Opinion: Does NZ need a banking Royal Commission?

By Dr Claire Matthews

One banking boss collapsed under cross-examination, another resigned after revelations that clients were charged for services they did not receive. There’s no doubt Australia’s Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has had the media glued to their seats.

But given the largest banks here are owned by the ‘Big Four’ Australian banks, New Zealand is following events with particular interest. The question that many are asking is, “Should we have concerns about the same issues in New Zealand?”

First of all, it is important to note that the Royal Commission’s remit ranges beyond the banks into the wider financial services market in Australia, but some of those organisations, such as AMP, also operate in New Zealand. To date, there have been two rounds of public hearings to address consumer lending and financial advice. The next round, in May, is focused on SMEs, and further rounds will follow.

So, let’s take a look at the issues raised so far and whether they apply to the New Zealand financial services environment. 

Do we have a consumer lending crisis?

The main concerns raised during the first round of hearings on consumer lending related to loans made to people who could not afford them, and the involvement of mortgage brokers in the home loan process. In 2014, New Zealand added responsible lending principles to the Credit Contracts and Consumer Finance Act 2003.

The Act says: “A lender must, in relation to an agreement with a borrower, make reasonable inquiries, before entering into the agreement, so as to be satisfied that it is likely that … the borrower will make the payments under the agreement without suffering substantial hardship” – that is, the lender must be confident the borrower can afford to repay the loan.

This should provide confidence that lenders in New Zealand are not making loans to people who cannot afford them, but Australia has similar regulatory requirements, which suggests this confidence may be misplaced. Nevertheless, while lenders may not get it right every time, there does not appear to be widespread examples of inappropriate loans being made in New Zealand.

Mortgage broker remuneration

The issue of mortgage brokers primarily relates to the way they are remunerated. In both countries, mortgage brokers generally offer their services free to their clients and are remunerated by the lenders via commission made up of an upfront payment and a trail commission paid until the loan is repaid. The Royal Commission has heard the structure of commission payments in Australia incentivises mortgage brokers to maximise the size and term of the loan to maximise their own remuneration.

The New Zealand situation is different, as the balance between upfront and trail commissions here are weighted towards upfront commissions. This view is supported by occasional complaints of churn by mortgage brokers seeking a new upfront commission by assisting a client to refinance with another lender.   

Questions about the quality 

While the hearings on financial advice are still underway, two key issues have been getting publicity: the quality of advice provided, and the charging of fees to dead clients. 

The quality of advice issue appears focused on superannuation savings, and this is an area where there is a key difference between the two financial systems. New Zealand does not have compulsory retirement savings – the closest we have is KiwiSaver, which is fully implemented via managed investments with KiwiSaver providers. Much of Australia’s compulsory retirement savings are managed investments too, but Australians also have the option of self-managed superannuation funds (SMSFs). These have regulatory advantages over ordinary managed funds.

With SMSFs, the few members are usually also the trustees and have responsibility for complying with super and tax laws. There are considerable opportunities for professional advisers to assist with SMSF administration and management, for a fee. The issues raised at the Royal Commission appear to primarily relate to SMSFs and are not confined to banks.  We don’t have anything equivalent to SMSFs in New Zealand, so similar issues are unlikely here.  

It is worth noting, however, that concerns have been raised in New Zealand about the independence of bank staff providing advice, and the impact this may have on the quality of the advice provided. In part, this concern is about banks advising customers to purchase the bank’s own products, but this does not automatically mean that the advice is not appropriate, as has been suggested.

Charging the dead

Charging fees to deceased customers is also not necessarily wrong. It very much depends on the type of fees being charged and the service being provided. The Australian Securities and Investment Commission notes ongoing financial advice fees may cover regular reviews with the financial adviser, regular investment portfolio reports, access to the adviser, newsletters and seminar invitations. The estate of a deceased customer may still require some of these services, particularly the reports. A fee would therefore still be appropriate, but you would expect it to be a reduced fee due to the more limited service provided.  

Do we need a Royal Commission here?

In New Zealand, public concern is focused primarily on the banks, so it is useful to examine statistics from the Banking Ombudsman. In the five years to June 2017, the Banking Ombudsman Scheme completed 1264 disputes, averaging 252 per year. Of those, 9.5 per cent were resolved solely in favour of the customer, with a further 22.2 per cent resolved with a result for both parties. By contrast, more than half (52.5 per cent) were resolved in favour of the bank, including those that were withdrawn or abandoned. This does not support widespread issues in the banking sector.

While New Zealanders regularly complain about their banks, and have an innate distrust of their motives, if a Royal Commission was held here I doubt there would be widespread problems uncovered. Sure, there would be cases of inappropriate behaviour by financial services firms and their staff, but I believe such cases would be isolated examples and not indicative of endemic issues within the sector.

The regulatory environment in New Zealand is similar to that in Australia, but sufficiently different to suggest the regulated behaviour would be different. Possibly more important is the culture of financial services firms in the two countries is quite different. But if a ‘lite’ version of the Australian Royal Commission was helpful in addressing New Zealanders’ distrust of the sector, then it’s an exercise that’s probably worth considering.

Dr Claire Matthews is the director of academic programmes at the Massey Business School and a financial services researcher.