Regulations put customer interest at risk says expert

Venkat Raman

Although reports on commercial banks in Australia and Life Insurance Companies in New Zealand have raised cudgels against the players in the respective sectors, their strictures will eventually harm customers, an expert has said.

He said that ordinary people- Australians and New Zealanders who the regulators such as the central banks and monetary authorities are trying to protect will in fact become the victims.

Kenneth Hayne Report

“The Kenneth Hayne Report on commercial banks in Australia has ruled that they have placed profit before customer interest and that it should be the other way around, which is a valid point. But in the same breath, it has said that mortgage brokers should charge their customers fees for their services and not the lenders, which will place extra burden on borrowers,” he said.

The expert, who did not want to be named, has more than 40 years of experience in the banking and insurance industry. He said that mortgage and insurance brokers act in the best interests of their customers (and lenders and insurers) and any move to penalise them would be counterproductive and harm the industry as a whole.

Banking Scene in New Zealand

A Joint Review of New Zealand’s banking sector by the Financial Markets Authority (FMA) and the Reserve Bank of New Zealand (RBNZ) in November 2018 found “a small number of issues” related to the poor conduct by bank staff.

“Issues relating to system or process weaknesses were more commonplace. Based on these findings, conduct and culture issues do not appear to be widespread in banks in New Zealand at this point in time. However, we are concerned about banks’ lack of proactivity in identifying and remediating conduct issues and risks in their business. More broadly, we identified weaknesses in the governance and management of conduct risks. This is a vulnerability that, if left unchecked, has the potential to lead to widespread issues,” the Report said.

Brokers, essential links

“Mortgage and Insurance brokers perform all the documents essential for the scrutiny of lenders and insurers. Imagine the chaos if all customers begin to approach them directly! Not only will each application take time for scrutiny, these institutions would have to employ more staff, adding to their overheads. Thusly, instead of paying mortgage brokers, customers will have to pay the lenders and insurers, for, they will be forced to charge fees,” he said.

Insurance Report

On January 29, 2019, the FMA and RBNZ issued a damning Report into how 16 Life insurance companies have done business, saying that they put sales and profits ahead of customers (Indian Newslink, February 1, 2019)

The Report, which will be released on February 21, 2019, shows the life insurance sector in a poor light accusing life insurers of complacency.

Problems with the Law

“As a small country known for hard working people, New Zealand can do better with robust policies. The KiwiSaver for example, can be turned into a robust investment vehicle. We need  regulations that are people-friendly, benefitting ordinary customers. Lending institutions and insurers can be better controlled without penalising people,” the expert said.

In the Australian contest, he said that the flurry of prosecutions and actions will again reveal problems with the law – gaps in coverage, inadequate penalties and cases the law won’t allow to stand up.

Andrew Linden and Warren Staples of the Melbourne based RMIT University have said in an analysis (see Businesslink in this issue) that taken together, the recommendations made in the Hayne’s Report “are a patchwork of measures that if implemented will over time be eaten away – and at some point will be dismantled – because the rationale for their adoption will be forgotten.”

Even before they are implemented, they will have to run the gauntlet of a massive subterranean lobbying effort from industry to water them down, something Hayne indicated he expected.

CSR is good, but..

“We all agree that banks and insurance companies should show greater Corporate Social Responsibility and that they should put people before profit. But to expect these institutions to be ‘profit-free’ is not only economically unsound but also foolish. We should be careful in putting in place regulations. All financial directives should promote good business practices. Otherwise, we will end up in a mess,” the expert said.

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