ABA Banking Review – Page 3 – Digital Finance Analytics (DFA) Blog

Bank employees speak out on ‘broken’ system

A broken incentives scheme is pressuring bank employees to act against the interests of customers, insiders have revealed.

Anonymous complaints from bank tellers and other staff published this week paint a disturbing picture of a workforce that is stressed, overworked, undertrained and ethically conflicted.

“To keep their jobs and feed their families, they are desperate and will do what is demanded of them – exceed their target – however they have to,” one bank worker wrote.

“The whole culture of selling products to customers even if they don’t really need them is not ethical,” wrote another.

“Sales target [is] more important than compliance and the customer,” wrote a third.

These and many other damning survey responses collected by the Finance Sector Union (FSU) are proof, according to the union, that the “root cause” of the recent bank scandals is a remuneration system that forces employees to foist insurance, savings accounts, retail super funds, loans, credit cards and other products on customers who don’t need them.

FSU acting national secretary Geoff Derrick told The New Daily that bank employees are “just as likely to be victims of the system as the consumers” because their bonuses and pay are linked to demanding sales targets.

“These are targets imposed from the highest levels of the industry and they are forced down the food chain to the front line,” Mr Derrick said.

“If we change the pay system and recognise banking and finance as a professional service where there is a best interest duty owed to the customer, and pay people accordingly, then we will go a long way to fixing the problems we currently face.”

The FSU’s call for reform coincided with a remuneration overhaul by British investment fund Woodford Investment Management, which this week abolished bonuses and put all staff on a flat salary. Its founder, Neil Woodford, said in a statement that bonuses are “largely ineffective” and can lead to “wrong behaviours”.

Financial sector regulation expert Dr Andy Schmulow, a lecturer at The University of Western Australia, said the problems complained of by bank employees were the “trickle-down effect” of a “wider incentive culture”.

“Counter staff are experiencing a trickle-down effect of a wider incentive culture which puts profits first, second and third, and where banks are measured only on profit and face no real sanctions, which is why compliance is either dispensed with or ignored.”

Dr Schmulow said the vertical integration of banks, whereby they distribute the very same financial products they create, has been a “disaster” for the industry and the nation.

“It leads to a misallocation of productive investment, either through poor choices foisted on consumers, or through consumers withdrawing from financial advice all together,” he said.

Outrage at the banks is building. Even some in the Turnbull government are calling for action. Liberal backbencher Warren Entsch has proposed the creation of a bank tribunal to hear the complaints of disgruntled customers who cannot afford court action. Prime Minister Malcolm Turnbull has said he is receptive to the idea.

But the FSU’s Mr Derrick warned that focussing on a bank tribunal could “sidetrack” the push for a bank royal commission, which he said would be more likely to trigger an overhaul of banker pay.

The FSU survey was conducted in response to the Sedgwick review of banker remuneration currently being conducted by the Australian Bankers Association (ABA).

ABA chief executive Steven Münchenberg responded to a request for comment by praising the Sedgwick review and dismissing a royal commission as “unnecessary”.

“An independent review is being conducted by a former Australian Public Service Commissioner into how bank staff are paid, to help ensure that when people are rewarded for selling products and services they are putting customers’ interests first. This review commenced on 12 July and the Finance Sector Union is a member of the Stakeholder Advisory Panel providing input into the review.

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.

ABA released details of the independent review of the Code of Banking Practice

The Australian Bankers’ Association has today released details of the independent review of the Code of Banking Practice, which sets standards of good conduct for banks.

The Code of Banking Practice (the Code) is the banking industry’s code of conduct which sets standards of good banking practice for banks to follow when dealing with their individual and small business customers and their guarantors. The latest version for the Code is known as the Code of Banking Practice (2013).

The Code provides for a review of the Code every five years or earlier if the member banks of the Australian Bankers’ Association (ABA) request the ABA to do so. As part of the industry initiatives announced on 21 April 2016, the ABA’s member banks have requested the ABA to commission an independent review of the Code and to complete this review by 31 December 2016. The ABA commissions this Code review on 7 July 2016. Here are the terms of reference.

Objectives

The banking industry recognises that customers and the wider community expect banks to make sure they have the right culture, the right practices, and the right behaviours.

The Code review will make sure the offer of banking products and services is done in a way that further lifts standards, accessibility and transparency across banking and bolsters the existing strength of the regulatory framework.

Banks are committed to improving their practices and continuing to meet customer needs and community expectations. We want to make sure our Code of Banking Practice is effective in enhancing banks’ capacity to serve consumer interests and to building trust and confidence in banks.

To achieve this, the independent review will:

Consider the effectiveness of the Code and identify the relevance and operation of the Code and changes which have occurred in the legal and regulatory environment, including self-regulation, and changes anticipated in banking services

Understand and collate views about banking practices to ensure the Code continues to set standards for good banking practices building on banks’ legal obligations and other relevant industry codes, standards and guidelines and reflecting consumer needs and behaviour and community expectations

Make recommendations on how the banking industry can strengthen the operation of the Code and promote informed and effective relationships between banks and their individual and small business customers

Give attention to the initiatives contained in the industry announcement on 21 April 2016 and other recent initiatives and the extent to which these commitments should be contained in the Code, and

Ensure banks and consumers are clear about their rights and responsibilities and that the Code articulates the standards of behaviour expected of banks, including promotion of the Code.

Scope

The review will cover all provisions of the Code and any additional matters considered relevant to be included in the Code.

The Code reviewer will give specific attention to assessing and considering:

Purpose and role of the Code in setting the standards for good banking practices and the benefits that the Code provides to banks and their individual and small business customers.

Structure of the Code and clarity in communicating the standards for good banking practices to banks and their individual and small business customers.

The extent to which the Code demonstrates banks’ commitment to putting their individual and small business customers first.

The effectiveness of the key commitments of banks and whether these commitments meet consumer and community expectations to:

Promote better informed decisions about banking services.

Provide information about the rights and obligations of banks and their individual and small business customers in relation to banking services, including raising awareness of the legal and regulatory frameworks governing banks.

Act fairly and reasonably towards individual and small business customers in a consistent and ethical manner.

Comply with all relevant laws and regulations relating to banking services.

Take reasonable measures to provide relevant information and enhance accessibility for people in remote Indigenous communities, older persons and customers with a disability.

Provide hardship assistance to individual and small business customers experiencing financial difficulties.

Resolve complaints and disputes between banks and their individual and small business customers.

Provide appropriate staff training, including on discharging their functions, providing banking services and knowledge of the Code.

Promote the existence of the Code.

The role and mandate of the Code Compliance Monitoring Committee (CCMC), the appropriateness of the differences between the CCMC mandate and clause 36 of the Code, and incentives for compliance by banks with the Code.

The operation of the Branch Closure Protocol, taking into account the recent review and changes made to ensure the effective operation of the Protocol.

In addition, the Code reviewer will have regard to the following:

Definitions, including practical definitions of banking services and small business.

Recognition of the needs of communities in remote, rural and regional areas.

Dealing with the particular needs of agricultural small businesses with respect to banking services.

Direct debits and recurring payments made using a debit or credit card.

Notice provided by banks with regards to any changes with a banking service.

Guarantees provided by a person for the purpose of securing finance or a facility for another individual or small business customer and joint debts.

Laws and regulations covering banking services to individual and small business customers and the extent to which new legal obligations to act in the client’s best interest and responsible lending principles are addressed or require any amendment to the Code.

Treatment of disclosures and communications between banks and their individual and small business customers about products, services, and the costs of these products and services and the evolving technological developments in banking services and electronic communications, including the provision of bank statements to customers.

Sales and distribution and advertising and marketing practices of banks.

The extent the Code covers the practices and qualifications of intermediaries and others banks use in the course of providing banking services.

Commitments to accessibility and financial inclusion, including account suitability and basic bank accounts, financial literacy and the implications of technology developments on banking services.

The desirability for the Code to provide for banks to develop standards for communicating and dealing with vulnerable customers including older persons, customers with a disability and Indigenous customers.

The desirability of the Code to include minimum standards for working with small business customers in financial distress. For example, customer communication; notice period for enforcement actions; on request by the customer, disclosing independent valuation reports of its small business customer obtained by the bank and paid for by their customer; and ethical standards of receivers/ managers (particularly for rural properties with livestock).

The desirability of the Code to set a reasonable compliance timeframe for a small business customer to comply with a bank’s notice of demand and circumstances in which a minimum timeframe should not apply having regard to the provisions of clause 28 of the Code for the bank to work with the customer to try and help their customer overcome its financial difficulties with its credit facility.

The desirability of the Code to include minimum standards for the offer of credit cards, and specifically whether minimum repayment requirements or alternatives should be prescribed.

In addition, the Code reviewer is asked to consider whether the Code ought to comply, and whether it does comply with, ASIC’s Regulatory Guide 183: Approval of financial sector codes of conduct [RG 183]2.

Clause 14.3 of the CCMC mandate requires the CCMC to arrange a periodic review of its activities to coincide with a review of the Code. The Code reviewer is also asked to conduct a review of the activities of the CCMC concurrently with this review. This separate and independent review is given under instructions from the CCMC. More information about this review can be found at www.ccmcreview.cameronralph.com.au.

Independent Reviewer

The ABA has appointed Mr Phil Khoury, Managing Director, Cameron Ralph Pty Ltd, an independent person with relevant qualifications and experience to conduct this review.

In commissioning this Code review and identifying the Terms of Reference, the ABA has sought the views of the ABA’s Consumer Stakeholder Forum and a number of other stakeholders.

The Code reviewer will conduct the review publicly in consultation with:

consumer and small business organisations
financial services industry representatives
Finance Sector Union and employees of banks
relevant regulatory bodies
member banks, and
other interested stakeholders.

The ABA says:

“The Code of Banking Practice (the Code) is important in helping individual and small business customers understand how they can expect to be treated by their bank,” ABA Chief Executive Steven Münchenberg said.

“The independent review will determine if the Code continues to serve customers’ interests and it will make recommendations on how it could be improved,” he said.

Following consultation with stakeholders and banks, Mr Phil Khoury, Managing Director of Cameron Ralph Pty Ltd, has been appointed to conduct the review of the Code.

Mr Khoury will consult with banks, consumer and small business organisations, the Finance Sector Union and employees of banks, regulators and other stakeholders.

In April this year the ABA announced a review of the Code as part of major industry initiatives to build trust and confidence in banks. Mr Ian McPhee AO PSM is independently overseeing the industry initiatives, including this review.

Background:

The Code sets standards of good banking practice when dealing with individual and small business customers and their guarantors. The Code covers obligations for banks in areas including the offer of banking services, information and disclosure, complaints handling, customers with special needs and customers experiencing financial difficulty.

Banks that adopt the Code must reflect this in their contracts with their individual and small business customers and are therefore contractually bound by their obligations.

More information on the Code, including FAQ’s, is available on the ABA website.