01 May 2023

FMA letter to NZ registered banks: Treating consumers fairly – creating the right incentives

Media Release 
MR No. 2023 – 16

The FMA sent this letter, last week, to the Chief Executives of New Zealand registered banks from FMA Executive Director of Regulatory Delivery, Clare Bolingford.

It is now more than four years since the FMA conducted our review of Bank Incentive Structures (BIS Review). The design and management of incentive schemes is important because they influence how your staff act and tell them what behaviour is valued. In the BIS Review we described incentives as including variable pay, fixed pay (salary), competitions, and performance management (e.g. how staff are selected for promotion, and how staff are selected for performance improvement plans and, ultimately, termination of employment.  

In December 2018, we asked all banks involved in the BIS Review to implement changes to their incentive schemes to remove incentives linked to sales measures for salespeople and their managers, no later than the first performance year beginning after 30 September 2019. We defined sales measures as measures that are achieved by retail customer sales or referrals, whether at an individual or a team level. This includes sales/referral numbers, sales value and asset or liability growth.  

These changes were intended to reduce conflicts of interest that can hinder the fair treatment of consumers. As you know, we have been monitoring banks’ progress with their actions plans to address the recommendations of both the BIS Review and the joint FMA and Reserve Bank Conduct & Culture Review. In many cases, we are encouraged by the changes that have been made. 

However, we have also recently received reports of activity within banks suggesting that in some instances, sales targets have been reintroduced or other changes have been made that are not likely to be in the best interests of consumers. We are concerned about these reports and any reports of actions by banks that may result in consumer harm.  

We are now asking you to take the following actions to provide assurance that the incentives you provide to your staff are designed and managed in a way that supports the fair treatment of consumers. 

  1. Reconfirm to us that you did implement changes to your incentive schemes to remove incentives linked to sales measures for salespeople and their managers, and that these changes remain in effect as at the date of this letter. Please provide this confirmation by 31 May. 
  2. Reflect on the incentives for your staff and how these are aligned with the outcome of fair treatment of consumers. In this context, we are considering the broad range of actions - including performance management and promotion opportunities - that influence your staff, not just sales-based targets. We encourage you to think beyond the influence that sales-based targets can play in consumer outcomes – regardless of whether an incentive payment is made to staff when the target is met - and consider the importance of understanding how all of a firm’s processes, procedures and culture can, directly or indirectly, influence either the right or the wrong behaviour by staff. In our future engagements with you, we will be asking you for an update on your reflections and any changes you have made as a result. 

The FMA has signalled its outcome focused approach to regulation. This approach ensures regulations and rules are a means to an end, rather than an end in themselves. The real end is fair outcomes, which is what we are looking to achieve through our focus on incentive schemes and the behaviours and outcomes that those schemes lead to. 

Yours sincerely, 

Clare Bolingford 

Executive Director, Regulatory Delivery