Sales incentives in retail banking: update

In February 2019 the Financial Services Royal Commission’s Final Report recommended that banks should implement fully the recommendations of the Sedgwick Review that incentives no longer be paid to any retail staff based directly or solely on sales performance (recommendation 5.5).

Commissioner Hayne observed that the issue is a cultural and behavioural one: how do you ensure staff act in the best interests of the customer and at the same time reward performance?

Sedgwick Review
Sedgwick’s recommendations in 2017 included:

  • Recommendation 2: Banks remove variable reward payments and campaign-related incentives that are directly linked to sales or the achievement of sales targets (including, but not limited to cross-sales, referral targets, and profit and revenue targets);
  • Recommendation 3: Eligibility to receive any variable reward payment should be based on an overall assessment against a range of factors that reflect the breadth of the responsibilities of each role;
  • Recommendation 4: Any financial measures included in an overall assessment consistent with Recommendation 3 should:
    • Be product-neutral (that is, not encourage the sale of one product over another); and
    • In the case of a scorecard, financial measures together attract a maximum effective weight of 50 percent as quickly as systems and other changes can be introduced, falling to 33 percent or less by 2020;

Sedgwick Review implementation
In June 2019 the Australian Banking Association published Mr Sedgwick’s interim review into the progress of banks on the implementation of his 21 original 2017 recommendations.

In the June 2019 review Sedgwick said:

“my assessment is that substantial progress has been made to delink sales directly to reward for front line staff, including for specialist bankers such as home lenders and their managers. However, there is still more to be done to minimise the risk that sellers will receive ‘mixed messages’ about the importance of sales. I would encourage those few banks that still remunerate on the basis of financial indicators separately, despite having ostensibly adopted a scorecard approach, to reconsider the practice. Mathematically the change will make little difference to the reward available to an individual seller. Perceptions may be quite different between the two approaches, however. This issue should be taken up in the 2021 review.”

Scorecards can contain a mix of environmental, social, and governance (ESG) criteria and health and safety targets as well as non-financial incentives.

Team targets could also promote a customer-centric culture.

Financial Services Royal Commission’s Final Report
The Royal Commission Final Report discussed how to balance fixed versus variable remuneration, both at senior executive level and for front line staff.

Commissioner Hayne did not recommend prescribing how the balance could be achieved but Sedgwick rejected a scorecard approach with rewards directly related to sales targets.

The Final Report (volume 1, page 335) states:

“Remuneration and incentives, especially variable remuneration programs tell staff what the entity rewards. Hence, remuneration and incentives tell staff what the entity values. Remuneration both affects and reflects culture. As the Commission’s work has shown, and is now not disputed, poor remuneration and incentive programs can lead, and have led, to poor customer outcomes.”

The Royal Commission made additional recommendations relating to remuneration including:

“Recommendation 5.4 – Remuneration of front line staff
All financial services entities should review at least once each year the design and implementation of their remuneration systems for front line staff to ensure that the design and implementation of those systems focus on not only what staff do, but also how they do it.”

The Government’s response
The Government’s initial response supported the Royal Commission recommendations that banks fully implement the recommendations of the Sedgwick Review.

It has addressed remuneration in specific areas, but not for front-line retail staff.

Mortgage brokers
From 1 January 2021, the National Credit Act will regulate conflicted remuneration for mortgage brokers. Background.

The maximum value of upfront commissions will be linked to the amount drawn down by borrowers instead of the loan amount, campaign and volume-based commissions and payments will be prohibited and soft dollar benefits will be capped.

A new broker’s best interests duty to borrowers will also commence on 1 January 2021.

APRA response: executive remuneration
In July 2019 APRA released draft Prudential Standard CPS 511 Remuneration to give guidance in relation to sound remuneration principles and practices, including in relation to misconduct, compliance and other non-financial risks.

In March 2020 APRA suspended the majority of its planned policy and supervision initiatives in response to the impact of COVID-19. It does not plan to recommence consultation on any non-essential matters before 30 September 2020.

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David Jacobson

Author: David Jacobson
Principal, Bright Corporate Law
About David Jacobson
The information contained in this article is not legal advice. It is not to be relied upon as a full statement of the law. You should seek professional advice for your specific needs and circumstances before acting or relying on any of the content.

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