ABA Announces Independent Review of Product Sales Commissions and Product Based Payments

As part of the industry initiatives announced on 21 April 2016, the ABA’s member banks have requested that the Australian Bankers’ Association (ABA) commission an independent review of product sales commissions and product based payments. The ABA has appointed Mr Stephen Sedgwick an independent person with relevant qualifications and experience to conduct this review. A final report will be published no later than 31 March 2017, however, the reviewer will aim to complete the review by the end of 2016. The final report is expected to provide an overview of product sales commissions and product based payments in retail banking and other industries, identify possible options for better aligning remuneration and incentives so that they do not result in poor customer outcomes and set out actions which may be considered by banks and the banking industry to implement the findings.

Mr Sedgwick will be supported by legal and remuneration experts to inform his findings and ensure the conduct of the review and the options for implementation that it identifies are consistent with the legal and regulatory obligations that apply to participants in the review. Gilbert + Tobin Lawyers will provide competition law and policy expertise and legal oversight to ensure all participants meet their legal obligations, including competition laws. Mercer will provide expertise and input to the review with regards to remuneration and incentive structures and global best practice.

Mr Sedgwick will also have access to additional expert advice as needed from a Bank Advisory Group and a Stakeholder Advisory Panel. The Stakeholder Advisory Panel will include representation from across consumers, employees and professional standards.

While the banking industry will fund the review, the banking industry will not have any influence over the findings and options identified by the reviewer beyond our input as a participant in the review, and the reviewer and secretariat will act independently and not in the interests of, or on behalf of, the ABA or its member banks.

Depending on the completion of the ASIC review into remuneration structures and payment arrangements in mortgage broking, the findings of the ASIC review may be incorporated into the findings and options of the independent review final report or issued as a supplement to the final report.

Some options identified by the final report may require regulatory approval or legislative reform to enable banks to take action. Regulatory approval or legislative reform would ensure banks meet their various legal obligations, including under competition laws, and ensure any changes or further action by banks are agreed to be in the public interest.

Where regulatory approval is pursued, it is expected to occur around 6 months after the final report is provided and decisions are made about the industry’s response to the final report. If legislative reform is required, the timing of implementation will be dependent on the time required for passage of the legislation through the Parliament and subsequent commencement and transition arrangements.

Scope and Approach

The final report is expected to provide an overview of product sales commissions and product based payments in retail banking and other industries, identify possible options for better aligning remuneration and incentives so that they do not result in poor customer outcomes and set out actions which may be considered by banks and the banking industry to implement the findings.

The findings and options will not prescribe specific remuneration structures, but will identify principles for removing and changing product sales commissions and product based payments where they could lead to poor customer outcomes.

Any findings and options identified and presented in the final report will take into account the submissions of all interested parties but will be determined and framed according to the independent judgement of the reviewer.

The publication of the final report does not imply that the Stakeholder Advisory Panel or its individual member organisations provided any endorsement of the final report, in whole or in part.

The findings and options will be those of the reviewer. The ABA and its member banks will need to consider the report and determine their response and any next steps. The banks are committed to meaningful change that is supported by independent advice and a transparent and public process, and they will have regard to the findings and options identified by the report in determining and implementing appropriate reforms, consistent with their obligations including under the competition law.

To achieve this, the independent review will:

• Build on the Future of Financial Advice (FOFA) reforms by identifying and collating the existing product sales commissions and product based payments that apply in relation to the sale, offer and distribution of identified banking products to retail and small business customers.
• Assess whether and how product sales commissions and product based payments in retail banking could lead to poor customer outcomes, including identifying and collating examples as part of building a framework to assess whether the payment could result in poor customer outcomes.
• Identify and test options for strengthening the alignment of remuneration and incentives and customer outcomes by either removing or changing those product sales commissions and product based payments which could lead to poor customer outcomes.
• Identify options to guide potential responses for banks, including whether regulatory approvals or other actions are needed to enable banks to make any changes or take actions to address the relevant issues.

As part of the review, the reviewer will be conscious of factors such as competition and customer choice in retail banking in Australia as well as the importance of recognising and rewarding good performance.

Scope

Staff and roles in retail banking

The review will cover product sales commissions and product based payments received directly or indirectly by people selling banking products as a result of the number or value of products sold, offered or distributed to retail and small business3 customers. By focusing on roles in retail banking, the review may include bank staff who are employees, contractors and others in customer facing roles and non-customer facing roles, such as managers and supervisors, involved in selling, offering or distributing retail banking products to retail and small business customers.

In addition to bank staff, where payments are made by the banks to non-bank sales channels or intermediaries, such remuneration structures will be in scope.

Remuneration structures

Product sales commissions and product based payments will be reviewed where:

• They include fixed or at risk payments that are a direct or formulaic payment (either $ or %) for the sale of one product or multiple products or the gross revenue generated from those products, and may include performance bonus payments and other sales incentives.
• They are monetary or non-monetary and paid or given to staff or others (non-bank channels or intermediaries) by a bank.
• They could result in poor customer outcomes. The reviewer will need to build a framework in consultation with banks and stakeholders to assess whether the payment could result in poor customer outcomes.

Retail banking products

The types of retail banking products in scope of the review include:

• Basic banking products (e.g. transaction accounts, term deposits, travellers cheques)
• Non-cash payment products (e.g. travel money cards)
• General insurance products (except for personal sickness and accident)
• First Home Saver Accounts (FHSA)
• Consumer credit insurance (CCI)
• Consumer credit products (including mortgages, personal loans and credit cards), and
• Small business lending.

Scope exclusions

There have been extensive and significant changes to remuneration structures across financial services over the past few years. These changes have been due to legislative reforms as well as changes driven by the industry. The review is intended to build on these changes and now look at remuneration structures in retail banking.

The review will, therefore, not include product sales commissions or product based payments already addressed through other reforms and reviews. Specifically:

• Remuneration structures, product design issues and quality of advice regarding life insurance products as covered by the Review of Retail Life Insurance Advice (“Trowbridge Review”). The changes identified by this review have not yet been implemented. The banking industry supports fully implementing the recommendations of the Trowbridge Review and is committed to legislative reforms to support the industry making these changes to remuneration structures.
• Advice related business models that comply with the FOFA reforms and associated exemptions contained in law and regulations.
• Stronger Super reforms which removed the payment of commissions on default superannuation.
• Fee based commissions that are transparent to the customer (i.e. fee for service or fee for advice).
• Product sales commissions and product based payments made for the distribution of commercial insurance products through insurance brokers and other intermediaries, with the exception of CCI.
• Product sales commissions and product based payments received as a result of products sold, offered or distributed to wholesale customers including institutional banking customers, commercial banking customers and global asset fund managers.

Mortgage lending

The review will include product sales commissions and product based payments across mortgage lending. ASIC is currently reviewing the mortgage broking industry, and in particular the consideration of remuneration structures and payment arrangements in mortgage broking. The review will run in parallel with the ASIC review.

Banks are committed to an outcome that takes into account the ASIC findings. Any findings and options relating to mortgage broking will, therefore, align with the ASIC review timeline and wait for the completion of the ASIC review.

Customer outcomes

The reviewer will also be asked to provide observations and insights from the review to assist the banks ensure they have overarching principles on remuneration and incentives to support good customer outcomes and sound banking practices, the scope of which is broader than retail banking.

The development of overarching principles on remuneration and incentives is another initiative in the industry announcement on 21 April 2016.

 

Commenting on the review, ABA Chief Executive Steven Münchenberg said.

“Banks recognise that how they pay staff is an important factor in determining community trust and confidence in banks,”

“We want to ensure that across the banking industry when people are rewarded for selling products and services they are putting customers’ interests first,” he said.