Retail banking remuneration review – if you ask the right question you get the right answer

The Sedgwick review of retail banking remuneration published its final report on 19 April 2017. The review’s recommendations were pretty much in line with the indicators in the Review’s earlier “issues” report (see HERE).


Something predictable happened. The report made recommendations about incentives for sales of banking products. This is a direct result of its terms of reference, which was confined to reviewing bank product and sales commissions.


While this is obvious, what is less obvious is that it was in response to a question that has never been verified as the cause of a problem.


Let us backtrack a little. ASIC has found various instances of the mis-selling of financial products. That is, customers were persuaded to buy products that were not appropriate for their needs. The series of incidents was attributed to bank “culture”. ASIC, and others, have not taken the time to define what this means, so it is doubtful there is actual evidence that this is a cause of the problem.


On the other hand, if you apply the definition that culture is a set of normative behaviours indicative of values and attitudes, then we have something observable and verifiable. It follows, then, that a poor culture must exhibit behaviours that encompass mis-selling of products as usual, or frequent enough to be considered acceptable within the organisation.


The Sedgwick review found no evidence that such behaviour was systemic within retail banks. In fact, he reached the view that “there is not sufficient evidence of significant systemic risks of poor outcomes for customers to support an outright ban on all product-based payments in retail banking”. That is, outcomes were not systemically bad and, therefore, banning system wide sales-based incentive payments would not appear  justified.


Mr Sedgwick’s report indicated there was a risk that inappropriate behaviours could be promoted with incentive arrangements that focus solely on product sales outcomes and exclude customer service outcomes. Further, he formed a view from the ASIC report into mortgage broking that incentives played a part.


Somehow, this does not quite come together, because he notes that the effect of removing revenue and sales from performance assessments for bank staff in the UK has not ‘noticeably or adversely affected business outcomes’ for the banks. Therefore UK customers must be buying the same products and borrowing at the same rates as they did when product revenue and sales were in fact a core part of performance assessments. While ceasing sales incentives for product sales will remove a conflict for staff in dealing with the customer, the evidence seems to suggest that this is not going to help the customers much if other reward factors (like keeping their job or getting a promotion) create the same conflict. But these aspects of the reward system were clearly not within the Review’s scope.


He recognised this by saying that incentives are just one part of a system. He recommended a more holistic approach that encompassed performance management, leader development and cultural renewal as well as remuneration. Unfortunately, a more holistic approach was outside Mr Sedgwick’s brief, as the terms of reference requested he address sales commissions as the problem.


The Sedgwick review was commissioned by the Australian Bankers’ Association in response to ASIC conclusions from its various investigations into mortgage broking and financial advice.


None of these reviews have acknowledged that bank staff and the third party sales channels need to sell product. The bank employees are not there to discuss the weather as people pass by. They are not there to do something other than sell. A customer comes in with a need, they match the need with a product, and the customer purchases the product. The customer, needs met, is happy. The employee has helped someone, met their goal, enhanced their career and is paid for it.


The bank is not going to say to its employees, “do not sell“. It is going to say, “sell as much as you can”. The bank should also be saying, “and make sure they are happy, remain happy, and come back to buy more product, and do not go to the competition, so that we get more Present Value out of every transaction and customer than our competitors”.


Some banks get this better than others. Some, as Mr Sedgwick points out, continue to offer risky product based commissioned and product mix bonuses. This is very short term, and risks customer relationships. The better run banks have already moved to customer satisfaction incentive plans.


Clearly, what is failing, based on the reports, is the qualification processes to ensure the customer’s needs are properly met before an incentive is paid. That is, the risk control processes. Mr Sedgwick’s interim report acknowledged this insomuch as reporting that some banks had scaled back their checks and balances, and had more to do.


The report can be found HERE

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