Room for improvement in culture and conduct

Governance and culture is a key strategic priority for the FMA. It’s latest report summarises findings from an evaluation of New Zealand fire and general insurers’ responses to the 2019 Life Insurer Conduct and Culture review (carried out by the FMA and the RBNZ).

The headline finding is that “there is a poor understanding of and commitment to good conduct and culture practice across the sector, and that the majority of these insurers are not yet prepared for the new CoFI regime.” CoFI refers to the new conduct licensing regime set out in the Financial Markets (Conduct of Institutions) Amendment Bill before Parliament.

A key governance-related finding in the report was that “many boards are yet to support the development of an organisational culture that promotes good conduct, rebalance shareholder and customer interests, and set an appropriate conduct risk appetite.”

All boards have a core role in overseeing corporate culture, conduct risk and setting high standards of ethical behaviour. They need to think beyond compliance, take the lead and set the tone. A key update in the Four Pillars of Governance Best Practice this year was in relation to the board’s responsibility for culture and conduct – see section 2.2 Ethics and organisational culture.

Governance and risk management concerns

The FMA’s report discusses the role of boards and where there is room for improvement in governing conduct risk:

“Boards are responsible for leading an organisation’s approach to conduct and setting the tone for how it is to be addressed. In our review of insurers’ responses, the level of board engagement appeared mixed.

"We asked insurers to present to their board the findings from the actions we asked them to complete. Thirty out of 42 insurers presented to their board. Of those, 14 completed all four actions requested, 12 completed two actions and four completed one action.

"There were some examples of engaged boards. One board amended its charter to reflect governance of conduct and culture. Some boards used audit and risk committees to discuss conduct and culture issues, commenting on the level of resourcing, and requesting more detailed information.

"Others were not sufficiently engaged. While eight insurers had audit and risk committees, conduct and culture risks were often overlooked and excluded in the risk appetite and risk management framework. In several cases it was not made clear how conduct and culture risk identification and management would be integrated and embedded across the business.

"In a positive example, one insurer indicated a new team of risk advisers was created, with team members positioned across different business units.

"For the smaller, foreign-owned insurers, there was unclear accountability of the New Zealand operation to the board. The tone of responses from these insurers reflected a relatively low level of commitment to the exercise.

"There is clearly still work to do. Boards must set the tone from the top, developing a culture that balances the interests of shareholders with those of customers, and establishing an appropriate risk appetite that acknowledges conduct risk is material. The board’s expectations must be made clear to the organisation. Boards and senior management should be prepared to invest in systems and controls to manage conduct risk if required.”

Guidance

The FMA’s expectations are set out in its Conduct Guide and there are lessons for boards in the banking (2018) and life insurer (2019) conduct and culture reviews.

In the reviews, the FMA/RBNZ focused on whether:

the board and senior management had a strong focus on conduct and culture issues
there was a high level of board and senior management engagement and accountability via risk appetite statements, and regular comprehensive reporting
the board held itself accountable for the culture of the organisation, including ensuring it had a customer focus and staff were comfortable escalating issues
the board considered the impact of the organisation’s strategy on its customers
the board held itself accountable for incentive and remuneration structures
there were appropriate management structures and committees in place to oversee conduct and culture issues.

For more on the board’s role in governing culture and conduct, see: