FMA to Scrutinize Banks Over Delays in Passing On Interest Rate Changes

Watchdog says it’s no longer waiting for things to break before stepping in

New Zealand’s Financial Markets Authority (FMA) has a new priority — and it’s got the banking sector squarely in its sights. With fresh powers under the new CoFI regime, it plans to keep a close eye on how fast banks adjust lending rates in response to official cash rate (OCR) movements. The days of slow trickle-downs might be numbered.

FMA chief executive Samantha Barrass made it clear to lawmakers that watchdog patience is wearing thin. Speaking before Parliament’s finance and expenditure committee, she promised a proactive approach — especially when it comes to how fairly banks are treating customers.

Banks feeling the heat under CoFI

The Conduct of Financial Institutions (CoFI) legislation officially came into force on March 31. The new law mandates financial institutions to treat customers fairly and puts greater responsibility on them to prove it.

It didn’t take long for the FMA to make its intentions known.

“The time taken to pass on changes in the OCR to banks’ customers will be something that we will be paying very close attention to,” Barrass told the committee.

One person who pushed the issue further was Green Party co-leader Chloe Swarbrick. She grilled Barrass over banks’ tendency to hike rates fast when the OCR goes up — but drag their feet when it drops.

Faster oversight, fewer excuses

Barrass isn’t waiting for disaster before acting. That’s the big shift. Under CoFI, the FMA now has what she called “proactive supervision powers.” That means they won’t be sitting around waiting for customer complaints or systemic breakdowns.

And she’s not bluffing. “We would like to think we won’t have to wait for enforcement action,” she said.

Here’s what that means in real terms:

• The FMA can now conduct regular checks before problems emerge.

• Banks may be held to account for even small delays in adjusting rates.

• The burden of proof shifts — banks have to show they’re playing fair.

History of hollow promises

This isn’t the first time banks have been caught lagging behind in what they offer versus what they actually deliver. Barrass pointed to one case where banks were advertising multi-product discounts — but not applying them because their tech systems couldn’t handle it.

It’s a small example, but a telling one. And the FMA stepped in.

That kind of proactive enforcement, she said, gives customers more confidence. After all, a discount is only a benefit if you actually get it. It shouldn’t be up to customers to chase it down.

This wasn’t a one-off either. The FMA’s recent work includes tightening systems that directly impact borrowers’ wallets.

Is New Zealand late to the game?

Barrass knows how things work overseas. She’s worked in the UK, Europe, and the U.S., including stints with the London Investment Banking Association and the Business Banking Resolution Service.

Compared to those regions, she said, New Zealand’s regulatory framework is pretty light. That could be a blessing or a curse — depending on how it’s handled.

In her words, “We don’t have the overhang of legacy regulation.” That makes NZ “well-positioned to get regulation right.”

But here’s the catch: that also means there’s a lot of catching up to do.

New Zealand is behind on open banking, for example. To help speed things up, the FMA has rolled out a regulatory sandbox — a controlled environment where startup FinTechs can test their products without jumping through every regulatory hoop right away.

Tech startups get a softer landing

The sandbox approach is a major win for startups, especially smaller FinTech firms who often find traditional banking compliance systems impossible to crack.

Barrass said that while businesses do complain about regulation — particularly newer ones — New Zealand’s model is less complex than in other countries. And the FMA wants to keep it that way.

There’s also a push to simplify returns. Right now, financial companies report to both the FMA and the Reserve Bank. But talks are underway to consolidate those into a single annual return. That would save time, money, and resources — especially for smaller players.

One quick line in her testimony stood out: “We can hold their hands.” It wasn’t said with condescension, but with intent. Startups aren’t expected to go it alone.

Timing matters more than ever

Banks might want to brace themselves. This isn’t a vague warning — it’s a shift in regulatory posture.

For too long, banks have moved swiftly when it suits them and slow-walked reforms when it doesn’t. CoFI changes that equation. The FMA now has the power, the mandate, and — it seems — the will.

Here’s a quick comparison of how OCR changes and banks’ responses typically go:

Swarbrick’s comment summed it up best: “Up like a rocket, down like a feather.” But the FMA doesn’t seem amused.

What’s next for the FMA?

The regulator isn’t resting on its new powers. It’s already working closely with the Reserve Bank on making things smoother for regulated entities. Exemptions are being considered when warranted. Simplicity and fairness seem to be guiding principles.

Will banks change their ways under pressure, or wait until they’re forced into it?