What the FMA said to banks
The FMA has released a strongly worded letter it has sent to New Zealand banks in response to the Royal Commission in Australia.
Friday, May 4th 2018, 3:09PM 
6 Comments
To the Chief Executives of NZ Banks and NZBA
New Zealand Banks' response to the Australian Royal Commission into misconduct in Banking, superannuation and other financial services (Royal Commission)
Thank you for meeting with us on Monday evening. It was positive to hear the expressions of concern in relation to issues raised at the Royal Commission. As we said at the meeting, we both believe that the nature and extent of the issues within financial services in Australia and the obvious cross-over in terms of entities, people and practices into New Zealand demands a strong response from the industry here and from the regulators.
We would like to set out the expectations of the FMA and the Reserve Bank as to next steps and to clarify the information and actions required from your organisation. Our objective in this exercise is to understand what work you have undertaken to review your operations to promptly identify and address any conduct and culture issues. We expect you to show us what you have done in order to be comfortable that there are no material conduct issues within your business. We anticipate that you will have undertaken an exercise of that nature after our Conduct Guide (published in February 2017) and may be extending or enhancing that work in response to issues raised at the Royal Commission or more broadly as a result of that inquiry.
As we discussed on Monday, the window for you to demonstrate to consumers, regulators and other stakeholders that they can have full confidence in the financial services industry in New Zealand is narrow, and we encourage proactive leadership from the retail Banking sector.
Aspects of banking conduct and culture fall within the regulatory remit of both the Reserve Bank and the Commerce Commission. This letter has been shared with and has the support of the Commerce Commission. In addition, we advise that the responses we seek from you will be shared with both of these agencies.
Your response
We acknowledge that we have already received initial responses from some Banks which vary in the extent to which they outline specific work already undertaken or more recently underway. We would comment that an open invitation from Banks to us to come and look at their operations is not sufficient. We reserve the right to conduct on-site monitoring as and when we feel it is necessary (including in response to material that you provide us) but the purpose of this exercise is to understand how you as leaders of your businesses have obtained assurance that misconduct of the type highlighted in Australia is not taking place here. To clarify, we request a written response from your organisation outlining:The actions you, your Board and your senior teams have taken to identify and address conduct risk – including any "gap analysis" work against the expectations set out in the FMA's Conduct Guide
- Any specific plans and actions you have taken (or have underway) to respond to the issues and themes arising from the Royal Commission
- Any other work you have underway or that is planned to proactively identify and address potential conduct and culture risk
- Any work underway to remediate any identified issues where bank conduct has resulted in detrimental outcomes for customers.
We envisage receiving from you a summary document that provides an overview of your programme of work including:
- the key objectives of your work
- structure, approach and level of resourcing of your work
- level of Board and senior management oversight and reporting
- key personnel involved
- summary of any early findings/insights to date
- details of any remediation programmes underway
- any other summary information that will help to provide us with a view on level and depth and focus areas of your current inquiries.
Time frames
Please provide this overview to the FMA no later than Friday 18 May 2018. We will then assess this summary information and schedule a follow up meeting with your core team to discuss your response, agree next steps, timetable, further information requests and ongoing reporting. We will also work with you to schedule a meeting with your Board of Directors to discuss this work.
We intend to be fully open and transparent in our inquiries and interactions with you and we expect the same approach from your organisations. We encourage early discussion of any areas where you anticipate that some remediation may be appropriate or where you are considering changes to product offerings, sales practices or business structures.
We will also continue to focus on areas we have previously signalled as priorities, including:
- the FMA's thematic review on soft commission in life insurance
- the Financial Adviser Act reforms
- the FMA's thematic work on incentives in vertically integrated institutions
- QFE Insurance provider replacement business
- Follow up initiatives from the Reserve Bank's 2017 Bank Director Attestation Review
- Our stakeholder relationship management programme – we anticipate deepening our priority focus this year on governance and culture within financial services firms.
Please also share this letter with your Boards of Directors. We will publish this letter on our website in the interests of transparency.
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Comments from our readers
Covers all the bases.
Ticks all the boxes.
But I shan't be holding my breath.
Does the FMA still have bank secondees working in it?
"Compare and contrast the approach adopted by the NZ Regulator following the Trowbridge Report from Australia toward private financial advisers, with the approach adopted toward VIOs following revelations from the Haynes Enquiry also from Australia.
(NB - you may wish to make reference to Capture Theory, Section 25 letters, and so-called "level playing fields")
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Similarly the FMA asks about “any work underway to remediate issues where bank conduct has resulted in detrimental outcomes for customers”. Again I have shown the FMA a Private Wealth financial plan with annual fees of 300 basis points which guarantee a detrimental outcome for the customer vis a vis a more reasonable 50 basis point fee structure. The FMA says that fees must be fair but, again in keeping with its “talk but no walk” strategy doesn’t have the resources or confidence or knowledge to define fair. The ERP is 350 basis points so a 300 basis point fee structure on equities, let alone bonds, delivers for retail investors the risk of equities with the return of bonds. Clearly unfair. So what will the FMA do about it? Anyone hazard a guess?