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Remuneration report sounds alarm on broker commissions

by James Mitchell5 minute read

The Australian Bankers Association has welcomed the release of the interim Sedgwick Review into remuneration that has warned of “the risk of commission-related mis-selling”.

The interim report by Stephen Sedgwick AO, released on Tuesday, summaries the current practices about product sales commissions and product-based payments made to retail banking staff and third parties.

The report notes that while many banks are moving to de-emphasise sales-related remuneration in retail banking for employees, there is less evidence that banks are doing likewise in their broking channels.

“Some banks have stated that their scope to change such practices is constrained by market forces and an unwillingness to risk market share by upsetting established remuneration norms,” it said.

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“That unwillingness may itself suggest that the relative remuneration available from banks may affect the behaviour of mortgage brokers.

“The fact that many banks are reluctant to defy industry practice and move away from commission-based arrangements and the success of campaigns based on increased commission deals suggest that the risk of commission-related mis-selling is not insignificant in this market.

Data presented to the review suggested that third-party mortgages are likely to be “larger, paid off more slowly, and more likely to be interest-only loans than those provided to equivalent customers who dealt directly with bank staff”.

“Noting that all such mortgages need to satisfy the relevant bank’s credit assessment and responsible lending requirements, this evidence is suggestive rather than conclusive,” the report said.

The interim report pointed to the mortgage market in the Netherlands, where commission payments have been banned for mortgage broking activities. However, it noted that some Australian banks rely heavily on brokers for key components of their business, maintaining only a limited branch network, and that mortgage brokers contribute a substantial part of the new mortgage activity of even the largest banks.

“The costs incurred by third parties in providing these services need to be met (either by banks – perhaps on a fee for service basis since banks avoid incurring substantial costs that would otherwise accrue to them – or by customers through fees for advice),” it said.

“The growth of this market segment, however, suggests that brokers provide a service that many potential mortgagees value.”

According to the report, any move to reduce or eliminate commissions in Australia would need to include sufficient regulatory changes to ensure that the changes are competitively neutral.

ABA executive director – retail policy, Diane Tate, said the review is part of an industry-wide look at some of the influences on culture in banks, such as leadership and people and performance management.

“In recent years, banks have made changes to remuneration practices to place more of an emphasis on good behaviour rather than sales targets, in light of changing community expectations and regulatory requirements. However, there is more to do,” Ms Tate said.

“It is important that banks get the balance right between rewarding employees and getting the best results for customers.

“Banks have committed to changing or removing payments that could lead to poor customer outcomes.”

[Related: Broker commissions probed in new Deloitte report]

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James Mitchell

James Mitchell

AUTHOR

James Mitchell has over eight years’ experience as a financial reporter and is the editor of Wealth and Wellness at Momentum Media.

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