RBNZ and FMA: Banks need to revise their sales incentive structures 'through all layers of management'

The Reserve Bank (RBNZ) and Financial Markets Authority (FMA) warn it isn’t good enough for banks to do away with sales incentives for frontline staff when those higher up the chain are still driven by financial performance.

Reporting back on their review of conduct and culture in New Zealand retail banks, the regulators acknowledge banks are “generally reducing their focus on sales performance”.

For example, ASB in July and ANZ, BNZ and Westpac in October removed sales targets for frontline retail staff.

While First Union (which represents bank staff) has applauded these moves, the RBNZ and FMA say “none of the changes announced by banks to date go far enough to create a sustainable culture of good conduct”.

They point out the FMA has undertaken a separate thematic review of banks’ incentive structures (to be published later this month), which has found “incentives schemes in place are highly sales focused, with sales performance typically determining the majority of a salesperson’s variable pay”.

What’s more, the RBNZ and FMA say the controls to manage the risk of inappropriate sales are “unlikely to be effective”.

Many of these controls address other risks, like staff manipulating sales data, poor customer experience and poor record-keeping.

“These may inadvertently identify poor customer outcomes, but they do not directly and systematically identify inappropriate sales.”

Change needed ‘through all layers of management’

Importantly, the RBNZ and FMA expect banks to revise their sales incentive structures “through all layers of management”.

Their sentiment echoes that of Kenneth Hayne, the head of the Australian banking royal commission, who in his interim report released on September 28 explained that basing senior management’s incentives on revenue will “inevitably” affect how they engage with more junior staff.

In a similar vein, the RBNZ and FMA say: “The degree to which senior management focuses on conduct is likely related to how they are incentivised.

“In all banks, a portion of the CEO’s remuneration was linked to the performance and outcomes of the bank, such as financial performance, risk management, strategy and customer relations.

“At six of the 11 banks [it reviewed] approximately two-thirds of the total remuneration for the CEO was based on these variable components.

“In some instances, incentives were linked only to short-term outcomes. This is likely to lead to short-term financial goals being prioritised over long-term customer outcomes.

“Even where CEO remuneration was linked to long-term outcomes, the measures mainly related to financial performance or parent bank considerations rather than customer outcomes or the behaviour of bank staff.

“Boards need to set clear expectations for management about achieving good conduct and culture outcomes.

“Any incentives for senior management need to appropriately balance short-term and long-term outcomes, and be aligned to good outcomes for customers as well as shareholders.”

2019 deadline

The RBNZ and FMA recognise “banks are commercial enterprises,” but say “sustainable profitability” is best achieved when customers understand the products and services they receive, and these are suited to their needs on an ongoing basis.

“In the absence of these criteria, customer confidence declines, as does bank profitability and financial system soundness and efficiency.”

The issue of incentives is the only one identified in the RBNZ/FMA report that calls for specific action within a set timeframe.

They say they expect banks to implement changes to their incentives programmes no later than the first performance year after September 30, 2019.

They will check in with banks to see how their planning is going in March 2019 and report on their responses.

“Any bank that does not, at that date, commit to removing sales incentives for salespeople and their managers will be required to explain how they will strengthen their control systems sufficiently to address the risks of poor conduct that arise with such incentives,” the RBNZ and FMA say.