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Bank executive incentives a key focus for regulators

Monday 24th June 2019

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The Financial Markets Authority and Reserve Bank want a better grasp of how bank executive incentives have evolved and what controls are in place to avoid conflicts with sales practices. 

The regulators today said all banks have outlined plans to drop sales incentives for frontline staff and their managers in response to the joint FMA-RBNZ report on banking conduct and culture. Today's statement comes after the Bankers' Association said in April that its members had committed to remove or address sales incentives for frontline staff. 

The FMA and RBNZ said some banks plan to keep sales incentives for staff who service business, wholesale and select retail customers. 

The regulators also noted that executive incentives based on group or unit profitability are still in place at most of the banks. 

"These roles were generally not directly linked to sales staff or their direct line management. A key focus for future monitoring will involve understanding how these incentives have evolved and what controls are put in place to ensure that potential conflicts relating to sales do not remain," the regulators said in a joint statement.

The regulators have been reviewing the responses from the banks to their report that found significant weaknesses in the processes used by New Zealand's 11 biggest banks for monitoring conduct within their organisations. The four-month review didn't uncover the widespread misconduct seen across the Tasman. 

All of the banks have submitted their plans to drop the frontline sales incentives, the FMA chief executive Rob Everett said the regulators will now shift their gaze to how lenders progress against their wider plans. 

"All the banks have now developed plans to address weaknesses in their systems. They reflect our findings that there is more work to do to embed conduct risk into these firms," Everett said.

"The real test will be how plans are executed and it is board and senior management’s responsibility to ensure they deliver good customer outcomes." 

Today has been a busy day for the banking sector, with the Reserve Bank today ordering ANZ Bank New Zealand - the country's biggest lender - to prove it's operating prudently after the central bank censured the bank last month. 

ANZ's local chief executive David Hisco, who is on sick leave, was pushed out early amid concerns about the use of his expense account. Separately, ANZ's sale of a house below market value to Hisco's wife has come under scrutiny. 

And the Court of Appeal today ruled against ANZ in a long-running dispute over the way it sold interest rate swaps to farmers in the lead-up to the global financial crisis. A key area of the judgment was in rejecting the bank's claim that it could rely on the disclaimer clauses. 

Reserve Bank governor Adrian Orr today said ANZ is sound and well-capitalised, but that the central bank is engaging with the bank's board over the reviews to ensure the public and regulator can remain confident in the local ANZ unit. 

In the joint FMA statement, Orr said culture comes from senior management and the boards, and that the review of those plans show there's still work to do at a system level. 

"There is a much bigger concern and question about the culture being instilled and fostered at governance level. Boards are critical in leading the cultural shift that is needed to promote long-term customer outcomes," Orr said.

The regulators will be monitoring the sector's progress with that work.

Later today, the next round of consultation papers on the second phase of the Reserve Bank Act review will be released. 


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