The adage that a fish rots from the head is fundamental to understanding how regulators either side of the Tasman intend to address poor conduct in the financial sector.
The Hayne Royal Commission wants change at the top to hold boards and senior management responsible and accountable for changing culture, so it is aligned to good customer outcomes. New Zealand regulators want to see evidence at the governance level that this is happening, too.
Australian regulators will be under pressure to prosecute, industry codes there will be enforceable and there will be stronger oversight of product design and governance. Australian companies will be undertaking a root and branch change to non-financial organisational risk. They will need to show how they are making culture changes and how this will be monitored and measured.
Regardless of the approach taken by our regulators and the New Zealand Government, what happens in Australia will flow directly through to here. The transformation that will occur for companies across the Tasman will inevitably apply to branches and divisions operating here.
This is to be welcomed. Public trust and confidence right across the insurance sector is fundamental. Importantly, the joint FMA/RBNZ review of conduct and culture did not find widespread cases of misconduct, although it did identify several instances of poor conduct.
Taking more time to enquire after customers’ needs and ensure that products are appropriate will help support that. Having a better understanding of customers brings the benefit of being able to provide additional services and advice. Technology and data analytics will help us do a much better job of this than in the past.
Potentially conflicted remuneration arrangements will come in for greater scrutiny and demand transparency and full disclosure at least here. Consumer trust is also about being able to see the value of what they are paying for. Poor advice will be weeded out and those who put customers at the heart of what they do will be rewarded.
This will place the onus on all links in the distribution chain, from product designers through to the consumer, to work as one.
The Government here has committed to fast-tracking new conduct legislation across the financial sector. The FMA has made it clear that it wants regulatory gaps plugged. Prime among these is the ability to have a legislative mandate to regulate providers of banking and insurance services. So, we can expect enforcement measures to be brought in that will enable the regulator to change behaviour and remediate customer harm.
This will almost certainly require reporting data on misconduct and customer complaints.
In the wake of the FMA/RBNZ reviews of banks and life insurance, we can also expect that the two regulators will work more closely together. This makes sense since poor conduct is a result of poor governance and vice versa.
Ironically, the regulated have recently had the opportunity to submit on the governance arrangements of one regulator (the Reserve Bank), among other issues, as part of the Reserve Bank Act review. Reflecting on good customer outcomes, it is hoped that change from that review will emphasise the need for transparency and evidence-based reasoning to support appropriate regulation consistent with least-cost compliance.
The RBNZ recently set out a Charter for its relationship with banks. The intent seems good, but it has yet to be tested. It speaks to openness, being constructive, setting clear expectations and explaining decisions so they are easily understood. Insurers look forward to working with the RBNZ to develop a charter too.