Richard asked me to open with a few remarks about what the last 12 months have brought.
In many ways, it is easy to forget or ignore just how dramatic a period we have been through – and are still in.
This time last year, we and the RB had not yet published the results of our joint reviews into the banks and the insurers.
On the bank report, issued not long after the FSC conference, you will recall that we were particularly aggressive on internal sales incentives based on volume targets. And I’m pleased to say that, with some encouragement, all of the banks have moved significantly – or at least have committed to do so.
A number of other jurisdictions have really taken notice of this shift and I believe these sorts of arrangements, at least within vertically integrated institutions, will soon be a thing of the past.
The Hayne report landed with a thud in February. It stopped short of recommending fundamental restructure of the Australian industry but it made clear Hayne’s distaste with the behaviour of the industry – pretty much all parts of it – and in particular his dismay at the tin ears and complacent attitude of some of the most senior people in the industry. Some of those people didn’t last long afterwards.
Hayne was also very critical of the regulators – both conduct and prudential – and in particular what he saw as their lack of appetite for public scrapping with an industry that was thumbing its nose at them.
James Shipton at ASIC has a former prosecutor, the no-nonsense Karen Chester (who had authored a critical review of ASIC a few years ago) and NZ’s own Sean Hughes on his commission now. The industry is quickly learning that they have plenty of enthusiasm for a fight. The Australian govt has given ASIC $70m in additional funding (on top of the additional $121m it was given in 2016 after Karen Chester’s review) to ensure it has the firepower it needs and appointed a number of extra federal judges to hear the tidal wave of court proceedings that are coming.
Around the same time as the Hayne report, we released our joint report on the Life Insurance sector. I think it’s fair to say we were not impressed.
I know we now have the attention of the boards and management within that sector. Unfortunately, their previous lack of focus and resource on conduct and how to build organisations that serve the customers told us we should recommend to the government that legislative intervention was required.
Since this time a year ago, the Financial Advice legislation has been passed and is effective, we have announced the start of transitional licensing and the end date for that process and for the bulk of the new requirements and the Code to come into effect.
Let’s not forget what a big deal that is. For some parts of financial advice, the new regime will feel pretty familiar. For others, the new competency and conduct requirements require significant change.
For us too, licensing and then monitoring 1000s of new financial advice firms and advisers is a major undertaking. And one that requires major engagement with and education of currently unregulated advisers.
The advice sector is critical to NZers looking to invest for their futures and all parties want it to function well.
So where are we now……………………
Right now, the industry is at a cross roads. Other countries got here a bit before us, during or in the immediate aftermath of the Global Financial Crisis. Australia a little later, with its Royal Commission.
Public trust in financial services as a whole is at historic lows across the world. Here in New Zealand, the situation has generally been better but more recently public trust has been shaken.
The road marked “conduct and culture failure” seems to have the same destination, regardless of where in the world you are. An angry public, politicians demanding change, and industry executives fronting up to the cameras, forced to try to justify behaviour that as an individual they would never accept, but somehow within a well-resourced and profitable company they allowed to go on for year after year.
Our Conduct and Culture reviews did not find widespread breach of the law or misconduct across the banking and life insurance sectors. But this was a quick review, mostly dependent on what we were told or shown. And the somewhat positive conclusion was balanced by finding processes and practices that were sloppy and were not adequately designed to look after customers. We saw insufficient focus on the risks posed to customers of poor behaviour whether by deliberate conduct or sloppiness.
And in the last few months, the follow up work has continued – firms are reviewing their products and their practices. From what we are seeing, there will be more damaging headlines. There will be more remediation, more repayments to consumers.
So that’s what I see coming across my desk. And then I get out and about and I’m sometimes told that NZ is different that the issues seen offshore don’t apply. Or – “this is about other companies in the industry, you should focus on them, we’re the good guys”. That high upfront commissions from insurers for sellers of their products are fine. Or that they are not fine but no-one wants to be the first to move. I don’t know whether this is complacency or denial but either way it’s not good.
We’re also told ‘we don’t know what you want us to do’. Well, we set that out (or at least some clear signals) in a conduct guide at the start of 2017. The lack of significant efforts within some banks to make major change and the failure of most life insurers to read, consider and act on that guide or get involved in the preceding consultation was one of the big disappointments I took from our conduct and culture reviews.
Good conduct is up to you. Given what we’ve all seen in other countries, I have to ask why you are waiting for us to come knocking – look at what we are saying, and think about how it applies to your business. I’ve been talking since I started in this job about putting customers at the heart of your business model, about moving beyond compliance to serving the needs and interests of your customers. Yet still I get asked – ‘what do you want us to do’.
Some of you may simply be hoping we’ll shut up and go away or are waiting for a law change to ensure a level playing field with your competitors. Your response is ‘we can’t or won’t change on our own – you need to make us change’. I would warn you to be careful what you wish for.
In terms of how to treat customers of financial services – particularly those who are vulnerable to mis-selling or mistreatment, the rest of the world has been confronting what needs to change for some time. Here in New Zealand we are behind. The fact there was no regulatory regime for bank and insurance conduct shouldn’t let you off the hook.
I acknowledge that the FMA and RB have held the industry to standards that are not yet in the law here. However, these standards are surely reasonable and the fact that the industry has not aspired to them on its own worries me. The Government has indicated it is willing to consider legislation to change that.
Our end goal, and I believe yours is too, is the fair treatment of customers. I can’t emphasise enough that the industry should be choosing to do this, rather than being made to do this.
We’re at a crossroads – the financial services industry cannot take the confidence of the public, regulators or the government for granted.
Visibly and genuinely putting the customer at the heart of your business will build that confidence.
When we talked in our reports about good customer outcomes, some of you came forward and asked for more clarity – what does it mean? We have put that phrase into the context of how you serve the needs of customers.
It is about treating your customers fairly, recognising and prioritising the interests of your customers, giving your customers clear and honest information. Designing products that are suitable, targeted at and sold to appropriate groups. Ensuring your after-sales care is good, and effectively monitoring your own conduct and that of suppliers and distributors, to ensure you can identify, rectify and learn from mistakes.
There is a lot of change that is coming the industry’s way – but this change is an opportunity to build trust and confidence. We want to work with you to achieve that.
Together, trust in financial services can be repaired, maintained and supported.
It will require sustained attention from boards and management teams even after the harsh light of public and media focus has moved elsewhere.
I firmly believe that the different sectors of the industry represented here and the regulators can get us to the right place.
But we’re behind where we should be and we need to work really hard to get out in-front and to drive sustainable and meaningful change before it is too late.
Thank you for your time.
(Speech may have been delivered differently to these notes)