The Australian parents of New Zealand’s big four banks are pledging to overhaul the bonus structure paid to their staff.
It follows the release of the findings of the Sedgwick Retail Banking Remuneration Review, which was commissioned by the country’s Bankers’ Association.
It said staff should no longer be given bonuses for hitting sales targets. It also suggested sales commissions given to mortgage brokers be replaced with a set fee for service.
“Some current practices carry an unacceptable risk of promoting behaviour that is inconsistent with the interests of customers and should be changed,” report author and former Australian public service commissioner Stephen Sedgwick said.
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Under the recommendations, sales targets would only make up 50 per cent of any bonus payment. This must fall to 33 per cent by 2020. According to the review, the average rate is already between 40 per cent and 50 per cent.
A review earlier in the year, from the Australian Securities and Investments Commission, made similar recommendations to shift away from bonus payments for staff and broker commissions tied to the size of the loan. It said both could lead to customers taking out bigger loans than they otherwise would.
Commonwealth Bank, National Australia Bank, Westpac and ANZ all released statements saying the banks would implement Sedgwick’s recommendations in full.
Banking expert David Tripe, of Massey University, said it should be expected the changes would flow through to New Zealand. “This rule is going to impact on something like 87 per cent of the New Zealand banking sector … unless someone wants someone to try and run different rules in different countries for the same bank.”
It is something that was already being addressed in New Zealand as part of the review of the Financial Advisers Act.
Under new rules laid out in the Financial Services Legislation Amendment Bill, bank staff will have to provide more disclosure to their clients and banks will not be able to operate remuneration structures that incentivise staff in a way that does not put customers first.
New Zealand Bankers’ Association chief executive Karen Scott-Howman said her organisation supported those moves.
“The review proposes new customer-first obligations for financial advisers. This means advisers putting customer interests ahead of their own, regardless of their financial incentives and sales targets.
“We support this approach and are working closely with officials to help ensure a practical way of achieving this aim.”
The Financial Markets Authority said those legislative changes were positive and designed to promote better outcomes for clients, while giving it powers to act where it needed to.
“The proposed new conduct obligations do seek to address concerns about how conflicts of interest, including incentives, can lead to advisers not putting customer interests first,” a spokesman said.
“The changes to put the clients’ interest first across all advisers will help to manage those conflicts. In addition, the obligation on firms not to offer incentives to representatives that distract them from putting the interests of the client first will help to address these issues.”
Rod Severn, chief executive of the Professional Advisers Association, which represents financial advisers including mortgage brokers, said many of the problems were related to disclosure.
“We support the notion within the review that may prevent bank staff from receiving incentives for selling their basic products, or at the very least require them to be very open and honest about any incentives on offer. In our submission to MBIE we called for absolute clarity and clear disclosure to the consumer in any and all scenarios where an incentive is involved.”