Major Australian banks have been rocked by financial advice scandals. How are their NZ subsidiaries, and NZ regulatory framework, placed to avoid these?

By Gareth Vaughan

Australia's major banks have lurched from one financial advisory scandal to another in recent months.

The first one to make waves features ASB's parent Commonwealth Bank of Australia. There's a doozy involving BNZ's parent National Australia Bank. (There's more on NAB's woes here). Elsewhere ANZ's role at the collapsed managed investment scheme Timbercorp has come into question, and Macquarie Private Wealth has been fingered too.

The scandals have led to a senate inquiry amid allegations of systemic misconduct and trying to conceal information from the Australian Securities and Investments Commission. Whistleblowers feature, as do forged client signatures, sackings, an apology from CBA CEO Ian Narev, and compensation for customers.

Some of the key factors at the centre of the Australian scandals are a conflict of interest through banks making money both from selling financial advice, and from the financial products the advisers sell. There has also been criticism of banks incentivising tellers to encourage customers to take products that might not be suitable for them, and advisers acting against the best interests of their clients because they're more focused on lining their own pockets through payment incentives such as commissions.

With the same banking groups dominating the New Zealand market, and many of the same processes in place, what's the picture like here?

The Financial Markets Authority (FMA) last year aired concerns about bank KiwiSaver behaviour saying in some cases the interests of customers weren't being put first, which reflected poorly on the bank’s attitude towards the customer and/or the product. FMA CEO Rob Everett told interest.co.nz last September the regulator wasn't, however, seeing any systemic issue, but was keen to see any switching scandal nipped in the bud.

According to a spokesman, the FMA reckons New Zealand's regulatory framework is sound enough to enable the regulator to discover systemic financial advisory problems such as the those that have emerged via whistle blowers in Australia.

“Our monitoring of QFEs (Qualifying Financial Entities) and advisers in New Zealand during the last 18 months hasn’t uncovered any issues of a similar depth and seriousness to those reported on in Australia," an FMA spokesman told interest.co.nz.

"We believe our regulatory framework is sufficient to enable us to discover systemic problems where they may exist, given the new powers introduced under the Financial Markets Conduct Act. As part of the introduction of the new Act, further licensing requirements were introduced which have provided the regulator with a closer supervisory role than it had previously," the FMA spokesman said.

The spokesman noted the FMA outlined in its Strategic Risk Outlook its current areas of focus, which include governance and culture, conflicted conduct and sales and advice practices.

"Our ongoing monitoring of QFEs will focus on these areas."

"We are currently conducting a review of KiwiSaver sales and switching practices, as flagged at the end of last year, following the concerns we published in our QFE monitoring report in September 2014," the FMA spokesman said.

"We will continue to review behaviour and report back to QFEs and the public later this year. The review of the Financial Advisers Act is currently highlighting important issues relating to the Act and will cover how this regime works as a whole. Some of these areas are likely issues to be addressed as part of that review.”

'Robust processes'

New Zealand bank staff have naturally been watching the scandals engulfing their parent banks, or rivals, across the ditch. They maintain a different regulatory system and robust processes are in place to prevent Australian-type scandals from happening in New Zealand.

In comments attributed to its chief risk officer, Peter Whitelaw, BNZ provided detailed comments. Whitelaw said BNZ has a number of "robust processes" in place to ensure advice provided to its customers is of "the highest possible standard."

 “Doing the right thing by our customers is written into our customer promises," Whitelaw said.

BNZ doesn't pay commissions to advisers. Rather it charges a fee for services and all Authorised Financial Advisers (AFAs) are salaried.

"This encourages advisers to remain fully objective," Whitelaw said.

"In addition, BNZ AFA's incentives are measured against behavioural and customer focus metrics alongside sales achievements."

All BNZ AFAs are reviewed annually to confirm their licences are up to date.

"Advisers must also attend compulsory professional development days every year, to ensure they are clear on their responsibilities as an AFA and abreast of any industry changes," said Whitelaw.

"Probity checks are undertaken prior to AFAs commencing their employment at BNZ, which includes checks to ensure the AFA has the correct qualifications for the role and they are fully authorised to operate as an AFA. Before an adviser can contact a client BNZ issues them with a letter of authority to confirm that they have been assessed as competent to perform the role as an AFA at BNZ."

Furthermore, Whitelaw said, the products on BNZ’s recommended list are selected by a dedicated research team.

"All recommendations are then approved by an independent Investment Review Committee made up of BNZ employees and non-BNZ employees prior to deployment."

"The AFA is required to complete a detailed Client Financial Risk Profile in consultation with the client to determine the client's goals and objectives such as their risk appetite and income expectations. The client then signs off on their risk profile," said Whitelaw.

In contrast to BNZ, the other big banks were less forthcoming.

"We’ve been watching the situation in Australia closely but we don’t believe there are any parallels between what occurred in Australia at CBA in the mid-2000s and ASB, which operates in a different market and regulatory environment," an ASB spokeswoman said.

A Westpac NZ spokeswoman said: "We regularly review our processes and the way in which our people interact with customers to ensure we meet the standards of a high quality financial advice business. We continue to have strong oversight and governance practices to ensure that any issues or concerns are appropriately handled."

And an ANZ NZ spokesman said; "New Zealand registered banks operate under a separate regulatory framework to those in Australia. New Zealand has robust rules governing financial advisers and ANZ takes compliance with those very seriously. We constantly update our processes and systems to ensure our financial adviser services meet the high standards required by law."

'Vertically integrated distribution models can exacerbate conflicts of interest'

In its Strategic Risk Outlook the FMA goes into detail on its concerns about both conflicts of interest and sales and advice. 

"(Conflicts of interest) can be embedded in certain business models and are easily intensified in smaller markets like New Zealand. If they are not properly identified and managed, conflicts of interest can undermine market integrity and result in poor investor outcomes. When conflicts of interest are combined with information asymmetries, it can be difficult for investors to know whether a market participant is acting in their best interests. Remuneration and incentive arrangements can also reinforce conflicts of interest, particularly when sales staff are remunerated on a volume basis or through certain bonus structures," the FMA says.

The regulator goes on to say vertically integrated distribution models, such as those operated by big banks where a market participant is the provider, manager and distributor of a product, can exacerbate conflicts of interest and result in poor investor outcomes.

"This is particularly the case when the profit-making interests of the market participant are put ahead of the interests of investors. Remuneration and incentive arrangements can fuel this risk further, resulting in unfair investor outcomes and undermining confidence in our markets and financial service providers."

And on on sales and advice the FMA says; "When investors and consumers buy financial products, whether on an advised or non-advised basis, they expect to be treated fairly. Several drivers of risk could undermine the quality and integrity of sales and advice services. Competence of advisers, conflicts of interest, poor culture and conduct, information asymmetries and gaps in investor understanding can all lead to unacceptable sales and advice services and poor investor outcomes. We expect market participants to take account of these risk drivers and put investor interests at the heart of their sales processes and advisory services."

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