Conduct, culture and capital

Roger Beaumont, Chief Executive

Published in KPMG’s Financial Institutions Performance Survey Review of 2019, 19 February 2020

The New Zealand banking industry is living in interesting times. In 2019 the three C’s – conduct, culture and capital – dominated our landscape. Where have we got to and what’s coming up?

Good conduct and customer outcomes

Conduct and culture continued to be in the spotlight following the Reserve Bank and Financial Markets Authority 2018 review. It found no evidence of widespread misconduct, but did require banks to tighten their systems to more effectively identify, manage and remediate conduct risks.

Banks have continued to work closely with the regulators on their own board-endorsed action plans to respond to the review’s recommendations. That importantly included all affected banks removing sales incentives for front line staff and their managers. This move avoids potential or perceived conflicts for staff and helps ensure banks are serving customer needs.

In addition to the work individual banks are doing to support good conduct and culture outcomes, the Bankers’ Association has been working with the industry on guidance to help banks serve customer needs.

The guidelines will flow from the Code of Banking Practice in which banks commit to treating customers fairly and reasonably. They will aim to help bank staff understand what it means to serve the needs of customers and deliver good outcomes. The guidelines are intended to meet evolving customer and community expectations of banks.  

Vulnerable customers

As a subset of ensuring they meet their customers’ needs, banks are also looking at how they are working with customers in vulnerable circumstances. That includes reviewing their systems, processes, products and services to ensure that they are inclusive of the diverse needs of customers. Vulnerability comes in many forms, and may be related to certain timeframes or life events. For example, it covers customers who may be experiencing financial stress, mental and physical issues, or grief.

In April last year the Bankers’ Association also launched revised guidelines to help banks meet the needs of older and disabled customers. The revised version is written in plain language and sets out what banks will do for their older and disabled customers. In particular, banks will train staff to help and understand, and they’ll consider older and disabled customer needs in providing customer information, products and services, in physical banking spaces, and for ATMs and electronic banking services.

As with the proposed guidelines to help banks serve customer needs, these guidelines flow from the Code of Banking Practice. They were previously voluntary for our retail member banks. As of January this year, those banks have all committed to follow the guidelines.

New consumer-focused regulation

During the year the government also announced it would fast-track new regulation so financial service providers put their customers first. As well as banning sales incentives, which the banks have already done, the Financial Markets (Conduct of Institutions) Amendment Bill introduces a licensing regime for financial institutions and will require them to ensure products sold to customers are fit for purpose and meet their needs. The bill is currently before parliament.  

In addition, other major regulatory changes in the pipeline include the Credit Contracts Legislation Amendment Act to target irresponsible lending, alongside the Financial Services Legislation Amendment Act to ensure financial advisers meet their clients’ interests.

So there’s a bit going on.


At the same time, the Reserve Bank’s consultation on banks’ capital adequacy attracted a lot of attention, both in the media and among business and consumer groups. This is perhaps surprising for an issue that might otherwise have gone under the radar. It reflects the Reserve Bank’s desire to engage a broader cross-section of stakeholders on banking stability matters than it might have previously.

Following the consultation the Reserve Bank retained its proposal to raise the minimum total capital requirement for systemically important banks to 18 per cent. There was movement for non-systemically important banks that will now have a total capital minimum of 16 per cent. The implementation period also moved from five to seven years.

The final decision also usefully recognises the difference between the larger systemic and smaller non-systemic banks. That’s reflected in the lower total capital requirements for smaller banks. There was also a levelling of the playing field between the two whereby the larger banks that use their own internal risk models will now be closer to the standardised model used by other banks. That means banks will need to hold similar levels of capital for similar types of risk, which promotes competition in the sector.

We support a strong and stable banking system that can withstand significant shocks. The fact remains that the Reserve Bank’s decision will have a cost for our economy. The new requirements will impact each of our banks differently because of their exposure to different types of lending, how much capital they currently hold, and their ability to raise new capital.

Each of the banks is considering the implications for their business and is developing its own commercial response. Depending on each bank’s position, managing the new capital requirements may be met by a mix of responses including retained earnings and less lending in certain sectors. The Reserve Bank also expects some of the costs to fall on customers.

What’s coming up

We expect conduct, culture and capital to continue to be major focuses for the banking industry in 2020 as we continue to implement changes in those areas.

At the same we’ll be pushing ahead on some new proactive initiatives. They include the regional Banking Hubs pilot that we announced last September.

Banking Hubs will be trialled in Martinborough, Opunake, Stoke and Twizel. The hubs will feature a Smart ATM, support staff and online and technology support. The idea is to test demand for an innovative banking service in small towns where individual bank branches have become unsustainable because customers prefer other ways of banking.

Among other initiatives, we’ll continue to work with the Banking Ombudsman to develop a complaints dashboard that aims to make customer issues more transparent. At the moment the Banking Ombudsman, as the free and independent dispute resolution service, largely only sees unresolved issues between banks and their customers. Through the complaints dashboard banks will also share information about customer complaints they resolve themselves, which is the vast majority.

We’ll also be looking at ways to further support financial capability, particularly for people in vulnerable circumstances.

In 2020 the banking industry is still likely to be living in interesting times, but our focus will be more on bedding in previously announced changes and developing new initiatives to enhance our social licence to operate.