Banks should be able to absorb the extra costs of more rigorous, long-term monitoring of product outcomes for clients, according to Liam Mason, Financial Market Authority (FMA).
Banks would likely have to implement more intensive oversight of both point-of-sale practices and long-term product suitability checks in the wake of the FMA’s ‘Bank incentive structures’ report last week.
In a statement, Mason said future bank staff incentive schemes should deliver “positive outcomes for customers over the life cycle of the products they hold”.
The FMA report, which followed closely on the back of the wider regulatory ‘Bank conduct and culture’ review, notes most institutions did not adequately assess post-sales outcomes for clients.
“Outcomes-based reviews are more likely to identify poor customer outcomes because they consider the sale holistically, rather than just adherence to policies,” the report says. “While all banks conducted post-sale reviews, many are process-based.”
Banks could develop more in-depth and longer-term post-sales reviews with better real-time observations by senior staff of sales practices, testing customer product understanding with multiple follow-up contacts and mystery shopping exercises.
While the extra oversight would inevitably add costs, Mason said banks would be able to afford it.
“One of the findings of the conduct and culture report was the low cost-to-income ratio of NZ banks,” he said. Regardless of the expense, Mason said banks would benefit over the long-term with better customer engagement.
He said banks should view long-term product suitability analysis as a “core obligation not a compliance overlay”.
The FMA is hoping banks would eradicate “volume-based and volume-driven” sales incentives by next September under an ‘if not, why not’ approach: regulators currently have no direct powers to banish incentive schemes.
All banks will report to the FMA next March on their progress towards removing sales-based incentives.
However, the FMA incentive investigation excluded authorised financial advisers (AFAs), registered financial advisers (RFAs) “and specialist sales staff within banks”.
“We also excluded staff who sell to wholesale customers. Our definition also excluded third parties such as external brokers,” the report says.
Mason said the incentive review targeted “employed staff” with higher-level advisory arms, such as private wealth divisions, exempted from the review.
But the FMA report does issue a warning to the wider industry.
“While this report and its expectations apply to banks, many of the issues are relevant to other types of financial services firms,” the FMA says. “We recommend that all financial services firms consider this review, the issues raised, and how they relate to their business.”