Public Service Commissioner Stephen Sedgwick AO was appointed by the ABA to review how bank tellers and other customer-facing bank employees, their managers, and third parties are paid by banks. The final report was released today. He concludes:
It remains my view that there is not sufficient evidence of significant systemic risks of poor outcomes for customers to support an outright ban on all product based payments in retail banking.
Nonetheless, as foreshadowed in the Issues Paper, some current practices carry an unacceptable risk of promoting behaviour that is inconsistent with the interests of customers and should be changed.
Some of these relate to management practices that may reduce the effectiveness of the bank’s risk mitigation strategies. Other practices relate to the way incentives and remuneration are structured. The need for change is true of both direct (i.e. staff) and some third party channels – a view reinforced by myreading of the Australian Securities & Investments Commission’s (ASIC) recent report into the mortgage broking sector.
The ABA says: Mr Sedgwick has concluded that while there are not systemic issues warranting the outright banning of product based payments, some practices need to be changed because they could promote behaviour inconsistent with customer interests.
“Mr Sedgwick has not only identified that remuneration arrangements need to improve, but also that it needs to happen alongside a change in culture and approach from management,” Ms Bligh said.
“Banks don’t underestimate the changes recommended by Mr Sedgwick. This will not be easy for banks and there will be challenges. Changes will need to be made to bank policies, workplace agreements, contracts, staff training programs, internal controls, and performance management systems.
“This is not just about payments; it’s about governance and leadership. It’s not just about bank tellers and their managers; it goes up the line.
“Banks have heard the criticism about the sales culture. The industry needs to embed a customer-focused culture so customers have confidence banks are doing the right thing by them,” she said.
Ms Bligh said individual banks would take action to make changes to their businesses, while any industry-wide response would need to consider competition and other legal obligations.
“Banks will focus on the best way to change payments for their employees,” she said.
“Mortgage brokers play an important role in supporting competition in the home loan lending market, and the industry wants to ensure competition is preserved and customer choice is maintained.
“The ABA will seek guidance from the Australian Securities and Investments Commission and liaise with the Australian Competition and Consumer Commission as appropriate, in particular around changing payments to third parties like mortgage brokers,” Ms Bligh said.
Mr Sedgwick’s final report contained 21 recommendations about what banks should do to ensure payments achieve better customer outcomes, including:
- No longer paying retail bank employees incentives based directly or solely on sales.
- Where incentives are paid, they should be based on a range of measures of which financial measures is not the dominant component.
- Incentives paid should be product neutral and no longer include payments related to additional products or cross-selling products.
- Examining workplace culture and leadership frameworks to ensure they are aligned with good customer outcomes.
- Increasing transparency of remuneration arrangements with third parties, such as mortgage brokers, including stopping payments directly linked to loan size and introducing more robust performance management like that used with employees.
“The ABA would like to thank Mr Sedgwick and his team for conducting a rigorous and thoughtful independent review,” Ms Bligh said.
More information on the Sedgwick Review, and a copy of his final report, is available at retailbankingremreview.com.au.
Background
On 16 March 2017, ASIC published its report into the review of mortgage broker remuneration.
Mr Sedgwick’s recommendations are consistent with ASIC’s findings and proposals to improve consumer outcomes and competition in the home loan market. Mr Sedgwick’s final report identifies how the ASIC proposals could be implemented by banks and the mortgage broking industry working together to protect consumer interests, increase transparency and promote competition.
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