The FISA assessment is taking place against a much broader backdrop of focus on the behaviour of our FS providers. The immediate post-GFC period quite rightly focused on financial stability and the prudential supervision of markets and significant players within those markets. How firms organised themselves and behaved was assessed in terms of risk-taking - market, credit, liquidity and a distant fourth operational risk.
As regulators responded to the behaviour unveiled in the LIBOR and FX benchmark fixing scandals and a series of mis-selling issues around the world, attention moved towards conduct risk and the potentially systemic impacts poor conduct can have on confidence in financial services. At first, conduct and the treatment of customers was merely part of operational or reputational risk.
But now, with the full impact of the PPI mis-selling scandal in the UK up to around 30 billion pounds, the Wells Fargo cheque account situation costing them hundreds of millions of dollars (on top of mortgage and auto loan fines of over $2bn) - and the board chair and CEO - and the wide range of misconduct highlighted by the Royal Commission in Australia, conduct issues are truly at the top of the agenda.
I would stress that these are only a slice of the mis-selling and mistreatment issues that seem to be all too common in retail financial services.
Our legislation (the FMC Act) deliberately has the word conduct in it and we have been talking about conduct and customer treatment more broadly in financial services since the day the first pieces of that Act came into effect.
I’m going to quote from my first public speech as FMA CEO in April 2014.
I said that I wanted industry leaders ‘to embed the concepts of “interests of the customer” and “integrity” in everything that they do.
I said that we would ask industry players facing retail customers:
- what behaviours do you model?
- who do you reward?
- how do you motivate and incentivise?
- what behaviour do you punish?
- who is setting the cultural tone in your organisation?
I went on to say that culture within firms is “critical and is driven from the top. It needs to manifest itself in all core processes that drive customer and regulatory outcomes.”
This was 2014.
In 2016 we consulted on a conduct guide and published it in early 2017.
Authorised financial advisers already had their own code of conduct and we wanted the rest of the industry to consider what principles they should be operating under.
Again, we emphasised to all of FS that although our remit only covered parts of NZ’s financial services industry, our expectations of best practices set out in that document should be looked at by all FS providers and their current governance, processes and controls should be assessed against it.
It’s for that reason that we and the RB were frustrated that our conduct and culture reviews showed relatively little engagement with our conduct guide across the banks and almost no engagement from the life insurers.
I would love to think that, given we found relatively few signs of any systemic misconduct in our 2 reviews, we could assume that the industry here had learned from the lessons of the UK, US, Australia and a host of other countries. Sadly, our review told us that whilst much of the industry was confident that it had not happened here - and wasn’t going to - there wasn’t as much evidence as we would have expected of institutions having done all of the hard yards necessary to make that a realistic assessment.
It is important to note that while significant pieces of work, our reviews were conducted at pace and allowed relatively little independent verification of much of what we were shown or told.
For that reason, we told the government that we did not believe the bank and insurance sectors had done enough to address the risks to investors and consumers posed by their own conduct. We felt that more needed to be done to bake the interests of the customer into core processes and practices with organisations.
We recommended that the government level the playing field that exists between core retail banking and insurance and the FMC Act authorised sectors such as retail funds management, derivatives and the regulated parts of financial advice.
I’m not one to want to regulate the life out of any business but the industry had years to prepare itself and was found to not have been paying sufficient attention. Given the forest fire going on in Australia over the last 5 years or so (and certainly well before the RC was established), I find that hard to comprehend.
Well, it looks as if the government is going to fill that regulatory gap and do so comprehensively. I hope that in the meantime we can move banking and insurance much closer to where we feel they should be in terms of organising themselves around fair treatment of customers and driving internal cultures that support that.
We can debate endlessly as to what “fair” means and how a regulator is going to determine that. Nonetheless, I strongly support the inclusion of a high-level statutory obligation in any new legislation demanding that providers of financial services prioritise serving their customers’ needs in a fair way. The AFA code of conduct talks about acting in the customer's interests and notwithstanding semantics I think these have been important and worthwhile principles to lay out for advisers.
For sure, some of what was highlighted in the Australian inquiry could not, in any reasonable interpretation, be regarded as serving the customers interests. If you are not providing a service for instance, why are you charging the customer for it? If you are selling an insurance product that is highly unlikely ever to be successfully claimed on, how is that fair?
And so the focus on conduct and customer treatment broadens from investment products and advice to consumer financial products and services.
The FISA assessment is attempting to cover broader ground and using very different methodology than the RB/FMA Conduct & Culture reviews. Indeed it goes so far as to attempt to assess regulatory oversight mechanisms. The assessment goes beyond customer treatment and the mechanisms within banks and insurers to achieve the best possible outcomes for customers which is where the Conduct and Culture reviews were primarily targeted.
I wish TINZ well with their exercise and look forward with interest to the results.
Thank you.
Notes:
Speech may have been delivered differently to these notes.
