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Presentation by Rob Everett at INFINZ Industry Awards

I have been thinking recently about how we should deepen the conversation on conduct and culture with the Financial Services sector.

And right now - across the globe - conduct and ethics in FS is top of the list. Here, too, it is close to our hearts. I’m not going to give you a lecture on culture, especially tonight, but I thought I would try to set out where we as the ‘conduct regulator’ are expecting to operate.

What is the lens we use when we look at you; when we engage with you; when we see what happens with your customers and investors?

First and foremost, the FMA doesn’t set culture - that’s your job. Nor are we going to run ‘culture diagnostics’ on your business or give you a handbook for achieving a preferred culture.

But we all know that culture is critical; it drives how your people behave, it drives what actually happens at your firms and, in the end, what your customers experience and how they are treated. Whether the services and products they get from you, do the job they need them to do.

Your culture drives your conduct.

So – when we look at areas where we think, or we know, that customers are getting a raw deal; when we look at behaviour we don’t like in wholesale markets; when, in short, we look at poor conduct; we will be looking for cultural problems, and the indicators of those problems.

Culture is not formed by a poster in the lunch room. It is not formed by a one-off ‘sheep dip’ training exercise. It is formed by what your people see happening in their peripheral vision. What their colleagues do, what their leaders – what you in this room do - is what they take their behavioural cues from.

It’s how they decide whether the pep talks they get and the posters they read are real, or just hot air. They look at those posters with inspirational quotes and sunsets, and they test them against the real indicators of culture.

These are the same indicators we pay attention to:

  • How are your people paid, and for what
  • Where’s the evidence that the customer or client is being looked after, and that this isn’t an accident but the core of your business
  • How do complaints get looked at; and what happens with them
  • What performance measures and controls does Exco look at and who owns them (or are they window dressing for the auditors)
  • How does Exco engage with us, or other regulators, when there’s a problem
  • And what has the board asked to see; what do they do with it, and what messages do they send.

We will look at what goes well, and what doesn’t go so well. We’ll ask ourselves, and then we’ll ask you:  

  •  Was that just a one-off screw up?
  •  Or, does it point to a hole in your controls?
  • Or, worse, does it suggest that there is an issue with your culture, that there are deeper issues with what happens at your firm;
    • because that’s what’s actually expected;
    • because that’s how your people actually get ahead – forget the posters - when you think nobody is looking.  

…………………………………………………..

I said earlier that all of this is top of the list across the globe, and it is. The FSB and IOSCO and the G20 group have all spoken out on conduct and culture as a major cause and certainly a major exacerbating factor in the last crisis.  And across the globe, organisations like ours are responding.

Here in New Zealand the major planks of the FMC Act are in place, with a design objective to promote confidence in the regulated sectors and indeed in the regulator itself:

  • We are almost finished with the huge workload of cleaning up after the governance and disclosure horrors of the collapse of the Finance Company sector
  • Because of that we have started to lift our heads, and explore ‘conduct’ with our newly licensed sectors  - both within the strict confines of the Act – and more broadly
  • That includes pivoting our attention to misconduct in wholesale markets and to how FS providers sell products to retail customers
  • We are mid-way through MIS licensing – pretty much the last major piece
  • The FAA and with it the entire financial advice regime is being re-examined.

Looking elsewhere, the UK:

  •  Is still trying to put people in jail for LIBOR  - London Interbank Offered Rate  - (14 years (reduced down to [11] in jail  for Tom Hayes and fine banks for mis-selling insurance products), GBP30bn and counting)
  • It is still looking at ring-fencing investment banking and retail banking and still retains a bank levy which is nothing more than a conduct tax on the banks (both domestic and foreign)
  • It has brought in a senior manager regime designed specifically to put executives on the hook for the conduct that occurs on their watch
  • It is also trying to rethink the horrors the regulators imposed on financial advice in the Retail Distribution Review.

Australia:

  •  Has launched a deeply painful set of proceedings against banks for benchmark manipulation – having already laid some horrific and arguably systematised mis-selling of advice and product out in the public domain
  • Is still tying itself in knots about how best to regulate financial advice.

Europe:               

  • You wouldn’t want to be a banker or a fund manager in most of Europe either right now with all of the new legislation in MiFID (Markets in Financial Instruments Directive) and other occasionally bonkers meddling in financial services from the French socialists who ran the FS section of the European commission.

America:

  • Well,  the politicians, central bankers and FS people responsible for the GFC have all moved on to other well-paid jobs in the industry with barely a voice raised in anger so for all the hot air, nothing much has happened there
  • Ironically the early and bold legislative moves made in the US have been shown to be misguided and over-reactive as they look to re-wind Dodd Frank Act and the Volker rule.

The effect of all this, and what went before it, is that the reputation of FS is worse now than it has ever been.  We are actually a bit of an outlier in this. Compared to other jurisdictions, FS doesn’t have pariah status here. Even after the finance company melt down and issues like the mis-selling of IR swaps.

We can all be thankful for that but, as I have said repeatedly since I took this role, it won’t take much and the damage can be years in the repairing. And it is for that reason we care - and you should care – not about what you say to your staff but the examples you – as the leaders of the industry – set for them. And the image you portray to the NZ public.

I congratulate everyone who is up for an award tonight because it is right to be recognised for what you do, not what you say. 

-END