The Independent Reviewer commissioned by the Australian Bankers’ Association has published an Issues Paper on Remuneration in Retail Banking.

A central question being considered in the review is whether product-based payments and product sales commissions should be removed and, if so, what they should be replaced with?

The Issues Paper summarises current practices and seeks further information about product sales commissions and product-based payments paid in respect of retail banking products. Such payments are linked to the number or value of products sold, offered, or distributed to retail and small business customers.

The Issues Paper observes that the vast majority of banks provide incentives, bonuses or product-based payments/product sales commissions to at least some of their retail staff or to third parties acting on their behalf (such as mortgage brokers) that are directly or indirectly related to product sales. There is a risk that such incentives may lead to behaviours or practices that lead to poor outcomes for customers.

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).

The Issues Paper also observes that arrangements 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 deserve careful scrutiny . Simplification of complex incentives schemes could reduce risk of confusion by staff.

Products that are covered by the Review include:

• Basic banking products (e.g. transaction accounts, term deposits, travellers cheques)
• Non-cash payment products (e.g. travel money cards)
• General insurance products (except for personal sickness and accident)
• First Home Saver Accounts (FSHA)
• Consumer Credit Insurance (CCI)
• Consumer credit products (mortgages, personal loans and credit cards)
• Small business lending.

The issues on which views are sought are:
1. The role of targets
2. Does size of rewards or their structure matter most?
3. Should bank obligations be strengthened?
4. What is the difference between a ‘sales’ and a ‘service’ culture?
5. What role may the remuneration arrangements applicable to very senior managers play in conditioning the behaviour of front line staff?
6. Issues specific to remuneration of third parties
7. What is a poor customer outcome (and what is the link to agent remuneration)?