Financial Services Regulation

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Unravelled: Retail banking remuneration review

7 February 2017

Written by Managing Associate Simun Soljo and Associate Virosh Poologasundram

The Australian Bankers' Association last year commissioned Stephen Sedgwick to undertake a review of remuneration in retail banking. The review recently published an issues paper which describes the common remuneration practices, how some may be resulting in bad outcomes for customers, and asks for further information to inform the final recommendations.

The review is one of six initiatives announced by the Australian Bankers' Association in April 2016 with the aim to 'build public trust and restore consumer confidence in the banking industry'. The others include establishing a 'dedicated customer advocate' in each bank, promoting whistleblower protections, establishing an industry register to identify and remove from the industry individuals with bad conduct, reviewing the Code of Banking Practice, and 'supporting ASIC as a strong regulator'.

The issues paper released in January summarises and comments on the current product sales commissions and product-based payments remuneration structure for retail bank employees and third parties selling retail banking products. The products covered include basic banking products, non-cash payment products, general insurance, consumer credit and consumer credit insurance, and small business lending. Out of scope are life insurance, personal advice, and default superannuation, each of which have either current or proposed restrictions on remuneration, and wholesale banking.

Key interim findings

The paper is fairly frank in its summary of the remuneration practices in retail banking and the problems they can cause. It admits that in Australia and globally 'there has been an erosion of public trust in the banking industry'. The remuneration review is part of the effort to turn this around by 'identifying opportunities to modify or remove remuneration practices that entail an unacceptable risk of promoting behaviour by retail staff that is inconsistent with the interests of customers'.

Remuneration linked to sales is the key issue:

The Review’s work to date has tentatively identified some practices of some banks that have high risk of incentivising poor selling practices leading to poor customer outcomes, which those banks should consider changing. These include practices that deliver significantly increased incentive payments as certain sales thresholds are achieved (described… as accelerator-type payments). Similarly, arrangements deserve careful scrutiny that provide incentives based on cross sales such as add-on insurance products, or that deny access to incentives otherwise available unless sales or cross-sales targets are also met. Further, some incentives schemes are complex, running the risk that staff or Managers will resolve any confusion or uncertainty by assigning more emphasis to sales-related activities than is intended. Careful simplification could reduce this risk.

There is a lot of talk in the paper about culture, and specifically the prevalence in some parts of the industry of a culture of 'sales' rather than customer service. It suggests that in many organisations the culture is deeply ingrained, in part at least because of the history of rewarding and promoting employees based on sales. Replacing sales-based remuneration with more discretionary remuneration based on other factors may not help if there are not the 'appropriate cultural norms' that will resist the allure of rewarding sales above all else.

While the paper says that the review has not received 'clear evidence that the risks in banks' current arrangements lead to such significant systemic risks of poor outcomes for retail banking customers as would warrant outright banning of product-based payments', the reviewer has 'formed tentative views that some banks should re-examine elements of their present practices' and 'it is appropriate to reduce the emphasis on product-based payments whenever possible' to 'reduce risk and help rebuild public trust'.

Next steps

The interim report does not propose banks make immediate changes to remuneration structures, but the implications of some of the tentative findings are clear and are likely to be reflected in the final report, and so banks may want to consider their existing practices and start moving towards making adjustments if necessary (to the extent they have not done so already).

The issues paper calls for further submissions on a number of issues identified in the report which will inform the final report, including:

  • The role of targets generally, and the relative risks of service-based and sales-based targets.
  • Does the size of the commission or the structure of it matter the most? Should there be a cap on the financial element? And how to design a simple remuneration system that also encourages the right sort of behaviour?
  • Should bank obligations be strengthened? Are further changes required to the regulatory framework? And, is the distinction between information, general advice and personal advice 'useful or effective in the retail banking context'?
  • What is the difference in practice between a 'sales' and 'service' culture, and what is the best way to effect a transition to 'service'?
  • What role may the remuneration arrangements applicable to very senior managers play in conditioning the behaviour of front line staff?
  • A number of issues specific to remuneration of third parties distributors, including whether banks should continue paying volume-based commissions to them, and whether contractually based risk mitigation devices are inadequate to avoid poor customer outcomes.
  • Generally, what are considered to be poor customer outcomes, and what is the link to agent remuneration? Should the approach taken by the UK regulator, which focuses on 'fair outcomes for consumers', be adopted here?

Submissions to the review are due by 10 February 2017.


The review presents an opportunity for banks to consider their remuneration practices and, where there are risks, to consider alternatives. The issues paper is frank, and there is no reason to think that the final report will be any less so. How the industry responds to the findings and recommendations will be important. Government and regulators will look on with interest. If the industry is not able to persuade all concerned that things are and will be changing for the better, the pressure to force changes by legislation or regulation will continue.

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