Newsroom's Business Editor Nikki Mandow has taken a closer look at the conflicts of interest problem the biggest banks have around Kiwisaver. The FMA and the Reserve Bank are taking an even closer look behind the scenes.
New Zealand's top bankers are working overtime this week pulling evidence together that dodgy practices being unveiled by Australia's Royal Commission into misconduct in the banking, superannuation and financial services industry aren’t happening here. The deadline is this Friday.
At the same time, calls for our own commission of inquiry are growing, including from bank workers worried about selling customers products that might not be in their best interests.
Emma* is a bank teller with one of the big four Australian-owned banks. The person you’d see if you wanted to ask about an unexpected item on your statement, or order a new bank card.
Emma is helpful, friendly and efficient. She’s been with the bank 15 years and knows her stuff. But what her customers might not realise is Emma isn’t simply a customer service person. She’s also a frontline sales person for the bank. A make-or-break part of her job is to get you to buy other bank products - KiwiSaver, insurance, a credit card, a loan, a bigger loan.
When Emma brings up your details on her screen, so she can resolve your problem, what will also appear are some subtle written prompts.
‘The customer doesn’t have KiwiSaver,’ the prompt might say. ‘Tell them about the advantages.’
“KiwiSaver is a big one for us,” Emma tells me, talking about the team of tellers in the bank. “I might say to someone: ‘Do you have KiwiSaver? It’s good, it’s great to save for your first house'. That would be a line lots of us would use, especially when the customers are young, 18 or 19.”
If Emma can convince the person in front of her to go and sit down with an adviser to discuss whatever product it might be, that counts towards her weekly sales target. And that’s critical.
If she doesn’t meet her sales targets, she risks being taken into one of the bank’s glass-fronted office and given a grilling by her manager, in full view of her colleagues. If that happens often enough she could find herself out of a job.
“I need to get two [bank customers sitting down with an advisor] a day to keep my head above water. If you get behind it’s very hard to catch up. You try to stay under the radar; if you are getting your targets they aren’t going to pick on you.”
Emma’s good at her job. She meets her targets. But it’s stressful, and she worries because she isn’t always convinced the person in front of her really needs the product she’s selling. She's heard about a mother stormed into a branch demanding to know why her single, 18-year-old son had been signed up for life insurance. The bank cancelled the policy.
Emma would prefer customers to shop around for independent advice before opting for one of her bank’s KiwiSaver funds. But she can’t say that to them. She can only suggest they take the bank's risk quiz and chat to one of her colleagues about which of the bank’s funds would be best.
She also believes, with some disquiet but no concrete evidence, that more sales pressure is put on customers in lower socio-economic areas. Encouraging people to take bigger loans than they need, to buy expensive insurance, or to put money into a savings account that they will likely later need to withdraw (and pay fees).
Does she think the bank is acting in the best interests of its clients, or in the best interests of the bank?
Definitely the bank, Emma says. “I don’t know why we can’t just do what’s right for our customers.”
The banks argue the sales pitch is about meeting customer needs. If someone comes up to the counter to change money for their holiday, surely the bank is doing them a favour by checking they have travel insurance. Like mum making sure you’ve packed clean underwear.
Anyway, banks argue, what do people expect? When you visit a Honda showroom, you know you’ll be sold a Honda. The salesman isn’t going to give you a hot tip about great deals on Nissans at the yard up the road.
That less-than-subtle pressure to move your life insurance and KiwiSaver to get a better deal on your mortgage is no different from the internet-mobile-home phone packages offered by telcos.
Maybe. But maybe the relationship between banks and their customers is different. Emma believes many customers, particularly older ones, think of frontline bank staff as people who are going to look after them and their money. Not people who will try to upsell them large fries and a thick shake.
Financial author Mary Holm agrees. Her weekly Herald column and radio slots often focus on KiwiSaver and financial advisors. She says banks always argue customers expect to be upsold, and understand they should shop around.
But that’s not necessarily true.
“The counter argument is when people go to a financial advisor at a bank, they are expecting professional advice on their financial position. Like when you go to a doctor you expect professional advice, not to be put on drugs from companies that reward that doctor.”
Holm recommends going to a fees-based independent advisor (there is a list on her website). But she knows most people don’t.
Conflict of interest
The situation with the banks is a classic example of the conflict of interest which comes with a vertically-integrated organisation. Garages that do WOFs also fixing cars. Monopoly electricity lines companies with retail arms being allowed to set transmission prices for their competitors.
It’s too easy for these structures not to work in the best interests of consumers.
With the banks, the conflict comes partly because the same organisation which is selling financial products is also providing advice on which financial products to buy.
In a classic example highlighted by the National Business Review recently, financial advice given to an ANZ customer with $540,000 to invest involved putting practically the whole lot into ANZ products. At the same time, a bank brochure insisted there was no conflict of interest.
The banks say they are meeting customer needs. Customers might say otherwise. A survey by watchdog Consumer released last month found customers were fed up with upselling from the big four Aussie-owned banks. The worst offenders were ASB and ANZ, where 34 percent and 32 percent of customers respectively said they had been offered unsolicited products. At the other end of the scale, locally-owned Kiwibank was “the least likely of the banks in our survey to try it on”, the report said.
“While you might expect this type of behaviour at your local appliance store, it’s more concerning when a bank tries it on. By law, lenders are required to ensure credit is suitable for borrowers and meets their needs. Our survey found less than half of the customers who got these offers thought the product was a good option.”
But that’s not all...
With banks there is yet another layer of conflict: bank-run KiwiSaver funds putting their customers’ money into their own or related bank products.
Take BNZ. Buried in pages and pages of KiwiSaver investment information in the Companies Office Disclosure register is the possibly disquieting information that as of the end of 2017, the NZ$ and A$ cash deposit component of BNZ’s six KiwiSaver funds are invested either in its own products, or those of its parent NAB.
Put that another way: BNZ’s KiwiSaver investment gurus apparently believe that the best possible cash deal for more than $21 million of its customers’ money is its own bank deposits.
BNZ says the “small amounts” of cash holdings provide daily liquidity for its KiwiSaver schemes - for example for customers that want to take money out for a deposit on their first home, and for transfers to other KiwiSaver schemes.
But Sam Stubbs, founder and managing director of KiwiSaver provider Simplicity says banks don't need to be invested in their own products to get liquidity.
“Why is the BNZ putting it’s members funds into its own cash investments? The bank will be paying interest on those accounts for the benefit of its KiwiSaver members, so how can they guarantee an arm's length pricing process? The amount of money involved will be small, but the principle is a large one. They simply should not be investing any money in their products.”
BNZ is not the only bank KiwiSaver provider investing in its own bank products. All them do it to some extent, including NZ-owned Kiwibank.
“Any investment we make in Kiwibank products, such as term deposits or bonds, must be covered by a related party certificate which is approved by the Supervisor, prior to investment, says Kiwibank spokesperson Kara Tait.
“We currently have a small exposure to Kiwibank term deposits in a number of our funds and this is fully disclosed.”
Meanwhile, BNZ also has related party investments via its international equities portfolio. The bank invests in the JANA Multi Manager Global Share Trust, which is managed by investment advisors MLC. Both organisations are linked with BNZ's parent company National Australia Bank - MLC as a 100 percent subsidiary of NAB, and JANA from being 45% owned by NAB.
BNZ argues, somewhat obliquely, that its JANA investments also help day-to-day liquidity. “MLC has Australian dollar transactional cash accounts with NAB for JMMGST to cover daily liquidity for similar purposes, such as to settle redemption requirements, fund hedging positions and rebalance across the four underlying managers in the JMMSGT.”
Stubbs argues it's too much of a conflict. He says the Financial Markets Authority warned the banks against investing members’ cash in their own lucrative fixed term deposits and securities after complaints in the past - including from Simplicity. But that didn't stop them investing in other conflicted products, as BNZ as done with cash and international equities.
“What I hate is the apparent gaming of the regulation here. Is it coincidental that of all the thousands of third party managers BNZ could have chosen as being the best for their customers, they chose two companies owned 45 percent and 100 percent by [their parent]?
“I’m not saying they did that purely to keep fees within the NAB group, but it’s an interesting question to ask.”
The position of the Financial Markets Authority on conflicts of interest is pretty clear, says director of regulation Liam Mason.
“Our conduct guide reminds providers of the need to manage conflicts and place the interests of customers at the heart of their businesses.
“We have stated repeatedly that vertically integrated [financial service providers] in particular, need to appropriately manage... the conflicts of interest inherent in sales and advice practices... and ensure customers are aware when they are being offered a limited range of products.”
The FMA is conducting a review of bank incentive structures, expected to be complete late this year, and last week it published the letter (co-signed by the Reserve Bank) sent to NZ banks "with our expectations and how they need to show us what they have done in order to be comfortable that there are no material conduct issues within their businesses".
So, do we need a Royal Commission inquiry here?
With new revelations about dodgy bank practices emerging from Australia’s Royal Commission investigation into misconduct in the banks and other financial institutions, the chorus of high-profile voices calling for a New Zealand Royal Commission is growing. They include Consumer magazine, Massey University banking expert Claire Matthews, financial adviser Brent Sheather, economist and writer Shamubeel Eaqub.
First Union organiser Stephen Parry, whose finance sector members face issues like those faced by Emma every day, says a Royal Commission is crucial.
“For years we’ve been raising issues about incentives around selling financial products with the banks, particularly the big four. We’ve told them our members feel pressure to sell contrary to the needs of customers and that creates a very stressful working environment.
The publication a year ago of Stephen Sedgwick’s report into bank remuneration in Australia did produce some changes, Parry says, but they don’t go far enough.
“Of course the banks are going to be saying a royal commission is not required in New Zealand because they stand to gain nothing from such an inquiry - only have their practices exposed. But it’s really important for the wider public to be able to participate in a conversation about what is the appropriate balance between the profit motive of the large Australian banks and the interests of the New Zealand public. Otherwise there’s a risk we only hear the voices of the banks themselves.”
True, not everyone outside the banks thinks a royal commission is necessary. The FMA, for the time being at least. Financial journalist Gareth Vaughan, for example. And Brian Gaynor, business writer and head of investments at investment company Milford, which has its own KiwiSaver funds. He says the banks are big and powerful, but not as badly behaved as their counterparts across the ditch. And a Royal Commission would be very expensive.
“I’m not a lover of the banks, but the Financial Markets Authority has been aggressive in its first 10 years and has kept behaviour in New Zealand at a better level than in Australia,” Gaynor says. “What will happen is the FMA and regulators here will see what’s happening there - and will tighten the rules." Having our own Royal Commission would be a waste of money.
Simplicity boss Sam Stubbs disagrees. Loudly.
Perhaps the most vocal champion of a New Zealand royal commission, Stubbs argues banks only change their practices when forced to - and then will only go as far as they have to. That’s why an independent body with the power to get people to testify and to allow confidential evidence is essential, he says.
He points to the fact that bank KiwiSaver funds hid their fee structures from customers until forced into transparency by the regulators. Even then, the Bankers Association lobbied for (and got) a year’s delay before the new rules were implemented, he says.
Oh, and don’t get Stubbs started about the fact that New Zealand executives work in senior positions in their Australian owner banks and vice versa.
Or that the amount of profit New Zealand banks make ($5 billion last year) is 15 percent more per capita adjusted for GDP than the Aussie banks make.
“How is it these banks make 15 percent more money from New Zealanders than Australians? If the Australian banks are behaving so badly and they make $1, isn’t it worth asking the question whether NZ banks, which make $1.15, might not be engaged in same level of bad behaviour. We don’t know, but we should be asking that question," Stubbs says.
“Imagine you had a drug company operating in Australia and New Zealand and the drug company was selling dodgy drugs into Australia. If there was a Royal Commission in Australia you can bet your life there would be an inquiry in NZ too. Why is people’s financial health any different from their physical health?," he says.
“I’m convinced once you get a commission of inquiry here people will be able to speak in confidence, and things will start to come out.”
*Emma asked for her identity to be kept secret