Stephen Sedgwick AO today published the Final Report of his Independent Review
of product sales commissions and product based payments in retail banking in Australia (Review). These are payments linked to the number or value of products sold, offered, or distributed to retail and small business customers.
The Report makes 21 recommendations for change. Although the extent of change required will vary, almost every bank will need to change at least some of its practices to comply with these recommendations.
“The 21 actions I propose, if fully implemented in the spirit in which they are intended, will complement other initiatives the Australian Bankers’ Association (ABA) has underway in the Banking Reform Program and will assist in addressing a trust deficit that has emerged in the banking industry. They are deliberately intended to signal a sharp break with the past”, Mr Sedgwick said
“Adoption of these recommendations will mean that in-scope retail bank staff (importantly, including mortgage sellers) and their Managers:
- No longer receive incentives based directly or solely on sales performance;
- Instead, eligibility to receive any personal incentive payments will be based on an assessment of an individual’s contribution across a range of measures, of which sales (if included at all) will not be the dominant component; and the maximum available payments will be scaled back significantly for some roles.”
“Changing remuneration alone is not enough. Each bank should address the issues holistically. This means many banks should also revise their target setting, performance management, leader development and, most importantly, culture; and ensure they are aligned with the ethical, customer-centric philosophy that underpins my recommendations.”
Moreover putting greater emphasis on the customer, which lies at the heart of the proposed reforms, will require new approaches to measuring customers’ views about their service experience and the outcomes achieved.
A holistic approach also requires that individual banks adopt broadly equivalent reforms to the governance and remuneration of third party channels such as mortgage brokers as each determines for its own staff. “In my view, any changes, however, must preserve competition and the viability of that industry.”
The need for change in the mortgage broking sector is reinforced by the Australian Securities & Investments Commission’s (ASIC) recent report into that sector1
“Time is not on the side of the industry. I suggest that each bank quickly implement these proposals irrespective of whether they perceive other banks are moving similarly. Decisive action will clearly signal that each bank stands for ‘doing the right thing’ irrespective of what approaches its competitors adopt. “
Implementation should begin as soon as systems and other processes can be amended and by no later than 2020, if a transition period is required.
A consolidated list of the recommendations appears in Section 3 of the Report.
“Following an extensive process involving an examination of banks practices (here and abroad) and public consultations, 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 some current practices carry an unacceptable risk of promoting behaviour that is inconsistent with good customer outcomes and should be changed. Some of these relate to management practices that may reduce the effectiveness of the bank’s risk mitigation strategies. Others relate to the way incentives and remuneration are structured.”
“I have been heartened by the support that many banks have given to this process, in some cases publicly committing to implement my recommendations. Nonetheless, it is prudent that a further independent review be conducted in three years to assess progress in implementing these recommendations and examine whether regulatory or legislative change is required.”
Mr Sedgwick expressed his thanks for the support provided by the ABA, the banks and the community. “I have benefited enormously from submissions and open-minded discussions with many in the industry and elsewhere (including ABA member banks, some bank staff and their representatives, academics and consumer groups), and the guidance of the Stakeholder Advisory Panel. All have respected the independence of the Review.”
“I now call on the leaders of each bank to implement these recommendations quickly and in the holistic spirit in which they are intended, to minimise the risk of poor outcomes for customers and to help rebuild trust in their industry”.