Sedgwick says there is progress in banking pay practices
05/04/2019
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As pushed by Commissioner Hayne in February (See HERE), banks should be moving towards policies in line with those recommended by the initial Retail Banking Remuneration Review. Guerdon Associates discussed the changes and effects this could have on the front line staff of retail banking (See HERE). On the 12th of March, Mr Stephen Sedgwick AO published his interim review for the progress of banks towards his 2017 recommendations.

For the review, he sent out questionnaires to banks at the end of last year and had discussions with the senior representatives of various bank. We note that executives or those in higher management positions were the ones responding to these questions. He has not had the time ‘for an independent systematic assessment’ of the ‘significantly changed policy positions’ and how they are reflected in the ‘day to day experience of front line staff’.

Overall, feedback is that ‘substantial progress has already occurred in the industry overall’ and Mr. Sedgwick believes that banks should be able to clean up their acts by the final report. He has also provided additional recommendations in the interim report based on the feedback.

The final review has now been proposed for the first half of the 2021 performance year. It will review whether the inappropriate sales incentives have been removed from front line staff remuneration, checking if banking behaviour has evolved into a ‘should we’ approach and that third parties have replaced their standard commission model to be based on the effort to identify and meet the customer’s needs.

Front line Staff (Recommendations 2-8)

According to the interim report, the banks are well on their way to adjusting their front-line staff remuneration.

Mr. Sedgwick reported that as it stands, the ‘most risky elements of previous remuneration arrangements are all but gone’. Policies are also in place for the remaining banks to reduce the weight of financial indicators to below the target 33%. Furthermore, they have begun to reduce the proportion of variable pay and the maximum variable pay available, which has been offset by increasing fixed remuneration.

By the end of this year, accelerator sales practices are also expected to be completely removed and replaced by ‘measures based on customer experience of the depth of the relationship with the customer’. These measures include complaints data that focuses on the time to respond to and resolve complaints, the depth of the relationships which is the number of conversations had with the customer and manager judgement and observations which assesses the quality of the interactions. It is yet to be seen if these new measures are simply a facade.

On the other hand, the use and abuse of leaderboards are still prevalent within banks. Managers still turn it into personal targets to track individual performance.

Governance, Culture and Performance Management (Recommendations 9-14)

With both the initial report and the Hayne Royal Commission putting the spotlight on the behaviour of banks, many have begun to take up changes to ‘reframe their culture’. Some banks have ‘refreshed their statements of values and purposes’ while others are making sure that ‘staff understand those values and the bank’s vision and purpose’. They are also looking to drive this change by re-skilling and training managers to understand the evolution of their roles and by shifting behaviours to a ‘should we’ behaviour instead of ‘can we’.

Sedgwick suggests that this change and refresh from the top down will take time. He calls it ‘premature to attempt an assessment of progress in changing culture to date’. Perhaps by the final report we will be able to observe if any tangible changes to the treatment of customers by banks have occurred.

Third Parties (Recommendations 16-20)

Progress has been mixed with third party brokerages. All banks surveyed expect to eliminate volume-based incentive payments, soft-dollar payments or support sales campaigns by this year.

Given their sway, the larger banks have reviewed their list of brokers and made the necessary changes with their mortgage brokers. At the same time, much to Sedgwick’s disappointment, the industry has not fully moved to replace the standard commission model.

Further Review

Mr. Sedgwick has proposed further recommendations and wants the final review moved back from the 2020 performance year to the first half of the 2021 performance year.

His next recommendation is for the ABA to ‘develop principles that should underpin metrics that capture the outcomes customers achieve’ to ensure these metrics are not acting as sales measures in disguise.

Mr. Sedgwick also recommends that the current standard commission model for mortgage brokers and aggregators be reconsidered. He would like the payments to be linked to the ‘effort expended in securing the loan for the customer rather than the value of loan secured’.

The interim review report can be read HERE .

© Guerdon Associates 2020
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