New Zealand banks ordered to scrap incentives tied to sales

Bloomberg

New Zealand banks have been ordered to take steps to reduce the risk of bad behaviour, including scrapping all incentives linked to sales.
In a report on bank culture and conduct released on Monday by the Reserve Bank and the Financial Markets Authority, the regulators said they identified “significant weaknesses in the governance and management of conduct risks” that require remediation. One of the key requirements is that banks explain by March how they will remove all sales
incentives.
“The FMA and RBNZ conclude that the overall standard of banks’ approaches to identifying, managing and dealing with conduct risk needs to improve markedly,” they said. “However, based on their findings, the FMA and RBNZ do not consider that widespread misconduct or poor culture issues currently exist across banks in New Zealand.”
The four-month review of 11 retail banks was prompted by misconduct coming to light overseas, particularly in Australia, where a royal commission uncovered a litany of wrongdoing, ranging from charging dead people for services to lying to regulators. New Zealand’s four largest banks are Australian-owned, raising questions about whether the same things were happening here.
The regulators identified five key areas for improvement: Greater board ownership and accountability, including being able to properly measure and report on conduct and culture risks; Prioritising the identification of issues and accelerating remediation; Prioritising investment in systems and frameworks to strengthen processes and controls; Strengthening staff reporting channels, including whistle-blower processes for conduct and culture issues; Removing all incent-ives linked to sales measures and revising sales incentive structures for front-line salespeople and through all layers of management.

SALES INCENTIVES
The regulators said they will give individual feedback to banks, which will be required to provide a plan to address the issues identified by the end of March. Banks will be expected to implement changes to their incentives programs no later than the first performance year after September 30, 2019.
“In March 2019, we will ask all banks how they will meet our expectations regarding incentives, and we will report on their responses,” the regulators said. “Any bank that does not, at that date, commit to removing sales incentives for salespeople and their managers will be required to explain how they will strengthen their control systems to sufficiently address the risks of poor conduct that arise with such incentives.”
RBNZ Governor Adrian Orr said New Zealand banks’ low cost-to-income ratios suggest they can afford to invest more in systems to reduce risk to customers.
It’s good that the banks are highly profitable and well capitalised, but “they have one of the world’s lowest cost-to-income ratios, which we have to question,” Orr said at a press briefing in Wellington. “It’s this cost-to-income ratio that leads to a lot of the profitability. We’re here saying ‘have you invested sufficiently across things that are important for the long-term sustainability of your business?’”