In March, the Reserve Bank of New Zealand (RBNZ), or Te Pūtea Matua, demanded Westpac NZ to commission an independent review to address concerns, stemming from “material compliance issues”.
The resulting report, prepared by management consulting firm Oliver Wyman, confirmed RBNZ’s concerns around the risk governance processes and practices applied by the bank’s board and executive management were well founded.
It has come after RBNZ issued a formal warning to Westpac in August over failures to flag international transactions as required under anti-money laundering and counter-terrorism financing laws.
The concerns echoed those in the Westpac and AUSTRAC scandal, which resulted in the bank copping Australia’s largest corporate penalty of $1.3 billion over 23 million breaches of Australian AML/CTF laws.
Among other issues, the new review has ruled there had been historic underinvestment in risk management capabilities at the bank, with it “appearing reactive, rather than strategic”, according to RBNZ deputy governor and general manager of financial stability Geoff Bascand.
“The bank’s risk resources appeared overstretched and struggled to deliver against their mandates,” the report from Oliver Wyman stated.
“Whilst this review has not involved a detailed assessment of the bank’s risk resources, the gap may be driven as much by skills and capabilities as by headcount challenges, and requires further investigation.”
Further risk reporting to the board and management committees was deemed “significant in volume”, but publication was often delayed, diminishing the ability of executives and the board to effectively oversee risk management.
At the top, independent non-executive board directors were found to collectively not have sufficient expertise across banking, risk management and banking technology to meet the Westpac Board Charter.
The report also noted the directors “placed too much trust in the executive without sufficient substantiation” and were not able to engage with or challenge executives on risk topics.
“The board tolerated risk measures that were out-of-appetite for sustained periods and did not consistently demonstrate the expected levels of urgency, challenge, or debate in response to these,” the report said.
“Risk appetite was not sufficiently used in broader strategy setting and investment discussions, and was seldom discussed outside its formal annual review. This was not helped by insufficient commentary being provided on risk appetite and out-of-appetite measures in board risk reports.”
This is combined with all of the non-executive directors working on all four board committees, which is not common practice. The report noted it had the impact of “increasing director workloads, diluting individual accountability and reducing the opportunity for the full board to scrutinise the recommendations of each committee”.
Other problematic behaviours included inconsistencies in ‘tone from the top’ on risk, a pattern of tolerance for poor risk outcomes and a reactive approach to managing the bank’s risk profile, particularly with respect to emerging risks and case studies from overseas jurisdictions.
Mr Bascand further commented that the major bank’s Kiwi board “needs to see significant improvement”.
“The report’s findings highlighted material risks to effective risk governance and noted that the role played by the board fell short of the standard expected of an organisation of the bank’s scope and scale,” Mr Bascand said.
“In some cases, issues that had been acknowledged by the board for several years had not received due attention or effective remediation.”
The bank has reportedly already made progress towards implementing the review’s recommendations, having recently refreshed its board.
However, the report found the underlying risk and regulatory remediation programs underway across Westpac have “design weaknesses that resulted in delayed or ineffective delivery”.
“Timelines appeared to have been set without full consideration of available capability, capacity, and priorities,” the paper stated.
“Delivery was often approached in a siloed manner without effective consideration of synergies or interdependencies. This created broader efficiency and programme delivery issues, including over-stretched resources and recurring extensions of programme timelines.”
Mr Bascand asserted “there is a lot more to do”.
“We expect Westpac NZ to prioritise remediation in line with the report’s recommendations and will be closely monitoring their efforts to ensure that they are effective,” he said.
RBNZ has issued a warning to other institutions, to consider their risk governance practices ahead of the cross-sector thematic review on governance it will conduct next year, alongside the Financial Markets Authority (FMA) Te Mana Tātai Hokohoko.
Sarah Simpkins is the news editor across Mortgage Business and The Adviser.
Previously, she reported on banking, financial services and wealth management for InvestorDaily and ifa.