Reflections of the Regulator - Looking Backwards and Forwards
FMA Chief Executive Rob Everett’s speech to the Financial Services Council’s ReGenerations Reimagined conference, 19 October 2021.
Note: this was an online event and some of this speech was not delivered in full.
Good morning - e nga mana, e nga waka, e nga reo, e rau rangatira ma – tena koutou katoa
As Richard has said, I’ve been asked to reflect both on the past 7 or 8 years and on what lies ahead. I had written a speech assuming I had a captive audience where sleeping, playing darts, personal grooming and wandering off to make a cup of tea were not an option. So this is the short version – we’ll publish the full version.
When I arrived at the FMA the FMC Act was a few months old and we were a few months away from the first wave of licensing under the Act – crowd-funding and peer-to-peer platforms.
The FMA was busy with what we thought was the tail end of the court proceedings and investigations that came out of the finance company collapses and preparing itself and the industry for licensing and conduct regulation under the Act.
Now in 2021 – the FMC Act is fully operative, the financial advice regime has been substantially revised and we are facing into further major changes to our mandate with the banking and insurance regulation and climate-related disclosures.
What have we asked of the industry?
So, thinking back to early 2014 – what did we ask of the financial services industry?
I'm going to repeat a couple of passages from my very first speech as CEO of the FMA at the time.
"What do I ask of industry leaders? I ask that you embed the concepts of "interests of the customer" and "integrity" in all that you and your organisations do........These must be the very cornerstones of the industry....."
In relation to our focus on culture and on governance, I went on to say:
"We will be demanding of the industry in ways that you have not seen before..... we will ask:
I said that culture was critical and it needed “to manifest itself in all core processes that drive customer and regulatory outcomes”.
I repeat all of that to show that under my tenure we have been consistent in what we've asked for. And I think pretty clear.
In late 2016/early 2017 we put some flesh on those bones and issued our conduct guide.
Whilst we only had licensing authority over certain sectors of the industry, we expressed the hope that other sectors would take note and start to change their operating set-ups.
Quite frankly, we have not seen that. It took the Royal Commission in Australia and our Conduct & Culture reviews with the Reserve Bank to get some parts of the industry to take note. And even now it is requiring court proceedings and public sanctions to bring some firms fully to the conduct table. We have asked for - and received - more financial ammunition to bring complex cases resisted stoutly by well-resourced financial firms. And that is what we have been doing.
The challenges of regulating behaviour
Conduct regulation is complex – at a high level, we all want fairness, transparency and integrity. There will always be crooks, fraudsters, outliers but I believe the bulk of the industry wants and aims for those things.
At a high-level it sounds easy. But financial services is a collection of very different sectors that interact and inter-relate in complex ways and behaviour or outcomes that in one set of circumstances seem unfair and reprehensible, in another can seem unfortunate but reasonable. As ever with high-level principles, what seems obvious and free from doubt to me as a regulator, may not seem obvious and free from doubt to you.
The days of long-standing, black & white prescriptive legislation are probably over in lots of areas. That approach was never going to do the job for conduct regulation. The legislation now needs to give us the skeleton of the requirements and expectations of law-makers - regulators and the industry need to work together to frame what practices and processes, what governance and culture, will deliver those expectations. And where regulators and firms cannot agree, the courts will need to assess the particular circumstances and make their judgements. This is “principles-based regulation”.
Where are we on the “conduct journey”?
I was asked back in 2014 what the biggest risk to the conduct regime for financial services was and I said "complacency".
Coming from the UK where the systemic melt-down of the GFC was followed by ugly revelations of poor sales practices (payment protection insurance) and institutionalised dishonesty (LIBOR), I was genuinely surprised to be told by some senior people in the industry - and those that advise them - that I needn’t look at the big end of town but should focus on the operators lurking around the edges. “Why look at us, we’re regulated half to death by ASIC and APRA already” said one big bank CEO.
You don’t get much bigger in the UK than Lloyds Bank or globally than UBS or Wells Fargo but the damage done by those firms to confidence that markets or customers will be honestly or fairly treated has been colossal.
I'm not at all convinced that the industry or those in the legal and consulting professions paid much attention to my comments on arrival or the conduct guide in early 2017. I’m a big believer in getting industry buy-in for the direction of travel but where we don’t get it we will continue to use the stick – enforcement action and public censure.
If you look at our current slate of activity that is visible to the public eye – we have been active on AML, derivatives for retail investors, insurance products, KiwiSaver and a host of other areas.
So it was clear to me then that the conduct journey in New Zealand would be hard yards and would take a good while. I reckon we are no more than half way there.
That complacency was very clearly reflected in the outrages laid bare by the Australian Royal Commission. And in many respects that was the spark we needed to make the industry, its advisers and consumers confront what could easily happen here.
The Australian Royal Commission in 2018 prompted Adrian Orr and I to ask the banking and life insurance sectors to tell us why it couldn't happen here and we followed that with a review of the general insurance sector.
I have to say that whilst now in late 2021 I am confident in saying that real progress has been made, it has not been easy. As those who read our report into general insurance recently, we continue to be affronted at instances where see how little boards and senior management actually do until the FMA is at their door.
The rethinking of products, sales practices, incentives – this is the hard wiring of the industry. It cannot be changed easily – ripping the wiring out and replacing it is painstaking and sometimes requires consequential changes that weren’t obvious on day 1. The commitment and determination required is very significant.
I know that principles-based regulation that uses terms like "interest of the customer", "serving customer needs" and "customer-focused outcomes" can be fuzzy but a customer-focused industry does not happen because related topics occasionally appear on the Board agenda or appear on management committee agendas.
These principles don't turn into good outcomes for customers easily in any environment and everyone at the FMA gets that - they need to be driven into the firm's core processes, their incentive structures, their product design, their product reviews and their product marketing.
The way ahead - legislative change/remit change for the FMA
I am disappointed to be leaving this role before the CoFI Bill becomes law. That draft legislation was the direct result of the Conduct & Culture reviews we undertook with the Reserve Bank to get some degree of assessment as to whether the Australian bonfire could happen here. Bear in mind that at that time, the FMA licensed those bits of banking that undertook financial advice or funds management but really not much else. And nothing in insurance. So our line of sight – and arguably influence – over the true state of play from a conduct perspective was v thin.
I regard that legislation as the plugging of an industry-sized hole – in fact two industry sized-holes – in NZ’s conduct regulation. The FMC Act reflected its predecessor legislation – the Securities Act, Securities Markets Act – it was focused on investment markets, investment products and investment advice. It left out the vast swathes of New Zealanders who interact with financial services through their bank products and their insurance.
We have seen within financial advice the benefits of a code of conduct for what was the Authorised Financial Adviser population. that's a segment of the advice sector that has set standards for the rest of financial services - notwithstanding the occasional crook.
We have seen how banks responded to the conduct and culture reviews and to our attack on misaligned incentives that, with the right leadership at the top, even the biggest end of town can turn itself around.
I do not believe that the outrageous misconduct that we saw in Australia is endemic or systemic here. But it could be and even if it isn't, we do see sloppiness, lack of resource and conflicted behaviour across the industry.
A critical lesson for management and for Boards of regulated financial services firms is that where we see accidental harm or even risk of harm to consumers or investors we will take action. The fact the issues we see are not deliberate is relevant but it is in no way sufficient to get you off the hook. Investing in good technology, creating and maintaining effective processes and rigorous disciplines is hard work but it is required and it is expected.
Similarly, going back and scrubbing systems and practices and legacy products to see if they are what they were supposed to be, or whether they no longer work as well as they once did for customers – that is painful and expensive.
But it needs to be done. And where there are issues, they need to be promptly dealt with and promptly disclosed to and discussed with regulators.
We are, however, seeing good signs of progress in some parts of almost every sector. Remediation programmes are getting better at identifying and resolving past issues, and product design and marketing, whilst still occasionally seeming as it serves the provider better than the consumer, has started to shift.
We also see advisers, insurers, fundies and banks striving to serve customers during times of need and working hard to meet our expectations. And to help us hone those expectations so that they are demanding but also fair and reasonable.
The FMA will be here to engage with you, listen to you and offer support wherever we can - I am a strong believer in agreeing a common purpose and end objective being the very first thing that needed to be done in this area and that this is in place.
The challenge for regulators
The kaleidoscope of regulation of financial services is a major challenge. In my early years in the role, this occasionally felt compounded by regulatory and law enforcement organisations operating on an "every man or woman for themselves" basis.
This has changed.
The leadership showed by Adrian Orr and Adrienne Miekle at the Reserve Bank and Commerce Commission has helped us drive a degree of collaboration and coherence into how we operate together and alongside each other.
The legislative environment continues to be complex and over-lapping and it is harder for some of you even than it is for us. But a critical role for the leadership of all of these organisations is to work relentlessly to only impose burden where it is proportionate to the benefit to New Zealanders and to reduce to an absolute minimum any burden caused by absent or inefficient collaboration across regulatory agencies.
The Council of Financial Regulators has this as one of its driving objectives and I salute all of the members, and Adrian Orr in particular, for the vision and determination to make the system work the best we can - whatever its complexities.
If NZ's economy is to survive current challenges and to thrive and for people in this country to be confident that we have a strong, trusted and vibrant financial sector - that demands yet more collaboration across the regulators and the policy-making arms of government.
The Financial Services Council
A word here for the FSC and the many of you in this room who contribute selflessly to its work.
I know many of you here toiled long and hard to get the FSC and the industry sectors it comprises to where we are today. I take my hat off to all of you - I know this stuff is almost always additional to your day job and rarely rewarded and it requires a real passion for the professions you all want to be part of.
We recognise the achievements of the FSC, the quality of its research and its investor and consumer materials and the leadership shown by those at the top of the firms driving it. Thank you and to Rob and Richard - you have my admiration for the job you have done and the battles you have fought - including with me - to get here.
To conclude – I’m going to go back to one of my favourite themes.
And that’s to point to leadership – this industry in NZ will flourish if it remembers who it serves. That is every man, woman and child in New Zealand. If you work in financial services, you provide vital products and services to New Zealanders. Advice, insurance, banking, managed funds, investment products and platforms. Our economy cannot thrive without confidence that financial products and investments are offered and sold honestly and fairly.
We are here to help you be proud of what you do and if leaders never forget that sense of service and resist the urge to take the simpler or more profitable route rather than harder and longer-term routes, then the industry sectors represented here in this room will do great things.
I have been honoured to serve you and all New Zealanders in this role and I am proud to hand a strong and experienced leadership team at the FMA to the next CE. Thank you for your patience and your commitment – it has been a privilege.