Revelations of less-than-ethical practices in the Australian financial sector have sparked debate this side of the Tasman, including on the role and responsibilities of directors in preventing misconduct. In the third in a series of articles,* Nikki Mandow asks Deloitte experts about the tough questions boards should be asking.
In 2016, a salesperson from ASX-listed Freedom Insurance cold-called the 26-year-old son of Australian Baptist minister Grant Stewart and sold him more than $A100,000-worth of life insurance, taking his debit card details over the phone.
No problem, right; an insurance guy just doing his job?
Wrong. Stewart’s son has Down’s Syndrome. He has no dependents and no need of life insurance. But while it took only one call to sell the insurance, cancelling it involved numerous phone and email conversations, Stewart told the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry earlier this month.
Stewart ended up filing a complaint with the Australian Securities and Investments Commission. He believes his son wouldn’t be the only one with a similar experience, and that the practice of selling unnecessary products to vulnerable customers needs highlighting.
“I really didn’t think during the call that our son indicated any understanding of what he signed up for,” Stewart told the commission.
While this is an extreme case, it’s nonetheless useful to illustrate the point. And it’s a story that wouldn’t surprise Stephen Parry, national organiser of New Zealand bank workers union First Union. Although regulators this side of the Tasman have so far concluded that practices in the banking and finance sector here aren’t as toxic as in Australia, Parry says he’s aware of cases where, “[First Union members] are being pressured to sell, up-sell, and cross-sell financial products to consumers in circumstances where these products are neither needed nor wanted”.
Deloitte risk advisory director Roopa Raj says the Royal Commission investigation highlights complex issues around conduct and governance which are as relevant to New Zealand finance sector companies as their Australian counterparts.
She says boards of directors have increasingly had to recognise their responsibilities around environmental matters, and around the health, safety and wellbeing of their employees. Saying you didn’t know what was going on in your organisation is no longer an acceptable defence when there is an accident.
Now directors of banking, insurance and other financial services companies also need to be thinking about their responsibilities around treating customers fairly – and some already are, Raj says.
“What is happening in your organisation when nobody’s looking? How can you be sure your organisation is delivering fair outcomes for your customers?
“Simply saying ‘It’s the way we do things around here’ can leave you vulnerable to serious risk culture issues that could prove to be damaging to your organisation.”
Catherine Waugh, Deloitte risk advisory partner, says it would be naive to think the sorts of issues coming to the fore in Australia aren’t on some level playing out in New Zealand. As part of their governance role, directors need to make sure they hear about incidents when they occur, and that they ask the right questions – often the awkward and difficult questions – to make sure bad practice isn’t going on behind their backs.
“This is systemic risk. It can happen across lot of different channels, and because many insurance and other financial products have a long shelf life there is an extended timeframe,” Waugh says.
“Board members may be presented with all sorts of data to suggest nothing like this is happening in their organisation. They need to know what’s going on and plan for the worst.”
Raj says there is data available within companies to help directors probe into potential problems. However, often boards don’t get to see this data, or the numbers aren’t presented in such a way so as to reveal there is a problem.
Take the example of product profitability data. In some cases the focus needs to be on why some products or areas are materially more profitable than others, rather than the other way round. For example, a product might be showing profitability of 80-90 percent.
“Rather than assuming this is a ‘good news story’, your next question should be ‘Why are we making so much money on that product?’”
Another example of potentially misleading data is numbers of complaints, Waugh says. Low complaint numbers could mean your company is doing the right thing, but it might also mean no one knows when you are doing the wrong thing.
“Ask yourself why does no one complain? Vulnerable customers don’t complain. Or maybe they just don’t know what’s happening.”
A third example might be an insurance product which is selling well, with a low claims ratio. That’s good for the bottom line, but might hide the fact the product is designed in such a way that it is hard for customers to claim.
“It’s about directors and senior managers being brave, taking all those bits of data and saying: ‘Does this tell me a conduct story?’”
The financial risks of mis-selling products or misleading customers are huge, Deloitte says. A 2016 report in the UK found the 10 biggest misconduct scandals cost British banks and building societies more than $100 billion.
An article in the UK’s Financial Times found the mis-selling of payment protection insurance alone cost companies $72 billion in fines, more than four times the price of staging the 2012 London Olympics.
And penalties aren’t the only cost, Waugh says. Without the right systems in place, proving retrospectively to a regulator that you haven’t been mis-selling can take teams of people and thousands of people hours.
“If it happens at one of your competitors, the regulators are going to say: “How can you prove to me it’s not happening in your company. You can sit there and wait for that to happen, or you can front-foot it and do the right thing,” Waugh says.
“Ultimately doing right by your customers in the first instance will make a material difference to protecting and enhancing your institution’s reputation. In the end, this is paramount.”
Raj agrees. “The policy decisions you make today will impact on how your business performs in 15 years’ time. They are really difficult questions and decisions, but if you don’t talk about it now, it’s a ticking time bomb.”
Three questions directors should be asking
– How do I know that all elements of my organisation (customer, channels, products and people) are working together to deliver fair customer outcomes today and tomorrow?
– Is my company’s appetite for risk, along with its policies and procedures, aligned to identify and manage conduct risk?
– How does the company’s culture protect my organisation and deliver fair customer outcomes?
Conduct is a lens into the culture of an organisation. By understanding and addressing the fundamental drivers of misconduct, Deloitte helps organisations drive a sustainable and robust risk culture to protect themselves for future growth. Find out more on Deloitte’s website.