Reserve Bank of New Zealand governor Adrian Orr has pushed back strongly against an accusation that the Bank, along with the Financial Markets Authority, acted outside of its mandate by undertaking the six-month review of the conduct and culture of the country’s banks.
After listening to Orr, along with FMA chief executive Rob Everett, present to a select committee the findings of the review – which found, in Orr’s words, no “widespread egregious behaviour” – ACT Party MP David Seymour said “what’s really happened here is you have gone and done a study outside your legal mandate, spent $14,000 hours and spent $2 million, found next to nothing and you are now filling in the blanks by lecturing the banking sector”.
Orr responded: “We are operating completely inside our mandate, so you are wrong.”
“An important part for the Reserve Bank is to make sure that the financial system is sound and efficient” and misconduct could result in loss of trust and “fear of failure” that then resulted in bank sectors failing, he said.
Pointing out the role of miss-selling of mortgages and other financial products in Ireland, Iceland and the US in the global financial crisis, he said conduct was “a critical, important part of overall risk”.
When Seymour persisted, Orr simply said: “I am right, you are wrong”.
Everett responded that “you only had to look at Australia and the UK to see what happens if the financial service sector is left unguided and unregulated in how it treats its customers”.
“We shouldn’t be complacent that that couldn’t happen here, because it could. What we are trying to do is to push the banks, and to ask the Government to look at regulating that space to create a climate where that’s not going to happen.”
Local banks complacent on conduct and culture risks
The select committee also heard that while the two regulators found no bank that was performing well across the whole area of conduct and culture risk management, it was the smaller, locally-owned banks which were furthest behind.
“Personally I was surprised at the lack of effort that had been made to date across the banking given how much noise and how much information has been out there,” Orr said.
“The larger banks were obviously more advanced because their parents have been battling this for a couple of years in Australia now.”
Everett said the Australian-owned banks had spent more time looking at conduct risks, and had constructed more processes and frameworks around conduct. He also said it appeared some of the smaller, locally-owned banks had failed to previously pay much attention to the FMA’s conduct guide, seemingly thinking it didn’t apply to them as “we don’t have conduct risks, we aren’t Australian-owned”.
Everett said the regulators wanted the report to be “a bit of a kick up the backside” of banks.
Orr said there were some examples of specific misconduct by banks uncovered by the review which would be followed up by the regulators and the Commerce Commission.