Banks will use Sedgwick review ‘to remove or change payments’

As part of this ongoing review, Stephen Sedgwick AO is evaluating how bank employees and those selling bank products, such as brokers, are remunerated for providing customers mortgages, personal loans, credit cards and small business lending, among other products.

The interim report, which was released in early January, suggested that many banks are moving to de-emphasise sales-related remuneration in retail banking for employees, but that 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.

“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.”

However, Mr Sedgwick conceded that any move to reduce or eliminate commissions in Australia would need to include sufficient regulatory changes to ensure that the changes are competitively neutral.

The interim report has been widely lambasted by those in the mortgage broking industry (particularly in light of ASIC’s ongoing review of broker remuneration), with several commentators highlighting that the ‘independent’ review has been commissioned by a banking body, and others emphasising the negative impact the removal of broker remuneration, such as trail commissions, would have on the third-party channel.

According to Jeff Zulman of Book Buyers Brokerage, more than half of the brokerages operating in Australia would fail without trail commissions. Meanwhile, Outsource Financial CEO Tanya Sale said the interim Sedgwick review fails to take into account two important factors in the lives of mortgage brokers: stress and emotions.

“If a bank makes a mistake or turnaround times blow out, where will that fall on? It falls squarely on the broker. Does Sedgwick lie in bed at night and worry about a client potentially losing their deposit because of a 21-day turnaround time? That’s stress,” Ms Sale said.

Better Banking program

Whatever the outcome of the Sedgwick review, which will be released in April 2017, the ABA has said that “banks will use the findings to remove or change payments that could lead to poor outcomes for customers”.

The website for the ABA's newly-launched Better Banking initiative, whose tag line is: 'We hear you', states: “An independent review is underway into how banks pay staff or third parties for selling retail banking products like mortgages, credit cards and deposit accounts.

“Led by former Australian Public Service Commissioner Mr Stephen Sedgwick AO, the review aims to identify whether commissions, bonuses or other incentives might mean that the interests of bank staff are not aligned with the interests of their customers.

“Banks will use the findings to remove or change payments that could lead to poor outcomes for customers. This represents a voluntary extension of the principles of the Future of Financial Advice reforms to retail banking.

“The outcomes of the review will also help banks develop new overarching principles on how they pay and incentivise all executives and employees.”

As well as reviewing remuneration, other initiatives in the new Better Banking program include:

• A renewed commitment to support customers in financial difficulty;
• Providing more support to farmers and small businesses by introducing new best practice standards on valuation practices and how banks appoint receivers;
• Holding a roundtable in March with banks, consumer groups and government representatives to identify customers’ underlying concerns about switching accounts;
• The appointment of customer advocates in each bank, to prioritise and escalate complaints;
• Improved protections for whistleblowers, which will be in place from July;
• An independent review of the Code of Banking Practice, which will identify areas where banks’ standards could be improved (findings of the independent review are expected in early February);
• Cracking down on poor financial advice by sharing information on financial advisers that have a history of poor conduct to “help stop these advisers moving around the industry” (operational by the end of February); and
• Contributing more money to help ASIC ensure better behaviour in the financial services industry.

The chairman of the ABA and CEO of National Australia Bank Andrew Thorburn commented, “Our focus is on our customers and ensuring as an industry we provide the right service and right products to meet their needs.

“We have heard the concerns of Australians and we are committed to taking action so that banking with all of us is a better experience.

“This program of initiatives is our commitment to continue to raise the standards, service and trust in our industry.”

[Related: Aggregation chief flags broker stress, turnaround times]