FMA caution to banks a red flag for all financial institutions

24 May 2023

The Financial Markets Authority’s (FMA) recent caution to New Zealand-registered banks that their incentive structures must not be linked to sales targets and must be designed, and managed in a way that supports the fair treatment of consumers, should be taken on board by other financial institutions. 

The caution was prompted by reports the FMA had received of instances where sales targets had been reintroduced or other changes made that are not likely to be in the best interests of consumers. 

Registered banks have been asked to reconfirm to the FMA that they have implemented their commitments to remove incentives linked to sales measures for salespeople and their managers, and that these changes remain in effect as at the date of the FMA's letter.

The FMA defines “sales measures” as measures that are achieved by retail customer sales or referrals, whether at an individual or a team level, and this included sales/referral numbers, sales value and asset or liability growth.

The FMA stated it expects registered banks to reflect on staff incentives and how these are aligned with the outcome of fair treatment of consumers, and noted it was encouraging banks to:

think beyond the influence that sales-based targets can play in consumer outcomes – regardless of whether an incentive payment is made to staff when the target is met - and consider the importance of understanding how all of a firm’s processes, procedures and culture can, directly or indirectly, influence either the right or the wrong behaviour by staff.

Our comments

When the Conduct of Financial Institution regime comes into effect in early 2025, financial institutions’ fair conduct programmes must include effective policies, processes, systems and controls for “designing and managing incentives to mitigate or avoid the actual or potential adverse effects of incentives on the interests of consumers, so far as reasonably practicable” (section 446J, Financial Markets (Conduct of Institutions) Amendment Act 2022). 

The letter suggests that the FMA:

  • Is likely to interpret “incentives” in section 446J broadly as including variable pay, fixed pay (salary), competitions, and performance management (e.g. how staff are selected for promotion, and how staff are selected for performance improvement plans and, ultimately, termination of employment); and
  • Will expect financial institutions to demonstrate that their remuneration, other incentives, and performance management (including promotion, performance assessment, misconduct and discipline) policies, processes, systems, and controls, as well as their culture in general, actively support compliance with the CoFI fair conduct principle.

As part of their CoFI-readiness programmes, financial institutions should be considering how their incentive structures (in conjunction with their policies, processes, systems, controls and culture) directly or indirectly influence the way their staff act, including the messages they give as to what behaviour is valued.

These requirements are additional to the proposed prohibitions on sales incentives based on volume and value targeted incentives: see Submissions sought on prohibited incentives regulations and CoFI licensing fees (04 October 2022).

Chapman Tripp has extensive experience in advising financial institutions on conduct and culture matters, including the design of incentive structures, and on preparations to comply with the CoFI requirements. Please contact us if you would like to discuss the impacts of CoFI on your business.

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