Former BNZ chairman blames 'weak and ineffective' Reserve Bank for industry failings

Monday, 5 August 2019

The Reserve Bank has has been labelled 'weak and ineffective' by a former BNZ chairman who says the regulator is not hands on enough in a banking sector let down by incapable leaders.

Kerry McDonald, who was on the Bank of New Zealand board for 17 years and chairman for 12 of those, said the Reserve Bank simply did not know whether the banks were abiding by the terms of their licences.

His criticism comes after Stuff's BNZ Files investigation outlining failings within BNZ and its Australian parent NAB, which have come to light through documents released by an Australian whistleblower.

The documents, drawn from internal documents prepared by NAB and the professional services consultancy EY, show BNZ struggled to comply with anti money laundering laws, processed a payment that breached its own Economic and Trade Sanctions Policy, knew it was charging too much for KiwiSaver and, in one instance of human error credited supermarket chain Foodstuffs $100 million.

**READ MORE:

* BNZ struggled to abide by anti-money laundering laws

* BNZ's parent bank had toxic banking culture but hid it from regulator with EY's help

* BNZ knew it was charging too much for KiwiSaver, but didn't cut fees for nearly a year

* BNZ accidentally sent Foodstuffs $100 million**

The leaked documents show how active Australian regulators were compared to New Zealand, for example, in the first three months of 2018 the Reserve Bank made no formal or other regulatory requests of BNZ.

By comparison Australian regulators made more than 250 demands for information of NAB.

The following month the ​Reserve Bank and Financial Markets Authority began its conduct and culture review of the banks asking the big four banks questions about how they were looking after the interests of their customers.

The review was prompted by the Australian Royal Commission on Banking, though the move by the New Zealand regulators' partly stemmed from their desire to ensure the banks did not lose the public's confidence.

The BNZ revelations come not long after ANZ New Zealand's corporate culture came under scrutiny, after its chief executive, David Hisco, lost his job over concerns about his use of expenses.

McDonald, who quit as BNZ chairman in 2008, said the failings highlighted systemic problems in the banking system largely born out of the Reserve Bank not doing enough to ensure banks operated within the regulatory framework.

'It's less about the individual banks. It's more about the failings of the system.'

A large reason for so many banking failures coming to light was due to a lack of competence of directors on bank boards, he said.

'The boards of the banks are not capable.'

He said many directors on bank boards did not have a thorough understanding of the banking and finance sector and relied heavily on a small number of directors that did.

They also leaned on the expertise of bank managers to help them make decisions, but the standards of management had 'dropped dramatically' over the past 20 years, he said.

'If you've got directors that rely on management for advice on making key decisions the system is obviously not capable.'

The Reserve Bank assesses senior appointments to banks, like directors and managers, to ensure they are suitable. If they are deemed suitable, the Reserve Bank issues non-objection.

McDonald said there was no ongoing scrutiny from the Reserve Bank as to whether the individuals were fulfilling their duties to an acceptable standard after being appointed to roles.

'They have been a very hands off regulator and I think that's been fatal.'

He said in his 17 years on the BNZ board he was never interviewed by the Reserve Bank to test his knowledge of the banking and finance industry.

The Reserve Bank was 'weak and ineffective' and its response to recent banking failures had been inadequate, McDonald said.

'We need the regulators to get off their backsides and to regulate under the current rules and if they don't do it the minister of finance should act.'

A Reserve Bank spokesman said it conducted an on-site inspection at BNZ after the bank commissioned the external review into its risk assessment with its anti money laundering programme and was comfortable with the bank's approach to compliance and its remediation of the findings from the audit.

The Reserve Bank was expanding its approach and becoming more intensive in its regulation and supervision to better address vulnerabilities in the financial sector, he said.

Banks were better placed to assess management and director performance, he said.

'That said, we meet regularly with a number of bank directors and senior managers as part of our regular engagement schedule.'

In recent times, the Reserve Bank had invested more in compliance verification in the form of deep dive, thematic reviews and stocktakes, he said.

Massey University banking expert Claire Matthews said regulators needed to know how banks operated and in order to do so the Reserve Bank needed to be more hands on.

'For some time, the Reserve Bank has appeared to have an approach that has not enquired as deeply as it might,' Matthews said.

'In part this seems to have reflected the focus of the governor of the day.

'There is room for the Reserve Bank to take a less hands off approach to the sector.'

She said some of the BNZ revelations were overblown but she was concerned it struggled to comply with anti money laundering laws.

'These requirements are not new. It is surprising that BNZ has struggled with what is now a fundamental part of its business.

'It is disappointing that it did not admit this to regulators and seek assistance if necessary.'

She said she was concerned that the regulators did not pick up the short-comings related to BNZ's anti money laundering requirements.

'I would see that as part of business as usual for the regulators, so I think they have questions to answer there.'