Industry wake-up call
Strong economy helped to drive bank’s result
David Hisco, ANZ chief executive
Areport criticising the way banks police the behaviour of staff and panning sales incentives is a wakeup call for the industry, says Westpac boss David McLean.
Yesterday the Financial Markets Authority and Reserve Bank of New Zealand released a joint report on the conduct and culture of 11 banks which operate in New Zealand after a fourmonth review spurred by Australia's Royal Commission into misconduct in the financial services sector.
It found “significant weaknesses” in the way New Zealand banks govern and manage conduct risks, and said changes need to be made.
The review found a small number of issues relating to poor conduct by bank staff but said a lack of proactivity in identifying and fixing conduct issues and risks meant “vulnerabilities remain”.
Rob Everett, the chief executive of the FMA, said the governance of conduct risk — how boards oversee and monitor conduct issues in the banks — required “serious attention”.
“Boards and senior management must address the recommendations and findings from our review with urgency.”
Those recommendations include greater board ownership and accountability, prioritising the identification of remediation issues and addressing them quickly, strengthening
staff reporting channels, including whistleblower processes, and removing all incentives linked to sales measures as well as revising the sales incentive structure for frontline sales people and through all layers of management including the CEO.
Everett said despite the FMA releasing a conduct guide in February 2017, some banks had only now started to consider the issues, with most initiatives not going far enough.
Reserve Bank governor Adrian Orr said banks had a responsibility to ensure customers receive products and services they understand.
The products and services must be suited to customers' needs.
“Failure in this responsibility exposes customers, banks and the wider economy to unnecessary risk — as dramatically demonstrated by the recent global financial crisis.”
McLean, chief executive of Westpac New Zealand and chairman of the New Zealand Bankers' Association, welcomed the recommendations and called them “fair enough”.
“It is a good wakeup call.”
But he was also quick to point out that the review had not found any systemic issues with the banking sector in New Zealand.
McLean said most of the banks here had already been looking at conduct and culture issues in light of the Australian inquiry.
Banks have yet to receive their individual report cards from the regulators but McLean said changes already outlined would be a lot of work for the industry and require customer outcomes to be prioritised.
“We may have to put some other things on the backburner.”
In Australia the Royal Commission has cost the four major banks more than A$1 billion combined but McLean said the changes in New Zealand were unlikely to cost “anywhere near that . . . magnitude”.
David Hisco, chief executive of ANZ, New Zealand’s largest bank, told staff yesterday that he and chairman Sir John Key were committed to moving promptly to implement the changes and it had already set up a group of management and the board to oversee the work.
Hisco said he believed the industry should go further than regulators required of it. “We should look at the lessons from Australia and implement any applicable laws/regulations from there in the coming years that might not already be in place here in New Zealand.”
He said the New Zealand and Australian economies were so interlinked
Banking is all about trust and we must do whatever is needed to maintain that in New Zealand.
these days, particularly financially, and expectations from Kiwis of the way companies operate here is rightly very high.
“Banking is all about trust and we must do whatever is needed to maintain that in New Zealand.”
Hisco said banks had to do the right thing by their customers and must never slip into the problems seen in Australia.
“As ANZ New Zealand CEO the buck stops with me and I take accountability and responsibility for doing that.”
Angela Mentis, chief executive of the Bank of New Zealand, said the report was a timely reminder that banks needed to have a continual focus on putting customers at the heart of what they did. “We have made good progress in many areas and still have work to do in others.”
BNZ did not take its customers’ trust for granted and was committed to delivering the best for them.
An ASB spokeswoman said it fully acknowledged banks would always need to work hard to exceed the high expectations of customers and other stakeholders. “Trust is central to our relationship with our customers and we are committed to putting good customer outcomes at the heart of everything we do.”
She said the bank already had a plan of work underway across several areas highlighted in the report.
“We will be working to review and implement all other recommendations from the report with a sense of urgency and will be allocating the appropriate resources to ensure this happens as quickly as possible.”
The regulators have asked bank boards and management to put plans together by next March to address issues raised for individual banks.
Paul Roberts, a partner at financial services firm EY, said the findings were not surprising but the banks should take them very seriously.
“The FMA and Reserve Bank have fired a shot across the bows of the banks, giving them an opportunity to address the issues arising in other jurisdictions, including those identified in the Australian Royal Commission’s investigation, and putting them on notice that significant change is expected within a relatively short time frame.”
He said it was “disgraceful” only six out of the 11 banks reviewed had measured their conduct and associated risk framework against the FMA’s February 2017 conduct guidelines before the report.
New Zealand’s strong economy — as well as good deposit and lending growth — has helped boost Westpac’s New Zealand profit to $1.017 billion.
The Australian-owned bank said its cash earnings were up 5 per cent compared with the prior year to September 30.
Its net profit for the New Zealand division rose 3 per cent to $936 million.
The bank also boosted its net operating income by 4 per cent to $2.349b.
Westpac New Zealand chief executive David McLean said a three-year focus on business transformation was delivering benefits for the bank, its customers and communities.
“This project involved investing money into critical parts of the business to simplify the banking experience, streamline dated processes, and improve services and fees for our customers.”
Westpac New Zealand’s operating expenses fell 3 per cent to $936m, while its net interest margin increased by 12 basis points to 2.15 per cent.
The bank’s deposits were up 6 per cent to $61.9b while its lending grew 4 per cent to $90.4b.
McLean said home loans and business lending both grew by 4 per cent over the past year.
“We are supporting our customers to save and invest, with deposit growth again outpacing lending growth over the last 12 months and customers using low interest rates to repay their mortgages faster.”
McLean said generally favourable conditions on the farm had helped lift its agri lending by 5 per cent, while deposits from farmers increased 14 per cent.
“This reflects a good turnaround in the dairy sector from three years ago and a broadly healthy agricultural sector,” he said.
Funds in Westpac’s Kiwi Saver scheme also increased by 17 per cent to $6.1b, with membership increasing by 3584 people and the average balance now reaching $15,300.
McLean said Westpac had been analysing customer data and proactively contacting individual customers through its “Value Me” programme to check if their bank account or Kiwi Saver scheme best fit their needs.
“We’ve contacted more than 470,000 customers during the past year.”
Westpac’s profit follows ANZ last week reporting a near $2b profit and BNZ also cracking through $1b in annual earnings.
Westpac’s result came on the same day as a report on New Zealand bank culture and conduct was released by the Financial Markets Authority and Reserve Bank of New Zealand.
Westpac’s Australian parent made a net profit up 1 per cent of A$8.095b while its cash profit was flat on $8.065b.