An incentive program run by a major bank, which rewards bankers with bonuses for achieving home loan sales targets, was a “significant cause” of misconduct involving “collusion” between its employees and introducers, according to Commissioner Kenneth Hayne.
In the interim report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Commissioner Kenneth Hayne alleged that NAB’s Star Sales Incentive Plan, which offered rewards for employees that achieve home loan sales targets, was a “significant cause” of misconduct involving the bank’s employees and third-party introducers in the years between 2013 and 2016.
In March, during the course of the first round of public hearings held by the commission, it was revealed that some NAB employees had engaged in fraudulent conduct when processing home loans referred to the bank by introducers.
In one instance, a NAB employee was found to have wilfully entered false information on a customer’s profile and in relation to an introducer’s contact details, and had accepted, or encouraged other employees to accept, documentation from an introducer as verification to support lending applications.
NAB acknowledged in its written submission to the royal commission that the misconduct that was identified “was attributable to several systemic issues in relation to its Introducer Program” and the structure of its incentive program.
However, the bank claimed that there was no evidence that the incentive program was a “significant” cause of the conduct, as opposed to having “contributed to a small number of people choosing to behave unethically”.
Commissioner Hayne, however, has dismissed NAB’s contention, claiming that its employees, which engaged in misconduct, were motivated by the incentive program.
“I do not accept this last proposition,” Mr Hayne said. “The proposition makes sense only if it is read as asserting that some of those who engaged in the relevant conduct [were] driven by the pursuit of financial gain, but that there was, or may have been, some other unknown reason why others participating in the conduct acted as they did.”
Commissioner Hayne continued: “NAB has not previously suggested that those who acted as they did were motivated by anything but financial gain.
“The evidence shows that from as early as April 2015, NAB was aware that one of the potential root causes of the conduct was the Star Sales Incentive Plan that the relevant bankers were operating [under].
“The investigation of the conduct confirmed that the incentive program was driving inappropriate behaviour.”
Commissioner Hayne added that the “scorecards by which employees were assessed” were “weighted heavily in favour of financial matters”, stating that “marginal weight attributed to compliance-related matters”.
“In the words used in one of the documents produced by NAB, the ‘risk/reward equation for bankers [was] unbalanced in favour of sales over keeping customers and the bank safe’,” the commissioner said.
While Commissioner Hayne noted that NAB has since moved many of its employees to a different incentive plan (the Short Term Incentive Plan), and proposes to introduce further changes to its remuneration structures from 1 October 2018, "that program presently continues to reward bankers with bonuses for achieving targets for the sale of home loans," he said.
Further, Commissioner Hayne noted that NAB employees were also told that introducers were required to refer a minimum of $2 million in loans per year for personal lending and $10 million a year for business lending, which he claimed “tied” the commissions paid to introducers to the amounts of loans referred that were drawn down.
“This created a further incentive for collusion between bankers and introducers and NAB itself identified introducer commission structures as potentially not driving the right behaviours,” Mr Hayne said.
Commissioner Hayne concluded: “The incentive arrangements used by NAB for bankers and for introducers were a significant cause of the conduct.”
RC looks at broker commissions
The financial services royal commission has taken a close look at remuneration structures (and more specifically, commissions) operate in the mortgage space, and has gone as far as to question whether some broker commissions are in breach of the NCCP.
In the interim report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Commissioner Kenneth Hayne claimed that lenders paying value-based upfront and trail commissions could be in breach of section 47(1)(b) of the National Consumer Credit Protection Act (NCCP).
Section 47(1)(b) states that licensees must “have in place adequate arrangements to ensure that clients are not disadvantaged by any conflict of interest that may arise wholly or partly in relation to credit activities engaged in by the licensee or its representatives”.
Commissioner Hayne pointed to conclusions reached by the Australian Securities and Investments Commission (ASIC) in its broker remuneration review and by Commonwealth Bank (CBA) in its submission to the Sedgewick review.
The commissioner stated that such reports suggested that value-based commissions were “reliably associated” with higher leverage, and that loans written through brokers have a higher incidence of interest-only repayments, higher debt-to-income levels, higher loan-to-value ratios and higher incurred costs compared with loans negotiated directly with the bank.
“Those conclusions point towards (I do not say require) a conclusion that the lenders did not have adequate arrangements in place to ensure that clients of the lender are not disadvantaged by the conflict between the intermediary’s interest in maximising income and the borrower’s interest in minimising overall cost,” Commissioner Hayne said.
However, Commissioner Hayne claimed that breaches of section 47 “are duties of imperfect obligation in as much as breach is neither an offence nor a matter for civil penalty”.
The public is being invited to respond to Commissioner Hayne’s interim report from the financial services royal commission, which covers the first four rounds of hearings.
Submissions in response to the interim report can be made on the Royal Commission website and must be received no later than 5pm on 26 October 2018.
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