2014 is shaping up to be another busy year for banks. It will largely be about continuing innovation and meeting customer demands in a very competitive environment, and bedding in recent regulatory changes.
2014 is shaping up to be another busy year for banks. It will largely be about continuing
innovation and meeting customer demands in a very competitive environment, and bedding
in recent regulatory changes.
A strong customer focus will remain a priority in the New Zealand banking sector. Margins
are constantly under pressure and credit growth is low, so competition will remain intense.
Banks need to continually consider all aspects of their operations and assess how they can
best support customer demands and needs.
In practice, many of the changes expected in customer experience will be driven by
technology. It’s worth noting that our generation of digital natives, those people born since
the widespread use of digital technology, are now moving into their teenage years. They will
start to demand products (and data security measures) that are designed to let them take
charge of their banking. Innovation is vital, but it has to happen in the context of ongoing
regulatory pressure.
As well as meeting consumers’ changing needs, appropriate consumer protection is also
important. This is reflected in the Credit Contracts and Financial Services Bill, which is in its
final stages of development. The Bill is expected pass before the election later this year.
While that legislation primarily targets predatory lending behaviour by loan sharks, it will
impose new requirements on all lenders to ensure they can demonstrate responsible
lending. These changes will impose costly systems changes on banks to demonstrate
responsible lending practices which are already in operation.
Uncertainty on the regulatory front remains, but the focus of this has largely shifted from
design to implementation.
A number of significant reforms hit the banking sector last year. The Financial Markets
Conduct Act (FMCA) was passed. Anti-money laundering (AML) legislation went live. And
macro-prudential policy designed to ensure continued financial stability was adopted,
resulting most notably in the imposition of restrictions on high loan-to-value ratio (LVR)
lending by the Reserve Bank of New Zealand.
International trends have influenced many of the reforms that have taken place in New
Zealand and will continue to do so. For example, the Reserve Bank’s introduction of macroprudential
policy mirrored an international willingness to use such tools to remedy perceived
instability and risk. Further work is likely in this area, particularly as the LVR rules continue to
be developed and refined.
Regulators are also demanding more data. Both the Reserve Bank and the Financial
Markets Authority have increased their requests for information and reporting. In addition,
international obligations to report to the US Internal Revenue Service under the Foreign
Account Tax Compliance Act (FATCA) require substantial investment in systems upgrades.
Most of the banking sector’s expenditure on technology is still being spent on changes
required to comply with new regulation and data requirements. This is likely to continue.
Other international regulatory developments we are watching include:
- Derivatives – International pressure to improve regulation of the derivatives market has
resulted in reforms such as the Dodd Frank Act. The Reserve Bank is currently
considering enhancing domestic derivatives regulation, intended to ensure our market
does not fall behind international best practice. - GATCA – The OECD is working on developing a similar reporting framework to FATCA,
on a global basis, which will require reciprocal reporting on potential tax evasion. The
principles are due to be finalised early this year. - BEPS – The OECD continues to work on implementing the Base Erosion Profit Sharing
action points it publicised in 2013. Implementation of these rules is likely to require
domestic law change, although the scope of that is not yet certain. - Basel IV – Even though Basel III has not yet been fully implemented, some central banks
are now signalling they will impose requirements that go further than Basel III. - AML – In light of the large fines that were imposed on some banks operating in other
jurisdictions last year, there is likely to be ongoing international pressure for increased
standards. - Changes to the lending market – There is increasing interest in the development of
alternate financing platforms such as peer-to-peer lending and crowd-funding equity. The
FMCA will make it easier for such platforms to operate in New Zealand.
The banking sector is committed to working constructively with government and regulators to
ensure the best outcomes can be achieved. Collaboration will require strong leadership and
a commitment to working together. As an industry we are very focused on playing our part.
Our banks are well placed to meet the challenges the year ahead will bring. Those challenges will largely centre on banks innovating to meet customer demands within the new regulatory framework and an ever competitive environment.