Former Australian Public Service Commissioner Stephen Sedgwick will lead a review into bankers' pay and commissions.
The Australian Bankers' Association (ABA) announced on Tuesday it had appointed Mr Sedgwick and a panel of experts to conduct an independent, industry-funded, review of retail banking remuneration.
They will investigate how commissions and payments made to bank staff and third parties, such as mortgage brokers, could be leading to conflicts of interest that mean customers receive advice that is against their best interests.
It comes as the banking industry breaths a collective sigh of relief having narrowly escaped a royal commission into its practices.
Opposition leader Bill Shorten, who conceded the recent federal election to Prime Minister Malcolm Turnbull on the weekend, had promised to establish a royal commission into the banking industry if elected.
While the banks have won a reprieve from the scrutiny of a royal commission the industry remains under heightened pressure from regulators. The Australian Securities and Investments Commission is conducting its own review into remuneration structures in the mortgage broking industry.
The country's four largest retail banks - Commonwealth Bank of Australia, Westpac Banking Corp, ANZ Banking Group, and National Australia Bank - all operate "vertically integrated" business models. This means that across their different divisions they both manufacture and sell financial products. Critics argue this model, combined with poorly structured pay and other incentives, can lead to the pushing of in-house products even when they are not the most suitable option for clients.
Damage control
The bankers' lobby promised to establish its own review into conflicted pay, as well as a separate review of the banking code of practice, in April as it shored up support to stave-off the royal commission push.
"Banks recognise that how they pay staff is an important factor in determining community trust and confidence," ABA Chief Executive Steven Münchenberg said.
"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.
The reputation of the major banks have taken a beating in recent years amid a slew of scandals over poor advice from within financial planning divisions, and more recently ASIC's high profile investigation of the big four's involvement in rigging the bank bill swap rate.
Remuneration in the wholesale and institutional banking sectors will be outside the scope of this review.
"This review builds on the Future of Financial Advice reforms which have brought about significant changes to remuneration structures across the financial services industry," Mr Münchenberg said.
The retail banking remuneration review will run till September 9 and is expected to report by as early as December, with a commitment to deliver findings by the end of March 2017.
Expert advisers
Mr Sedgwick previously led a major Capability Review of the Australian Public Service in 2013 that included an examination of incentive structures for senior government employees.
Assisting Mr Sedgwick on the ABA's retail banking remuneration review will be competition and legal expert Gina Cass-Gottlieb from Gilbert + Tobin Lawyers, and remuneration expert David Heazlett from Mercer.
A stakeholder advisory panel has been formed with: Consumer Action Law Centre chief executive Gerard Brody, Finance Sector Union national assistant secretary Geoff Derrick, National Seniors advocate Sarah Saunders, and Professional Standards Authority boss Deen Sanders.
Details of the retail banking remuneration review come after the ABA said last week it had appointed former ASIC executive turned corporate governance adviser Phil Khoury to head its review of the banking code of practice, with a mandate to recommend ways to improve consumer and whistleblower protections.
Former Commonwealth auditor-general Ian McPhee was appointed in May to oversee the banking industry's engagement with and response to both reviews.
