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To the Chief Executives of NZ Banks and NZBA
Thank you for meeting with us on Monday evening. It was positive to hear the expressions of concern in relation to issues raised at the Royal Commission. As we said at the meeting, we both believe that the nature and extent of the issues within financial services in Australia and the obvious cross-over in terms of entities, people and practices into New Zealand demands a strong response from the industry here and from the regulators.
We would like to set out the expectations of the FMA and the Reserve Bank as to next steps and to clarify the information and actions required from your organisation. Our objective in this exercise is to understand what work you have undertaken to review your operations to promptly identify and address any conduct and culture issues. We expect you to show us what you have done in order to be comfortable that there are no material conduct issues within your business. We anticipate that you will have undertaken an exercise of that nature after our Conduct Guide (published in February 2017) and may be extending or enhancing that work in response to issues raised at the Royal Commission or more broadly as a result of that inquiry.
As we discussed on Monday, the window for you to demonstrate to consumers, regulators and other stakeholders that they can have full confidence in the financial services industry in New Zealand is narrow, and we encourage proactive leadership from the retail Banking sector.
Aspects of banking conduct and culture fall within the regulatory remit of both the Reserve Bank and the Commerce Commission. This letter has been shared with and has the support of the Commerce Commission. In addition, we advise that the responses we seek from you will be shared with both of these agencies.
We acknowledge that we have already received initial responses from some Banks which vary in the extent to which they outline specific work already undertaken or more recently underway. We would comment that an open invitation from Banks to us to come and look at their operations is not sufficient. We reserve the right to conduct on-site monitoring as and when we feel it is necessary (including in response to material that you provide us) but the purpose of this exercise is to understand how you as leaders of your businesses have obtained assurance that misconduct of the type highlighted in Australia is not taking place here. To clarify, we request a written response from your organisation outlining:The actions you, your Board and your senior teams have taken to identify and address conduct risk – including any "gap analysis" work against the expectations set out in the FMA's Conduct Guide
We envisage receiving from you a summary document that provides an overview of your programme of work including:
Please provide this overview to the FMA no later than Friday 18 May 2018. We will then assess this summary information and schedule a follow up meeting with your core team to discuss your response, agree next steps, timetable, further information requests and ongoing reporting. We will also work with you to schedule a meeting with your Board of Directors to discuss this work.
We intend to be fully open and transparent in our inquiries and interactions with you and we expect the same approach from your organisations. We encourage early discussion of any areas where you anticipate that some remediation may be appropriate or where you are considering changes to product offerings, sales practices or business structures.
We will also continue to focus on areas we have previously signalled as priorities, including:
Please also share this letter with your Boards of Directors. We will publish this letter on our website in the interests of transparency.
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Similarly the FMA asks about “any work underway to remediate issues where bank conduct has resulted in detrimental outcomes for customers”. Again I have shown the FMA a Private Wealth financial plan with annual fees of 300 basis points which guarantee a detrimental outcome for the customer vis a vis a more reasonable 50 basis point fee structure. The FMA says that fees must be fair but, again in keeping with its “talk but no walk” strategy doesn’t have the resources or confidence or knowledge to define fair. The ERP is 350 basis points so a 300 basis point fee structure on equities, let alone bonds, delivers for retail investors the risk of equities with the return of bonds. Clearly unfair. So what will the FMA do about it? Anyone hazard a guess?