Financial Markets Authority (FMA) chief, Rob Everett, has called on directors and senior staff to change corporate culture with actions, not words.
Everett told a recent Institute of Directors gathering that corporate culture was defined by group behaviour rather than individual moral standards with company leaders responsible for setting the tone.
“In asking themselves whether they have built the processes, the training, the checks and balances to generate good customer outcomes – the board can start by asking themselves what behaviours they are exhibiting,” he said in the speech.
“The anthropologists and sociologists will tell you about learned behaviour. About children learning from their parents and most of us learning from those we look up to.
“The signalling that board directors and senior executives do by their actions cannot be under-estimated. Even for the most articulate of board chairs or CEOs, actions speak louder than words.”
Everett’s speech followed in the wake of the regulator’s joint investigation with the Reserve Bank of NZ (RBNZ) into banking ‘culture and conduct’ and a stand-alone FMA report on bank incentives.
Both reports found NZ banks, while not as dysfunctional as their Australian counterparts (despite shared ownership of some), had much room for improvement in customer care. A similar FMA/RBNZ probe into the life insurance industry is due to report at the end of January 2019.
In his speech, Everett said boards of financial services companies had to “decide on the culture they want and to set their expectations”.
“For financial services – as the core cultural driver, we’re asking the industry to show us how they put customer interests at the top of their priorities,” he said. “You want to be at a point where serving the needs of the customer ranks more highly than how much you can ram down their unsuspecting throats.”
However, Everett said having “happy or satisfied customers” was not the best gauge of a healthy financial services culture.
“In financial services of all industries, just because a customer happily bought the product or paid the fee does not mean that it was a good or proper sale or a service that was well-delivered,” he said.
“This is made more problematic because a lot of life’s most important financial decisions can take years to be proven good or bad decisions. And usually by the time you know, it’s too late to do anything about it.”
Policing financial services corporate culture, however, could be more art than regulatory science. According to Everett, corporate culture was “like an elephant” – difficult to describe to those who haven’t seen one “but we all know it when we see it”.
“Some senior regulators in financial services that I have worked with claim you can sense a good or bad culture within an hour of being in the building,” he said. “I’m not sure about that but I do know – even if defining it is relatively straight-forward, measuring it is hard and changing it even harder.”
Meanwhile, across the Tasman last week the FMA’s equivalent, the Australian Securities and Investments Commission (ASIC), was trampled over by the Royal Commission (RC) into financial services.
ASIC chief, James Shipton, faced a tough two days in the RC dock where he admitted the regulator had made some mistakes in not taking a tougher line with financial institutions that had committed serious breaches.
Shipton said ASIC could introduce a new governance structure for itself along the lines of the ‘Banking Executive Accountability Regime’ (BEAR) that requires banks to hold key staff responsible for operations with deferred remuneration linked to long-term outcomes. The UK financial regulator applies a similar set of rules to its own governance, which Shipton said could also be appropriate for ASIC.
“If we expect something of the regulated community, we must be holding that standard to ourselves,” he told the RC.
“And I have asked our team, well before I came here today, to undertake what is a review across our organisation of making sure that we are holding ourselves to the highest standard of account using as a benchmark the standards we expect of others.”
The long-running RC saga wraps up round seven next week with AMP, National Australia Bank, ANZ, Bendigo and Adelaide Bank and the Australian Prudential Regulatory Authority (APRA) booked to appear.