Good corporate conduct brings big benefits

Good corporate conduct brings big benefits

Companies which address the burgeoning threat of conduct risk stand to be winners in the marketplace, according to a top financial consultancy firm. Those that don't run the risk of severe censure, heavy penalties and even failure, says John Kensington, KPMG's Head of Financial Services.

John Kensington - KPMG NZ - Partner

Partner - Audit

KPMG in New Zealand


Conduct risk has gathered momentum recently. It is when companies and/or staff act illegally, unprofessionally or unethically - adversely affecting customers or the wider community, thus rebounding on the company itself and sometimes the entire market.

It has affected the financial industry and Kensington expects incidents to increase before they get better, partly because regulators are stepping up their efforts to prevent it and partly because social media quickly spreads news and opinions of lapses to a critical audience.

"If you look around the Asia-Pacific region alone, there are so many examples it completely underlines the need for companies to address it," says Kensington.

"In fact, those that do may well earn a winning advantage over the competition through enhanced reputation."That's because the way to minimise conduct risk is to manage a cultural shift within companies, becoming more customer-focused and respectful of the market rather than relying on volume-based, high-pressure selling which may impact negatively on customers.

Recent examples of financial misconduct in the region have included:

  • Australia - mis-selling complex products to less sophisticated investors; financial planning fraud; excessive late fees on credit cards; and manipulation of stock exchange, alleged foreign exchange and bank bill swap rates
  • China - allegations of mis-selling of investment funds; deposits used to fund loan shark schemes; and pump-and-dump share schemes
  • Hong Kong - mis-selling of mini-bonds; excessive bank fees for dormant accounts; and alleged currency market and inter-bank lending rate manipulation
  • India - mis-selling of insurance policies to underage customers; fraudulent sale of insurance companies by third parties; high bank fees for insurance cover; foreign exchange manipulation
  • Japan - mis-selling of trusts investment products; bribery, missing pensions funds; foreign exchange and inter-bank rate manipulation
  • Korea - mis-selling of investment products; extension of illegal loans; customer data hacked; exploitation of loopholes in credit cards; manipulation of derivatives market
  • Singapore - mis-selling of mini-bonds; manipulation of inter-bank lending rates

(Source: Oliver Wyman Research)

New Zealand has also been affected, with three banks fined a total of $24 million last year for misleading conduct in marketing, promoting and selling of complex derivative products to unsophisticated customers dating back to 2005.

That was the interest rates swaps issue which affected many farmers who thought they were buying products which would protect them from interest rate fluctuations - but who were forced to pay higher sums when interest rates dropped, with serious repercussions for some, including some who claimed they had to sell.

In the United Kingdom, about £20 billion ($44 billion) has been paid in redress by some organisations in relation to payment protection insurance; a series of widely publicised mis-selling scandals and impact on consumers led to British regulators taking a more interventionist approach.

KPMG's experience there showed that UK banks and financial institutions spent £16 on remediation costs for every £1 spent on upfront compliance, says Kensington.

"So you can see how widespread it has become - and it could well get even worse as regulators step up their game to make sure it doesn't happen, leading to more discovery of such things and the definition of what is unacceptable widens."It isn't just the financial services industry, it is things like real estate agents turning up at an auction and posing as bidders to boost the sales price; it is financial institutions selling products to people that don't meet their needs," says Kensington.

"It is fair play on fees and any products which do not operate in ways customers say they were led to believe they would - anything which might breach trust and impact negatively on customers."

Among various competitive pressures which could lead some companies around the region into misconduct was a move to digital sales, for example, where poorly designed technology may end up being detrimental to customers. Booming property prices and consistently low interest rates could create false levels of customer comfort with highly leveraged products or complex products - and sales staff incentivised by volume instead of customer satisfaction and risk profile could increase conduct risk.

However, Kensington says companies who understand conduct risk and implement governance and systems quickly and effectively stand to benefit: "Those that self-regulate and ensure their conduct risk is minimised first may actually find they are creating a real advantage for their business.

"Generally, a secure conduct risk approach means being far more customer-aware and to align the business with those customer needs.

"So their reputation is likely to grow and a competitive advantage and greater market share derived from handling conduct risk properly."

orgianally published in the NZ Herald

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