Spotlight on banking conduct

Roger Beaumont, Chief Executive

Published in KPMG’s Financial Institutions Performance Survey Review of 2018, 13 February 2019

In 2018 the spotlight went on bank conduct and culture in New Zealand. The Financial Markets Authority and the Reserve Bank of New Zealand launched a joint review in response to the Australian Royal Commission into financial services misconduct, which has dominated headlines in the business pages across the Tasman over the last year.

Last November our regulators reported back on their Bank Conduct and Culture Review. They found no evidence of widespread misconduct and culture issues across the industry here. The key finding provided a welcome reassurance to many that our banking system had not been affected by the kind of misconduct issues investigated by the Australian Royal Commission.  

That said, our regulators made a series of recommendations to ensure our banks maintain the trust of their customers, and the public as a whole. As a result our banks have been asked to tighten up their systems to more effectively identify, manage, remediate and report on conduct risks and issues. They have undertaken to do exactly that. 

That process is ongoing with individual banks due to deliver their respective board-endorsed work plans to the regulators in March this year. The New Zealand banking industry is determined to maintain the standards the community expects of its banks, and ensure it avoids both actual and perceived conduct issues. We know that trust is hard won and easily lost.

New Zealand’s banking culture

Given the nature of the New Zealand banking industry, it was not surprising for people to ask if we were experiencing the same conduct issues as our trans-Tasman cousins. In short, we are different. That’s mainly because we’re a smaller country and have smaller banks. We also have different lending and financial advice laws here, and independent regulators. And we have independent bank boards that make sure our banks are working well.

Our banking culture is strongly influenced by the New Zealanders who work in our banks, and the customers who bank with them. In turn, that influences how our banks operate and engage with customers.

We also have a different financial legal and regulatory framework. After the global financial crisis our regulators, the government and industry had a close look at our financial advice rules and lending practices. That resulted in legislative and regulatory changes that led to better outcomes for customers.   

Another important difference is that our banks are independently managed and governed. Reserve Bank rules require them to act in the local bank’s interests. If they fail to do that, they could lose their licence to operate in New Zealand.

All this lowers the chance of conduct issues going unnoticed here.

The customer voice is also an essential part of this discussion. If we were experiencing similar issues to those seen in Australia, customers would be telling the Banking Ombudsman. The free and independent dispute resolution service is in many respects the canary in the coal mine. While the scheme routinely deals with customer complaints, those issues tend to be about poor communication and customer service. Importantly, the scheme has not seen any systemic conduct and culture issues in New Zealand.

To assist the Banking Ombudsman develop a better picture of customer issues and complaints trends, banks are now providing the Ombudsman with information on individual customer complaints they deal with. The majority of those issues are resolved between the bank and the customer, and are not escalated to the Banking Ombudsman. Making this information publicly available is intended to help make customer banking issues more transparent, and ultimately improve the customer experience.

Sales incentives

A key recommendation of the report was that banks remove sales incentives for salespeople and their managers to ensure good customer outcomes. All of our banks accept that and are reviewing their sales incentives structures. That involves ensuring incentives and remuneration encourage staff to prioritise good customer outcomes.

Some banks have already removed all sales incentives and targets for customer-facing staff.

Banks value their employees because they are essential to delivering good customer experiences. It makes sense that remuneration policies drive the best possible outcomes for customers and recognise the effort that employees put in.

Meeting the needs of vulnerable customers

Another theme that emerged from the report was how banks deal with vulnerable customers. The report defined circumstances of vulnerability as people who may have low levels of numeracy or literacy, an inability to use the internet, illness or disability, and older people.

The banking industry understands the importance of an inclusive approach to the diverse needs of all customers. That means acknowledging that different customers have different needs, and working to meet those ongoing needs in the design and delivery of banking products and services.

Over the last year at NZBA we’ve been actively engaged in initiatives that assist the financial capability of vulnerable customers.

In July we co-hosted a forum to look at practical ways to help vulnerable consumers access responsible financial services and avoid predatory lenders. We’re continuing to work with partners on how to promote inclusive banking products and services.

We have also worked with FinCap, the organisation that represents budgeting and financial mentor services in New Zealand, to develop a standard privacy waiver to help vulnerable customers. The waiver provides a consistent approach across banks that can be used by bank customers who are clients of a budgeting service. Customers can authorise financial mentors to access their financial information, to help them get independent advice on managing their money.  

We’re also reviewing our guidelines to help banks to meet the needs of older and disabled customers. Under the latest Code of Banking Practice, published in June 2018, banks agree to do their best to meet the needs of all customers. Previously voluntary for our member banks, the revised guidelines will clearly set out what banks will do for their older and disabled customers.

The year ahead

In the coming year the banking industry will progress these and other initiatives to help ensure we continue to meet and exceed customer and community expectations. Banks will also respond individually to the regulators’ bank-specific recommendations that came out of the conduct and culture review. Collectively we have an opportunity to retain and enhance the confidence of our customers and ensure a solid foundation for banking in New Zealand. We are committed to taking that opportunity.