An independent report into Westpac New Zealand has found "material shortcomings" in its board's oversight of the bank.
Westpac was ordered by the Reserve Bank to commission the report in March to address concerns raised by the regulator about compliance issues and with the risk governance processes and practices applied by Westpac's board and executive management.
Undertaken by consultants Oliver Wyman the report found the bank's independent directors did not have sufficient expertise in the critical areas of banking, risk management and banking technology despite Westpac's board charter requiring them to.
As a result, the directors were not able to engage with and provide robust challenge to the executive on risk topics.
"The independent non-executive directors also placed too much trust in the executive without sufficient substantiation. Their relationship lacked the degree of transparency, respect, and constructive tension necessary to support effective risk governance."
The board also did not use, consider or engage with the bank's risk appetite framework and its independent directors did not demonstrate the fluency and depth of understanding of risk appetite expected of a director on a bank board.
The report also found the process of setting the agenda and developing papers for the board's risk and compliance committee lacked clear ownership.
"Agendas were lengthy, dominated by items 'for noting' and were not always aligned with priority risks and issues. This reduced the opportunity for sufficient discussion, debate, and reduced the board's ability to focus and provide challenge on important key areas."
All four board committees included all the non-executive directors as members which was not common practice.
It also found the behaviours and mindsets of the board and executive with regards to risk were not fully aligned with an effective risk culture.
The relationship between the board and the Reserve Bank had suffered from instances of miscommunication and misunderstanding.
"The complex dynamic between the executive, the board and the bank's parent Westpac
Banking Corporation ['WBC'] hindered effective information flows, including on risk matters. The lack of WBC representatives on the board for a period over 2020 and 2021 exacerbated this issue."
While there were a substantial number of risk and regulatory remediation programmes under way the programmes had design weaknesses that resulted in delay or ineffective delivery.
"Timelines appeared to have been set without full consideration of available capability, capacity, and priorities. 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."
Geoff Bascand, Reserve Bank deputy governor, said the risk governance of Westpac NZ's board needed 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. In some cases, issues that had been acknowledged by the board for several years had not received due attention or effective remediation.
"The report found there had been historic underinvestment in risk management capabilities at the bank with investment appearing reactive, rather than strategic."
Bascand noted that Westpac NZ had already made progress towards implementing the review's recommendations with a board refresh which, along with changes made to the board's processes had addressed some of the report's findings.
"But there is a lot more do to.
"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."
Westpac NZ said in a statement that it accepted the findings of the review and was well advanced in addressing its recommendations.
It appointed a new chair to its board on October 1. Pip Greenwood took over from Jan Dawson who retired from the board. Dawson had been on the board since July 2011 and chair since February 2015.
Greenwood has been on the Westpac NZ board since 2019 and is a former partner at Russell McVeagh.
Greenwood said she agreed strong risk governance and a strong risk culture were fundamental requirements for banks.
"We have always aimed for high standards of risk governance but acknowledge that in the instances identified we fell short."
Greenwood said since the Reserve Bank instructed the bank to commission the independent review in March 2021, a new chair and six new directors had been appointed to the Westpac NZ board.
"We have also followed up immediately on other recommendations in the report, including restructuring committees and overhauling the way information on risk is provided to the board."
Westpac NZ had also significantly increased investment in risk management in recent years.
"We'll continue to review the collective skills on the board, as the bank's needs evolve, and I'm confident the mix of capability and experience we've now built, alongside the programme of work underway, sets us up well for the future."
Greenwood said improving risk governance and following through on recommendations in the report were key priorities for herself, the board, new Westpac NZ chief executive Catherine McGrath, and new board risk and compliance committee chair Rob Hamilton.
"We're united in our determination to keep lifting capability in this area and will continue to work constructively with the RBNZ on these matters and ensure they are up to speed with our progress and support our plans."