Banks that use 'accelerator payments' to reward staff with a higher rate of commission as sales volumes increase could be encouraging bad behaviour to the detriment of customers, says former Australian Public Service Commissioner Stephen Sedgwick, who is investigating remuneration in retail banking.
However Mr Sedgwick, whose review forms part of the banking industry's attempts to re-establish public trust and avoid a royal commission after a wave of conduct scandals, said he has not uncovered evidence to suggest remuneration has created such risks as to warrant the outright banning of product-based payments. This was welcomed by the Australian Bankers' Association.
In a 73-page issues paper published on Tuesday afternoon, Mr Sedgwick did not name specific banks but said he had "tentatively identified some practices of some banks that have high risk of incentivising poor selling practices leading to poor customer outcomes, which those banks should consider changing".
He called out accelerator-type payments, which deliver significantly increased incentive payments as certain sales thresholds are achieved and are used by some banks for mortgage sales. They "may create increased risk if staff try to maximise their sales before the end of the incentive period," he said.
Pay which provides incentives based on cross-sales of products such as add-on insurance, or which deny access to incentives unless sales or cross-sales targets are also met, "deserve careful scrutiny" and should be simplified, he said. In addition, the use of "gateways", which refer to the conditions to be met before potential bonuses, commissions or product-based payments can be accessed, "is not necessarily consistent" with minimising the risk of mis-selling or poor customer outcomes.
Even though the Future of Financial Advice laws removed conflicted remuneration in financial advice, the laws did not extend to retail banking products like mortgages and credit cards. Mr Sedgwick said the "vast majority" of banks provide incentives, bonuses or product-based payments or sales commissions that are directly or indirectly related to product sales to at least some of their retail staff, or to third parties acting on their behalf – such as mortgage brokers.
While some banks had indicated they have scaled back the significance of product-related payments and strengthened checks and balances, and some said they intended to go further in this direction in 2017, other banks "argue that their culture has been historically strongly service oriented and significant change is not required".
He said he has "formed tentative views that some banks should re-examine elements of their present practices, and I concur with those who believe it is appropriate to reduce the emphasis on product-based payments whenever possible. This will reduce risk and help to rebuild public trust."
Australian Bankers' Association executive director of retail policy Diane Tate said banks "want to ensure that they pay their staff to do the right thing by customers, and we will work on any areas that need improving".
"Banks have committed to changing or removing payments that could lead to poor customer outcomes," she said, pointing to changes to practices in recent years "to place more of an emphasis on good behaviour rather than sales targets, in light of changing community expectations and regulatory requirements; however there is more to do."
Mr Sedgwick wants submissions responding to his report by February 10.
In a separate review, the Australian Prudential Regulation Authority is investigating the pay structures of senior banking executives as it increases its focus on bank risk culture.
