Australia’s banks will no longer pay bonuses to retail staff for product customer sales following a review.
THE toxic sales culture in Australian banks that sees customers saddled with inappropriate financial products may finally be coming to an end.
All four big banks have committed to winding back the “deep-seated” culture of product-based incentive payments after an independent review into the practice handed down its final report on Wednesday.
Stephen Sedgwick AO, the former Public Service Commissioner, was appointed by the Australian Bankers’ Association to review how bank employees were paid.
The review concluded that while product-based payments should not be banned outright, some practices that could “promote behaviour inconsistent with customer interests” needed to be changed.
The four big banks have committed to implementing all 21 of the recommendations, the adoption of which will mean bank staff, including mortgage sellers, and their managers, “no longer receive incentives based directly or solely on sales performance”.
“Instead, eligibility to receive any personal incentive payments will be based on an
assessment of an individual’s contribution across a range of measures, of which sales — if
included at all — will not be the dominant component, and the maximum available payments
will be scaled back significantly for some roles,” Mr Sedgwick said.
The reforms would see any sales-based bonus be “product neutral” — not encouraging the sale of one product over another — and make up a maximum of 50 per cent of any incentive, falling to 33 per cent or less by 2020.
He added that the reforms would “assist in addressing a trust deficit” and were “deliberately intended to signal a sharp break with the past”.
“This will not be easy for banks and there will be challenges,” ABA chief executive Anna Bligh said. “This is not just about payments — it’s about governance and leadership. Banks have heard the criticism about the sales culture … Banks will focus on the best way to change payments for their employees.”
Commonwealth Bank CEO Ian Narev said the bank would implement “many of the recommendations” by July 1 and would have all of the changes in place by next financial year.
“Over a number of years Commonwealth Bank has been working across a range of areas, including culture, people management, and incentives, to improve customer outcomes,” Mr Narev said. “The Sedgwick recommendations will accelerate that work by further encouraging our people to provide great customer service.”
NAB chief customer officer Andrew Hagger said the recommendations were a “significant step” for the industry and would “require focus, discipline and strong leadership to implement”.
“We want our customers to be confident that every time they deal with their bank, they are receiving products and services that best suit their needs and we want to ensure bankers continue to be rewarded for doing the right thing,” Mr Hagger said.
“In October last year, NAB committed to the Sedgwick reforms and now that we have the final recommendations our focus is to implement them well ahead of the 2020 deadline.”
ANZ group executive Fred Ohlsson said the review was an important step to “restore community trust” and the bank was committed to implementing the recommendations “as quickly as possible”.
“While we have already taken significant steps to improve our remuneration structures, we know there is real concern in the community about the sales culture within banks and I’m confident these meaningful reforms will provide better outcomes for all customers,” Mr Ohlsson said.
Westpac consumer bank CEO George Frazis said the bank would implement all the changes. “We are pleased to see that the final report endorses the changes to remuneration structures that Westpac announced recently,” he said.
“This includes linking incentives for all tellers in our branch network to providing great service, removal of product specific targets for personal bankers and changing incentive rewards for personal bankers to equally weight service to customers and sales, with 50 per cent based on customer measures and 50 per cent on financial measures.”
Gerard Brody, CEO of the Consumer Action Law Centre, said the report represented an “important first step in overhauling the aggressive sales culture that has come to dominate our retail banking sector”.
“It is welcome that the banks have embraced change, but the true test of their commitment lies in the implementation,” he said. “Actions speak louder than words — the proposed review in three years will be crucial for determining just how successful the banks have been in moving from a sales-culture to a truly service-focused culture.”
MORTGAGE BROKERS FURIOUS
The mortgage industry, however, has responded angrily to aspects of the report which recommended abolishing behind-the-scenes payments and incentives to mortgage brokers that lead to aggressive home loan sales.
“Several factors suggest that there are significant risks of mis-selling attached to current arrangements to remunerate mortgage brokers,” Mr Sedgwick said. “Mortgages arranged through the broker channel are likely to be larger, paid off more slowly, and more likely to be interest only loans.”
Mr Sedgwick said “many banks” told the review that they “need to offer significant ‘soft dollar’ payments” to mortgage brokers, in the form of luxury holidays or other perks.
The report recommends banks abolish such “soft dollar” payments, as well as “volume-based incentives that are additional to upfront and trail commissions” and “temporary increases in commissions to support campaigns to increase product sales”.
Speaking to The Australian Financial Review, Mortgage Choice CEO John Flavell said the report was “long on anecdote and short on facts”. “It is not brokers or the Australian Bankers Association’s role to tell regulators what to do, or what changes need to be made,” he said.
The Australian Securities and Investments Commission last month released its comprehensive review of mortgage broker remuneration. According to ASIC, banks paid brokers $1.42 billion in upfront commissions on $175 billion of home loans in 2015, compared to $729 million on $98 billion of home loans in 2012.
“The recent report by ASIC made it clear the damage that can be caused — loans made by brokers are 25 per cent more likely to go into arrears,” Mr Brody said. “At a time of record household debt and in the midst of a historic housing affordability crisis, regulators and politicians have been pushing for more accountability in home lending.”