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Banking businesses in Australia need to ensure that any incentive payments or employee remuneration schemes comply with new requirements and in particular are designed to avoid incentivising poor practices and negative consumer outcomes.
Mortgage Broker reforms introduced by the Australian Parliament are intended to have a similar effect.
In April 2016, the Australian Bankers’ Association (as it then was) commissioned former Public Service Commissioner Stephen Sedgwick AO to conduct a review of, and make recommendations in relation to, ABA member banks’ variable remuneration and incentive arrangements covering their bank staff and third parties selling retail banking products such as deposit accounts, mortgages, and credit cards. The Review was commissioned as part of a broader plan to address bank culture issues in response to sustained industry criticism.
The Sedgwick Review Final Report, completed in April 2017, recommended that incentives no longer be paid to any retail staff of banks based directly or solely on sales performance. Its specific recommendations in relation to remuneration structures for retail bank staff were as follows:
Mr. Sedgwick said these changes should be implemented by no later than each bank’s 2020 performance year [Rec 1]. He also made recommendations regarding the remuneration of third parties (mortgage brokers and aggregators); as well as broader recommendations around governance, culture, and performance management.
On behalf of its members, the ABA committed to implementing the Review recommendations following the release of the Sedgwick Report.
A follow-up implementation assessment, also undertaken by Mr. Sedgwick and released in 2019, found that, although considerable work remained to be done in implementing the recommendations in full, “substantial progress” had been made in delinking sales directly to reward for front line staff, including for specialist bankers such as home lenders and their managers.
According to the ABA website [https://www.ausbanking.org.au/policy/earning-back-trust/remuneration/]:
By the end of 2020, the industry will have reformed its remuneration structures to minimise the prevalence of financial targets as core indicators of staff performance. The revised structures will be balanced with other measures such as customer outcomes achievement and risk focus.
In addition, several banks have announced changes in recent years that go further than the Sedgwick Review recommendations. For instance, several have discontinued the payment of variable remuneration to tellers altogether, and some ABA members have removed, or are in the process of removing, variable remuneration for other customer-facing staff as well.
The most recent example of this is Westpac’s decision, announced in August 2020 [https://www.westpac.com.au/about-westpac/media/media-releases/2020/19-august/], to remove all short-term incentives for, and increase the fixed pay of, over 4,000 branch and “customer care” employees of the bank and its subsidiary brands from 1 October 2020. This follows Westpac’s decision in 2019 to move to a fixed pay only remuneration structure for all its tellers.
The Final Report of the Financial Services Royal Commission [FSRC], released in February 2019, identifies commission payments and variable remuneration structures at all levels as a key driver (if not the key driver) of the poor practices and negative consumer outcomes identified by the Commission. As the Report states:
Very often, the conduct has broken the law. And if it has not broken the law, the conduct has fallen short of the kind of behaviour the community not only expects of financial services entities but is also entitled to expect of them…
Rewarding misconduct is wrong. Yet incentive, bonus and commission schemes throughout the financial services industry have measured sales and profit, but not compliance with the law and proper standards. Incentives have been offered, and rewards have been paid, regardless of whether the sale was made, or profit derived, in accordance with law.
To address his concerns regarding the distorting impact of industry remuneration structures, Commissioner Hayne called for, among other things, a radical overhaul of the way mortgage brokers are paid, including a phasing out of all commission-based remuneration. He also called for APRA to overhaul its prudential standards and guidance in relation to the remuneration systems of ADIs and other APRA-regulated entities and to give elevated attention to non-financial risk factors. These aspects are further discussed under Related Developments below.
In relation to the remuneration of front line or customer-facing staff, Hayne’s approach (set out on pages 367 – 374 of the Final Report) was more incremental. The Final Report notes evidence of, and acknowledges, that “Banks have recently made, and are continuing to make, significant changes to the ways in which they remunerate front line staff” as they implement the recommendations of the Sedgwick Review Report, discussed above.
The “full” implementation of the Sedgwick recommendations “both in spirit and letter” was, the Report continues, an “important first step towards improving front line remuneration practices”, highlighting various aspects of those recommendations. However, implementation of the Sedgwick recommendations should only be seen as a first step:
… As I have sought to emphasise above, banks must continue to give frequent and considered thought to how their variable remuneration systems are structured: to whether they are geared not only to what employees do but how they do it.
The commentary then proceeds to highlight evidence of bank practices and proposed changes that Commissioner Hayne regards as appropriately geared to the how as well as the what, following which two summary recommendations are set out:
In its initial response to the FSRC Final Report, the Government indicated that it “supported” the Commission’s recommendations relating to staff remuneration. It went somewhat further in its follow-up Financial Services Royal Commission Implementation Roadmap (August 2019), stating that it “expected” banks to implement the Sedgwick recommendations “as soon as possible”.
Beyond indicating its expectations, the Government did not commit to, and has not since taken any further action in relation to, the recommendations.
Following the publication of the Implementation Roadmap, Commonwealth Treasury advised the Customer Owned Banking Association that the Government’s expectation that banks would fully implement the recommendations of the Sedgwick Report extended to all ADIs, not just ABA member banks.
In response to recommendations of the FSRC Final Report, legislation was enacted early in 2020 to amend the National Credit Act to require mortgage brokers to act in the best interests of consumers when providing credit assistance. This legislation also bans brokers and aggregators from receiving (and credit providers, employers, and intermediaries from giving) conflicted remuneration as prescribed by the Regulations.
Regulations are currently being developed to address various aspects of broker commission arrangements, as recommended by Commissioner Hayne, including banning campaign and volume-based commissions and payments, limiting soft dollar benefits, and requiring the value of up front commissions to be linked to the amount drawn down by the borrower (instead of the loan amount). After intense advocacy by the broker industry, the Government decided not to enact the FSRC recommendation that the payment of up front and trail commissions to brokers be phased out altogether. A further review of this issue will be undertaken in 2022.
The mortgage broker reforms are scheduled to commence on 1 January 2021, following a six-month deferral announced by ASIC in May 2020 in response to the impact of the COVID-19 pandemic.
In July 2019, APRA commenced consulting on a new cross-industry Prudential Standard on remuneration, releasing a consultation paper and draft Standard CPS511 [https://www.apra.gov.au/consultation-on-remuneration-requirements-for-all-apra-regulated-entities]. APRA’s stated intention was to strengthen reporting entities’ remuneration frameworks and incentive structures so they “better align with the long-term interests of entities and their stakeholders, including customers and shareholders”.
APRA indicated that the development of the new Standard responded to previous reviews it has undertaken (including its Inquiry into CBA completed in 2018), as well as the recommendations of the FSRC’s Final Report (Recs 5.1 – 5.3).
APRA has indicated that it intends to resume work on the CPS 511 consultation in Q2 of FY 20-21, after suspending this work (and nearly all its policy reform consultations) in March2020 as part of its response to the impact of the COVID-19 pandemic.
In light of the developments outlined above, all banking institutions that have remuneration incentive arrangements in place for their staff should ensure their arrangements align with the recommendations of the Sedgwick Review Report.
 Retail Remuneration Review – Assessment of progress (February 2019) is available here: https://www.ausbanking.org.au/wp-content/uploads/2020/07/Remuneration-Assessment-Paper-Final.pdf
 This picks up an earlier comment at p.368: “Focusing only on what is to be sold is not enough. How the employee does the job is at least as important as what the employee does.”
 Restoring trust in Australia’s financial system, available here: https://treasury.gov.au/sites/default/files/2019-03/FSRC-Government-Response-1.pdf
Regulation changes in financial services are happening at an average of 220 alerts a day, or one every 7 minutes. To mitigate this risk, some organisations are spending up to 970,000 hours in staff training! Training is a major part of the solution, but how can we be sure this training works? How do we measure the value to our businesses? Importantly, how do we ensure it doesn’t become a drain on valuable company time?
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