7 December 2018

NZ banking review: What you need to know

Review finds banks should do more to ensure that the financial products they sell are actually suitable for their customers.

Heard the one about the man who walked into his bank and walked out with a life insurance policy he didn’t need? The bank laughed all the way to the – you know the rest.

In the wake of Australia’s banking inquiry, the industry on this side of the ditch has been keen to convince consumers there’s nothing to see here folks, move along.

However, the banking review released last month by the Financial Markets Authority (FMA) and Reserve Bank didn’t quite paint the same rosy picture.

The review’s major finding was that banks were doing very little to monitor whether the products they sold were suitable for their customers. Sales incentives offered to staff increased the risk of customers being sold products they didn’t need or want.

Instances of “poor conduct” the review cited included a staffer at one bank deliberately excluding information about customers’ existing debts to push through credit applications.

In another case, a bank was selling products where the fees outweighed any benefits to customers. It’s now providing refunds.

The review also unearthed more than 50 “remediation activities” – a polite term to describe bank failings that led to customers paying over the odds. These failings, affecting an estimated 431,000 customers and costing $23.9 million, resulted from behaviour that risks breaching the Fair Trading Act, including:

incorrect disclosure of fees or interest
incorrect interest rates being applied
fee waivers not being applied consistently
potentially inappropriate unsolicited offers of credit being sent to customers
inaccuracies in customer transaction records and statements.

Survey research commissioned by the FMA and Reserve Bank also found one in four consumers had been offered unsolicited products by their bank in the past year. Fifteen percent felt staff tried to pressure them into buying a product. The big banks were more likely to be singled out for this behaviour.

The review didn’t uncover problems on the scale as those seen in Australia, but it also didn’t go digging like the Aussie Royal Commission did. The review was based on interviews with bank staff and directors, and documents supplied by the banks themselves.

What the banks delivered is only part of the story. The review found many banks relied on customer complaints to identify problems and there were “serious weaknesses” with complaints systems in some cases. Staff at one bank even manipulated customer records to prevent unhappy customers receiving satisfaction surveys because negative feedback could impact staff bonuses. Processes for whistle-blowers to come forward were also poor.

But the review didn’t name names. So we don’t know which banks are overstepping the mark.

Banks have been told to report to the FMA and Reserve Bank on what they’re doing to address problems by March 2019.

The regulators expect banks to drop sales incentives – or else justify how they’re going to manage the inherent conflicts of interests they create.

But what’s also needed is stronger regulation. When the institutions consumers have to trust to look after their hard-earned cash start to act like car dealers, it’s time to beef up the rules.

Gaps in legislation mean regulators haven’t been keeping tabs on banks’ behaviour and the industry has had a free pass. But relying on ad hoc reviews to find out what banks are up to is not the answer.

We want regulators to have stronger monitoring powers. Consumers need to know there’s someone looking out for their interests – and that banks’ record profits aren’t being swollen by the sale of poor-value products, which result in customers needlessly going into debt.