Time to progress the Financial Integrity System Assessment

Suzanne SnivelyONZM DNZM
Project Director, FISA

At the Wellington launch of the Financial Integrity System Assessment (FISA) on 2 August 2019, the CEO of the Financial Markets Authority (FMA) Rob Everett congratulated Transparency International New Zealand (TINZ) for being ready to rollout its assessment methodology, FISA, which enabled  financial institutions to assess their own integrity standards. 

Little did he or anyone else know then that COVID-19 was lurking in the shadows and it would take 18 months before the online FISA Self-Assessment could be launched to help test and review the integrity of the New Zealand financial sector.

Time to re-engage

It is a tribute to worldwide governments, central banks, and regulators that reasonable financial stability has been maintained, despite economies being locked down because of COVID-19.

However, now is the time to refocus on the conduct and culture of financial organisations to keep things on track.

FISA is a tool designed to engage financial organisations and support them to take a broad birds-eye view of their own conduct and culture around issues concerning integrity.  It provides an integrated view of all parts of their business, more so than can be carried out by our regulators, unless the regulator happens to be investigating a particular organisation.

Questionable conduct

The substandard conduct of Australian financial organisations was highlighted internationally in  2017 and 2018 when the Australian Royal Commission on Insurance and Banking (Commission) publicised the deficient management of customer care and prosecuted a number of Australian financial firms. These firms included the parent companies of some of New Zealand’s largest registered banks.

A 2018 review of Bank Conduct and Culture by the Reserve Bank of New Zealand and FMA found evidence of retail banks’ lack of proactivity in identifying and remediating conduct issues and risks in their business. More broadly, they identified weaknesses in the governance and management of conduct risks. This is a vulnerability that, if left unchecked, has the potential to lead to widespread issues.  These results were particularly surprising because the FMA had previously published a conduct guide in early 2017 after consulting with these firms. 

In January 2019, a  review of Life Insurer Conduct and Culture by RBNZ/FMA found even more serious concerns.  “Our review found extensive weaknesses in life insurers’ systems and controls. Across the sector, governance and management of conduct risks is weak and there is a lack of focus on good customer outcomes. There is a serious risk of further conduct issues arising. Insurers need to act urgently and undergo major change to address these weaknesses, as they leave the industry vulnerable to misconduct and escalation of issues, as seen in other jurisdictions.”

Although the FMA’s remit only covered parts of New Zealand’s financial services industry, the expectations set out in the 2017 conduct guide were relevant to all financial organisations. The conduct guide was designed so that it could be used by any financial organisation to compare their current governance, processes, and controls standards against it.

Retail banking and insurance providers had years to prepare for possible regulatory scrutiny. Yet the 2018 and 2019 FMA and RBNZ reviews found that banks and insurers had not been paying sufficient attention.

Given the publicity about the horrendous treatment of customers that emerged in Australia in the years prior to the Royal Commission, it is still hard to comprehend why New Zealand’s retail banks and insurers were found to be so indifferent to appropriate consumer protection mechanisms.

The 2018 review found that New Zealand’s retail banks were confident that they were different from their sullied colleagues in other countries.  They told the FMA and RBNZ that gross misconduct did not occur in New Zealand. When the reviewers dug deeper, they found that there was little evidence from institutions to provide assurances that they had undertaken the activities necessary to make that a realistic assessment.

This lack of evidence was the key reason the FMA and RBNZ reviewers concluded that the retail banking and insurance sectors had failed to adequately address the risks to their investors and consumers as a result of the way they conducted their activities.

How have the pressures of COVID impacted our financial sector?

Eighteen months on, it is fair to ask whether COVID19 led to our financial services companies being even more deficient as they focused on remaining resilient, providing mortgages in an overheated property market and responding to their customers’ survival needs during the lockdowns. Or, with the benefit of time is there now evidence of more appropriate conduct by our banks and insurers?

It is truly time that we found out.

FISA is designed to maintain reputations

The Financial Integrity System Assessment is designed to provide an independent view of the trust and integrity of New Zealand’s financial sector. The FISA Self-Assessment provides a framework for financial organisations to continuously monitor and improve their internal cultures.

The online FISA Self-Assessment covers broader ground, examining nine key subject areas, publishing anonymised results of findings relating to all nine. In contrast, the RB/FMA conduct and culture reviews focused on customer-related transactions only.

Also, the FISA Self-Assessment process is designed to engage the governance, senior management and staff of financial firms in focussing on conduct throughout their organisation and to discuss the challenges of conduct and culture as a strategic risk for the organisation. In this way, the internal and governance networks of those responsible for addressing conduct challenges and strengthening integrity is widened.

There is much to be gained for New Zealand’s financial services organisations who want to demonstrate that they have integrity and that they are unlike their international counterparts in this respect.

New Zealand’s international reputation has never been higher than now through its governance in response to COVID-19. Participation in the online FISA Self-Assessment will enhance the reputation and brand of financial organisations as it will be a demonstration of their desire to understand what really matters to customers and their conviction about continuously improving. It will motivate greater market access, lower the cost of regulation, attract investors, generate a higher return on assets, strengthen staff commitment and customer loyalty.

These actions, monitored objectively by Transparency International New Zealand, will demonstrate to the world’s responsible investors why our financial sector is exceptional and our country is a good place to invest.

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