Bank workers union FIRST Union is calling on New Zealand's Australian owned banks to adopt recommendations on retail banking practice and culture contained in a recent report commissioned by the Australian Bankers' Association (ABA).
As reported by interest.co.nz last week, the Australian parents of NZ's big four banks quickly confirmed they will implement recommendations from a major industry report on remunerating staff for selling core bank retail products. The report by ex-Public Service Commissioner Stephen Sedgwick is on product sales commissions and product based payments in Australian retail banking. It focused on bank staff and third parties who receive payments for selling bank products such as deposit accounts, mortgages and credit cards.
Sedgwick's retail banking remuneration review concluded there's insufficient evidence of significant systemic risks of poor outcomes for customers to support an outright ban on all product-based payments in retail banking. Nonetheless, he said some current practices carry "an unacceptable risk" of promoting behaviour that's "inconsistent with the interests of customers and should be changed."
"Some of these relate to management practices that may reduce the effectiveness of the bank's risk mitigation strategies. Other practices relate to the way incentives and remuneration are structured. The need for change is true of both direct, ie staff, and some third party channels," Sedgwick said.
Sedgwick's 21 recommendations are listed at the foot of this article in full. They include that the ABA commission an independent reviewer to report publicly in three years about how well banks have changed their practices and implemented the recommendations, and assess whether further regulatory or legislative change is required.
NZ banks should adopt the 'landmark' Sedgwick recommendations
The ABA said Australian banks "will change the way they pay and reward their retail staff to deliver better banking for customers." ANZ quickly confirmed its commitment to implementing Sedgwick's recommendations, as did BNZ's parent National Australia Bank, ASB's parent Commonwealth Bank of Australia (CBA), and Westpac.
In NZ, FIRST Union said executives at ANZ NZ, ASB, BNZ and Westpac NZ should adopt the Sedgwick recommendations. FIRST Union national organiser for the finance sector Tali Williams described Sedgwick's work as “a landmark report.”
“Bank workers on both sides of the Tasman have been saying for years that they’re under so much pressure to sell that they’re struggling to do their job properly. Something has to change and it’s encouraging to see the Sedgwick report support this," said Williams.
He notes the recommendations include measures to shift retail banking culture to a service first approach from a sales first approach.
“In New Zealand and Australia people working in retail banking are under pressure from above to ‘sell, sell, sell’ with disciplinary action and even the threat of job loss if they don’t, but our members want to put customer service before sales," said Williams.
“There has to be a culture change. This is what’s so encouraging about the Sedgwick report, it’s calling on bank executives to put service first. We’re willing to work alongside the major banks to help implement the culture change called for in this report,” Williams said.
FIRST Union says it represents a little over 3,000 staff across ANZ NZ, ASB, BNZ and Westpac NZ, with nearly 1,300 of these at Westpac and just under 1,100 at ANZ NZ. Combined, the four banks have about 21,700 staff in total.
NZ banks 'support customer first obligations'
A spokesman for ANZ NZ, this country's biggest bank, said ANZ NZ regularly assesses its remuneration approach to ensure it delivers the best results for customers, staff and the business.
"We’ll look at the [Sedgwick] report to see if there’s anything that we could implement to help us achieve these goals," the ANZ NZ spokesman said.
A spokeswoman said Westpac NZ was reviewing the Sedgwick report and assessing the impact on its existing remuneration structures.
"It is our belief that our practices put the customer first, but we will look to implement any changes that enhance current practices," the Westpac NZ spokeswoman said.
A BNZ spokeswoman noted NZ's Financial Advisers Act, which is being reviewed to include new customer first obligations, and guidance like the Responsible Lending Code that's designed to ensure conflicts of interest are appropriately managed in sales of financial products.
"BNZ is committed to honouring both the letter and the spirit of these laws and guidelines. Any changes we may make in the future will be done with customer front of mind, and in consultation with our staff as part of our normal employment negotiations. We look forward to ongoing and constructive conversations with FIRST Union on this matter," the BNZ spokeswoman said.
And an ASB spokeswoman said; "ASB regularly reviews practices and processes to ensure they provide the best outcomes for customers, and will be looking at the Sedgwick report recommendations to see if there is anything we can adopt."
Meanwhile, New Zealand Bankers' Association CEO Karen Scott-Howman last week told interest.co.nz the Sedgwick report broadly discusses issues of trust and confidence in the Australian banking environment.
"Here we’re addressing similar issues through the Financial Advisers Act review. The review proposes new customer first obligations for financial advisers. This means advisers putting customer interests ahead of their own, regardless of their financial incentives and sales targets. We support this approach and are working closely with [government] officials to help ensure a practical way of achieving this aim," Scott-Howman said.
Slimming down reward payments
Sedgwick's recommendations include that banks remove variable reward payments and campaign related incentives directly linked to sales or the achievement of sales targets. Variable reward payments should no longer include; accelerators related to financial measures, accelerator-like modifiers related to financial measures, other mechanisms related to financial measures that have an accelerator-like effect on the value of variable rewards available, and financial gateways, including but not limited to those relating to the number or value of cross sells.
Additionally Sedgwick recommends variable reward payments should be a relatively small portion of fixed pay.
In terms of mortgage brokers, who the Australian Securities and Investments Commission (ASIC) estimates lenders paid more than A$2 billion in commissions during 2015, Sedgwick said banks should cease providing volume based incentives in addition to upfront and trail commissions, cease non-transparent soft dollar payments in favour of more transparent methods to support training etc, and no longer increase the incentives payable to brokers when engaging in sales campaigns.
The Sedgwick review is intended to build on Australia's Future of Financial Advice reforms. It follows last month's review of mortgage broker remuneration by ASIC with its six proposals for consultation aimed at improving customer experiences. Sedgwick notes on mortgage brokers his view "generally aligns" with ASIC's.
'Cause has been found to review the market in Australia, this is not the case in New Zealand'
In response to ASIC's recent report Rod Severn, CEO of the Professional Advisers Association which amalgamated with the New Zealand Mortgage Brokers Association in 2012, told interest.co.nz NZ's mortgage market is "very different" to Australia's and there's no cause to review the NZ market.
In NZ Severn estimates advisers have about 35% marketshare versus 54% in Australia. Thus banks here have a greater direct presence in the market here.
"Generally speaking, banks in New Zealand require individual advisers to be part of an aggregator group. And importantly, banks do not own aggregator groups in New Zealand, so there aren’t the ownership-disclosure issues here as there are in Australia. Aggregators operate differently in New Zealand; they are essentially a network or group of advisers with common processes, structures etc," said Severn.
"Commission models in New Zealand vary from bank to bank – i.e. some banks pay trail and some don’t. There have been no indications that mortgage advisers in New Zealand are taking advantage of soft dollars/bonuses at the expense of the consumer."
Furthermore in NZ Severn said banks don’t charge higher interest rates to the home buyer to cover advisers' commissions.
Severn said, unlike here, Australian banks have been under the spotlight from ASIC for some time and, in conjunction with the Future of Financial Advice report and subsequent investigations, cause has been found to review the market in Australia.
"This is not the case in New Zealand," said Severn.
"A home buyer in New Zealand can get a mortgage via an adviser and pay the current bank rate, and the adviser gets paid their entitled commission. Or the home buyer can go direct to the bank and eliminate the adviser and therefore the commission the bank would have paid the adviser, and pay the same current bank rate, even though the bank is paying no commission," said Severn.
"Home buyers who work with an adviser often benefit from reduced interest rates due to the knowledge and expertise of their adviser in negotiating with the lender on their behalf."
Below are Sedgwick's 21 recommendations in full.
1. I recommend that all banks begin to implement the recommendations in this Report as quickly as systems and other changes can be introduced. If transitional arrangements are necessary, full implementation should be achieved by no later than the performance year that begins in 2020.
Note: This recommendation applies to retail bank staff and third parties (Recommendation 2 to 21).
I recommend that the following apply to all retail bank staff roles in scope for this Review, namely Tellers, Sellers (including Home Lenders and in-scope Financial Advisers) and Managers:
2. Banks remove variable reward payments and campaign related incentives that are directly linked to sales or the achievement of sales targets (including, but not limited to cross sales, referral targets, and profit and revenue targets);
Note: Some banks remunerate in-scope Financial Advisers under a fee for service model in which variable reward payments are not related directly to the products sold/ advised on. Fee for service or fee for advice models have been specifically excluded from this Review as per the Terms of Reference.
3. Eligibility to receive any variable reward payment should be based on an overall assessment against a range of factors that reflect the breadth of the responsibilities of each role;
Note: a number of approaches may meet this criterion, including approaches which involve:
1. Appropriately constructed scorecards; and
2. Assessments based on manager discretion.
However, some banks will need to revise how they apply scorecards to fully meet this requirement (see Section 4.2). Banks should be able to demonstrate credibly that any manager discretion is applied in ways consistent with my recommendations. Discretion could be applied to establish an overall assessment (or rating) or the amount of variable reward or both.
4. Any financial measures included in an overall assessment consistent with Recommendation 3 should:
• Be product neutral (i.e. not encourage the sale of one product over another); and
• In the case of a scorecard, together attract a maximum effective weight of 50 percent as quickly as systems and other changes can be introduced, falling to 33 percent or less by 2020;
5. All customer measures are genuinely customer-centric and tailored to the role being assessed, and progressively reflect a focus on customer outcomes not just customer loyalty/ satisfaction;
Note: Some banks classify as ‘customer’, measures that are arguably financial in character such as cross-product sales or the number of products accessed by each customer and the like. These will need revision to fully satisfy this recommendation.
6. Credible behavioural or equivalent values gateways be applied to determine whether an individual can access any variable rewards to which they might otherwise be entitled;
Note: In general terms, these minimum gateways would require ethical behaviour, a customer focus and similar behavioural traits.
7. Variable reward payments no longer include any:
• Accelerators related to financial measures;
• Accelerator-like modifiers related to financial measures;
• Other mechanisms related to financial measures that have such an accelerator-like effect on the value of variable rewards available; and
• Financial gateways, including but not limited to those that relate to the number or value of cross sells;
8. Variable reward payments ultimately amount to a relatively small proportion of fixed pay, with a progressive reduction in the maximum variable reward amount payable in any schemes that require a transition period to implement this recommendation.
I further recommend that:
9. Each bank formally examine its workplace culture and institute formal processes to redress any conscious or unconscious bias towards sales in preference to ethical behaviour and customer service;
Note: There is, of course, no necessary conflict between ‘sales’ and either ethical behaviour or a customer focus. The intention is to make clear that the latter is to prevail in the event that circumstances may place them in conflict.
10. Each bank examine its performance management system and make changes as necessary to ensure that the embedded signals and incentives to staff are aligned with Recommendations 2 to 8;
11. Each bank ensure Managers reflect predominantly an ethical and customer focus when: communicating with staff, exercising any discretion while managing performance, and in allocating variable reward payments;
Note: Recommendations 9, 10, 11 and 12 may require a significant investment in leadership development and management skill.
12. Each bank reconsider what use is made, if any, of leaderboards, recognition programs and campaigns as well as any other methods that have similar effect (including informally in branches or call centres) and ensure any continuing role in using these methods is consistent with the intention to de-emphasise sales relative to ethical behaviour and customer outcomes;
Note: Continued use of leaderboards or sales-centric recognition schemes may be perceived by some as the continuation of a sales culture.
13. Consistent with the objectives of the recommendations for frontline staff, the variable reward payment and performance management arrangements of all senior and (retail bank) middle level executives be based on:
a. Their overall performance against a number of measures that reflect the nature and breadth of their role; with
b. Customer oriented, ethical behaviour and non-financial measures accounting for the dominant factors in that assessment;
14. Boards and Chief Executives:
a. Visibly and effectively oversee the implementation of these recommendations for at least the next five years and report publicly, in their Annual Report to shareholders, for example, on how retail staff are remunerated and their performance assessed; and
b. Ensure that effective, safe channels are in place to obtain feedback from frontline staff about their perceptions of the effectiveness of efforts to reform the bank’s culture, performance management and remuneration arrangements, including in respect of whistleblower arrangements;
15. The ABA commission an independent reviewer to report publicly in three years about how well banks have changed their practices and implemented the recommendations and assess whether further regulatory or legislative change is required.
16. In respect of remuneration of Mortgage Brokers:
a. Banks cease the practice of providing volume based incentives that are additional to upfront and trail commissions;
b. Banks cease non-transparent soft dollar payments in favour of more transparent methods to support training etc.; and
c. Banks cease the practice of increasing the incentives payable to Brokers when engaging in sales campaigns;
17. Banks adopt, through negotiation with their commercial partners, an ‘end to end’ approach to the governance of Mortgage Brokers that approximates as closely as possible a holistic approach broadly equivalent to that proposed for the performance management of equivalent retail bank staff;
Note: These arrangements are not expected to exactly duplicate those applied to staff. A scorecard would meet this recommendation but is not the only viable approach.
18. Banks adopt approaches to the remuneration of Aggregators and Mortgage Brokers that do not directly link payments to loan size and reflects a holistic approach to performance management (see Recommendation 17):
a. To establish in a timely fashion how best to address Recommendations 17 and 18, banks with a significant recourse to the Broker channel, but at least the four major banks, each report regularly to ASIC on their progress; and
b. With enhanced oversight by ASIC (and other regulators as necessary) to monitor market responses;
Note: Options for alternative payment arrangements could include: commission based payments that take the loan to value ratio (LVR) or the loan type, or the quality of the advice given to the customer into account; and, preferably arrangements between lenders, Mortgage Brokers and Aggregators that are not product based such as lender-funded fees for service. Trailing payments of some kind might continue (with existing trail commissions grandfathered).
An issue is the general feasibility of alternative arrangements and whether such changes will require regulatory reform. An overarching principle, however, must be that competition and the viability of mortgage broking is preserved. Accordingly, any fees for service must be lender rather than customer funded. Although a new payment structure may emerge and the impact of some broad parameters examined, prices consistent with it should be left to commercial negotiations between the parties, as currently. This and Recommendations 16 and 17 apply to Mortgage Brokers and any authorised representatives.
19. The independent review proposed under Recommendation 15 or, at the latest, any post implementation review of the operations of the proposed product intervention power for ASIC, examine whether the government should legislate to extend ASIC’s intervention powers to address conflicted remuneration in circumstances in which the industry cannot or does not address Recommendations 16, 17 and 18 adequately without such an intervention.
Note: I understand that ASIC has a range of powers, whether through a legislative instrument (such as a class order) or a new licence condition, for example, that could be employed if the industry cannot or does not address this issue adequately without such an intervention. I encourage ASIC to explore such possibilities and exercise such powers as necessary to effect beneficial change. However, this recommendation supports the creation of another avenue if ASIC’s powers are currently insufficient.
20. In respect of Introducers and Referrers:
a. Banks examine their governance of these arrangements to ensure that existing practices are appropriate; and
b. ASIC, in due course, investigate whether the upfront commission paid to Introducers and Referrers is justified;
21. Banks that provide products or services through Franchisees examine their governance and, as appropriate, remuneration arrangements and seek to make changes that are consistent with the recommendations of this Review.