15 July 2016

Bank Self-Scrutiny

The Australian Bankers’ Association (ABA) has commissioned an 'independent review of product sales commissions and product based payments', no doubt entirely unrelated to calls for a royal commission and subsequent enforcement.

The ABA states
The banking industry recognises that customers and the wider community expect banks to make sure they have the right culture, the right practices, and the right behaviours. 
Banks are committed to improving their practices and continuing to meet customer needs and community expectations. Making sure the remuneration structures of people selling our products align with customer outcomes is important for our businesses and trust and confidence across the banking industry. 
To achieve this, the independent review will:
• Build on the Future of Financial Advice (FOFA) reforms by identifying and collating the existing product sales commissions and product based payments that apply in relation to the sale, offer and distribution of identified banking products to retail and small business customers. 
• Assess whether and how product sales commissions and product based payments in retail banking could lead to poor customer outcomes, including identifying and collating examples as part of building a framework to assess whether the payment could result in poor customer outcomes. 
• Identify and test options for strengthening the alignment of remuneration and incentives and customer outcomes by either removing or changing those product sales commissions and product based payments which could lead to poor customer outcomes. 
• Identify options to guide potential responses for banks, including whether regulatory approvals or other actions are needed to enable banks to make any changes or take actions to address the relevant issues. 
As part of the review, the reviewer will be conscious of factors such as competition and customer choice in retail banking in Australia as well as the importance of recognising and rewarding good performance. 
Staff and roles in retail banking 
The review will cover product sales commissions and product based payments received directly or indirectly by people selling banking products as a result of the number or value of products sold, offered or distributed to retail and small business customers. 
By focusing on roles in retail banking, the review may include bank staff who are employees, contractors and others in customer facing roles and non-customer facing roles, such as managers and supervisors, involved in selling, offering or distributing retail banking products to retail and small business customers. 
In addition to bank staff, where payments are made by the banks to non-bank sales channels or intermediaries, such remuneration structures will be in scope. 
Remuneration structures 
Product sales commissions and product based payments will be reviewed where:
• They include fixed or at risk payments that are a direct or formulaic payment (either $ or %) for the sale of one product or multiple products or the gross revenue generated from those products, and may include performance bonus payments and other sales incentives. 
• They are monetary or non-monetary and paid or given to staff or others (non-bank channels or intermediaries) by a bank. 
• They could result in poor customer outcomes. The reviewer will need to build a framework in consultation with banks and stakeholders to assess whether the payment could result in poor customer outcomes. 
Retail banking products 
The types of retail banking products in scope of the review include: 
• Basic banking products (e.g. transaction accounts, term deposits, travellers cheques) 
• Non-cash payment products (e.g. travel money cards) 
• General insurance products (except for personal sickness and accident) 
• First Home Saver Accounts (FHSA) 
• Consumer credit insurance (CCI) 
• Consumer credit products (including mortgages, personal loans and credit cards), and 
• Small business lending.
 Scope exclusions 
There have been extensive and significant changes to remuneration structures across financial services over the past few years. These changes have been due to legislative reforms as well as changes driven by the industry. The review is intended to build on these changes and now look at remuneration structures in retail banking. 
The review will, therefore, not include product sales commissions or product based payments already addressed through other reforms and reviews. Specifically: 
• Remuneration structures, product design issues and quality of advice regarding life insurance products as covered by the Review of Retail Life Insurance Advice (“Trowbridge Review”). The changes identified by this review have not yet been implemented. The banking industry supports fully implementing the recommendations of the Trowbridge Review and is committed to legislative reforms to support the industry making these changes to remuneration structures. 
• Advice related business models that comply with the FOFA reforms and associated exemptions contained in law and regulations. 
• Stronger Super reforms which removed the payment of commissions on default superannuation. 
• Fee based commissions that are transparent to the customer (i.e. fee for service or fee for advice). 
• Product sales commissions and product based payments made for the distribution of commercial insurance products through insurance brokers and other intermediaries, with the exception of CCI. 
• Product sales commissions and product based payments received as a result of products sold, offered or distributed to wholesale customers including institutional banking customers, commercial banking customers and global asset fund managers. 
Mortgage lending 
The review will include product sales commissions and product based payments across mortgage lending. ASIC is currently reviewing the mortgage broking industry, and in particular the consideration of remuneration structures and payment arrangements in mortgage broking. The review will run in parallel with the ASIC review. 
Banks are committed to an outcome that takes into account the ASIC findings. Any findings and options relating to mortgage broking will, therefore, align with the ASIC review timeline and wait for the completion of the ASIC review. 
Customer outcomes 
The reviewer will also be asked to provide observations and insights from the review to assist the banks ensure they have overarching principles on remuneration and incentives to support good customer outcomes and sound banking practices, the scope of which is broader than retail banking. 
The development of overarching principles on remuneration and incentives is another initiative in the industry announcement on 21 April 2016. 
Independent Reviewer 
The ABA has appointed Mr Stephen Sedgwick an independent person with relevant qualifications and experience to conduct this review. 
Mr Sedgwick will be supported by legal and remuneration experts to inform his findings and ensure the conduct of the review and the options for implementation that it identifies are consistent with the legal and regulatory obligations that apply to participants in the review. 
Mr Sedgwick will also have access to additional expert advice as needed from a Bank Advisory Group and a Stakeholder Advisory Panel. The Stakeholder Advisory Panel will include representation from across consumers, employees and professional standards. 
For matters relating to the independent review, Mr Sedgwick can be contacted confidentially at steve.sedgwick@retailbankingremunerationreview.com.au 
The reviewer will conduct the review publicly in consultation with: 
i. Consumer and small business organisations 
ii. Financial services industry representatives 
iii. Finance Sector Union and employees of banks 
iv. Relevant regulatory bodies 
v. Member banks, and 
vi. Other interested stakeholders. 
Submissions to the review are invited on any of the matters covered by the Terms of Reference. 
The reviewer  requests that each submission include a cover page with: 
- Name of the person or organisation making the submission, and a statement about whether the submission is personal or made on behalf of an organisation 
- Contact details 
- Key points made in the submission, and 
- List of (any) attachments to the submission. 
The reviewer  prefers submissions to be provided in Microsoft Word (docx) files or in PDF format.
Submissions should be lodged by 9 September 2016 via email to the reviewer at this address: Email: submissions@retailbankingremunerationreview.com.au  
Final Report 
Mr Sedgwick will publish a final report. The final report is expected to provide an overview of product sales commissions and product based payments in retail banking and other industries, identify possible options for better aligning remuneration and incentives so that they do not result in poor customer outcomes and set out actions which may be considered by banks and the banking industry to implement the findings. 
The ABA separately announced that
Mr Sedgwick will be supported by a competition and legal expert – Gina Cass-Gottlieb from Gilbert + Tobin Lawyers – and a remuneration expert – David Heazlett from Mercer, as well as a stakeholder advisory panel which includes: Gerard Brody – Chief Executive of Consumer Action Law Centre, Geoff Derrick – National Assistant Secretary at the Finance Sector Union, Sarah Saunders – Chief Advocate at National Seniors and Dr Deen Sanders – Chief Executive of the Professional Standards Authority.