year after Sept. 30. In March 2019 the FMA and RBNZ will ask banks how they will meet the expectations regarding incentives and will report on their responses.
The two bodies will be providing specific detailed findings to individual banks. Each will need to develop a plan to address the feedback and report progress by March 2019. "Banks need to place a high priority on the development and implementation of these plans," it said.
Any remediation issues that warrant further investigation and potential enforcement action will be considered by the FMA, RBNZ or the Commerce Commission, it said.
The report also said banks need to evaluate their conduct and culture against relevant issues that have been raised by the Australian Royal Commission.
"This work should be adequately resourced and given high priority," it said.
It said boards need to take ownership for driving change in conduct and culture within their banks and need to clearly direct management to devise frameworks and metrics to do so.
If banks have not identified any issues requiring remediation they need to "seriously challenge" whether this is because there are no issues or because there are weaknesses in the processes and systems they have for recording those issues, it said.
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