Sedgwick Retail Banking Remuneration Review Update

The Australian Banking Association has published Mr Sedgwick’s interim review into the progress of banks on the implementation of his 21 original 2017 recommendations relating to the remuneration practices and product-based payments in retail banking in Australia. He recommended implementation by 2020. Background.

The Financial Services Royal Commission’s Final Report recommended that banks should implement fully the recommendations of the Sedgwick Review.

Sedgwick concludes that overall, while banks are moving at different speeds in implementation for reasons outlined in his report, substantial progress has occurred.

He said:

“Although some individual banks still have adjustments to make, progress generally across the industry to date in respect of in-scope bank staff includes:

• A decisive shift to ‘whole of role’ assessment of performance and rewards for all in-scope staff, with greater focus on customer experience or satisfaction, and with financial indicators typically accounting for only a third or less of any formal assessment;

• The most concerning elements of previous arrangements, such as direct links between sales achieved and variable pay, and the use of accelerators or accelerator-like modifiers linked to sales, have all but gone; and

• The maximum achievable rewards for in-scope staff, especially specialist lenders, have fallen with a bias to come down further.

The adjustments remaining often involve further steps to reduce the likelihood of miscommunication about the desired practices and culture, especially in terms of any lingering perceived direct link between sales performance and rewards. These include how scorecards are applied in practice, the design and use made of leaderboards and how targets are set and monitored…

Progress is generally slower and much more mixed in respect of Recommendations that relate to third parties. Although substantial reforms to governance seem to be in prospect, changes to broker remuneration to date have been modest. Payments other than commissions have typically been removed. The move to pay brokers commission based on the loan drawn down net of offsets is a step in the right direction but does not fully meet the intent of my original Recommendation, which favoured the introduction of a lender-paid fee for service related to the effort required of the relevant third party rather than relative to loan size, with some deferred payment mechanism (effectively truncated trail payments).”

Emerging issues

Sedgwick says that seven issues are still unfolding in respect of how retail banks meet the intent of the 2017 Recommendations, namely:

• The proper role of targets;

• What constitutes a ‘relatively small’ maximum potential variable remuneration (compared to fixed pay);

• Customer metrics, including in respect of the outcomes achieved by customers;

• Discretion and manager capability;

• Third party remuneration;

• The interests of shareholders; and

• Bank culture and the risk of ‘change fatigue’.

Mr Sedgwick has recommended a further review in 2021.

He has also recommended that in the light of the findings of the Financial Services Royal Commission there be regulatory reform that will permit the introduction of a fee for service remuneration model for aggregators / brokers and introducers  that preserves the viability of the third party channel but links payments to the effort expended in securing the loan for the customer rather than the value of the loan secured, with appropriate deferred payment options (not long lived trail commissions).

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