Risk of commission-related incentivisation “not insignificant”

by Miklos Bolza18 Jan 2017
A new report on the retail banking remuneration review has warned that the use of upfront and trailing commissions and their effect on incentivising sales may potentially lead to poor customer outcomes.
 
In the Issues Paper on Remuneration in Retail Banking released yesterday (17 January), independent reviewer Stephen Sedgwick AO said industry risks were “amplified” through the use of accelerators such as larger commissions for greater volumes of sales through the broker channel.
 
The review which was commissioned by the Australian Bankers' Association said that the banks’ reluctance to move away from commission-based arrangements suggested that “the risk of commission-related mis-selling was not insignificant”.
 
“Indeed, data was presented to the review that suggested that third-party mortgages are likely to be larger, paid off more slowly, and more likely to be interest-only loans than those provided to equivalent customers who dealt directly with bank staff.”
 
However, he added that this data was “suggestive rather than conclusive” given the fact that mortgages need to satisfy a bank’s credit assessment and responsible lending requirements at all times.
 
With the growth of the third party market segment, Sedgwick said that brokers provide a service valued by mortgage holders. Thus, any move to eliminate or reduce commissions in Australia would need to maintain a competitive balance.
 
Another area of risk was that while banks implemented risk mitigation devices to protect against mis-selling within (including compliance checks and performance management), they were not employers of third party channels and thus may not have as many options available to combat improper behaviour, he said.
 
“Usually banks use contractual terms to enforce appropriate behavioural norms, which in practice may be enforced more readily in a franchise or profit-sharing model than otherwise.”
 
With ASIC currently reviewing the mortgage broking industry, he said the retail banking review would examine ASIC’s report once it was published to gain further insights on the matter.
 
Sedgwick called for further information on a number of areas relating to third party channels and asked for submissions on the following questions:
  1. Is there sufficient evidence to support a case for banks to discontinue the practice of paying volume-based commissions to third parties in respect of new and increased mortgages?
  2. If a move away from commissions cannot be justified, should banks desist from paying on the basis of accelerator-like arrangements (including bonus commissions)?
  3. Is there evidence that the contractually-based risk mitigation devices available to banks in respect of third parties are deficient in avoiding poor customer outcomes?
Submissions can be sent to [email protected].
 
What do you think of the Retail Banking Remuneration Review and the claims in this Issues Paper? Please let us know in the comments section below.
 
Related stories:
 
ASIC still finalising remuneration review
 
63% of clients willing to pay broker direct
 
Ban on broker commissions “unlikely”