Former Australian Public Service Commissioner Stephen Sedgwick talks about the review he has led into bankers’ remuneration and commissions, and its outcomes
Review of Remuneration in Retail Banking
Ross Greenwood: Welcome back to Money News right around the country. Great to have your company. I tell you, one of the most important reports that comes down into banking has been handed down today. For a long time, I’ve always understood and told you that there’s a conflict of interest when you walk into a bank branch or when you interact with your bank. That is, the person who is giving you the information could also very well be remunerated for the type of information they provide you to encourage you to buy one of the bank’s products.
What’s happened as a result of many of the scandals in the bank mis-selling In particular, many of the mis-selling in financial advice areas.
There has been a big review of remuneration in retail banking. This has been an independent review conducted by Stephen Sedgwick. That report is now being handed down. The interesting part about this report is almost immediately, all of the big banks have come out and said that they will take up the 21 recommendations of this report. Stephen Sedgwick, the author of that report and review is on the line right now. Many thanks for your time, Stephen.
Interview with Stephen Sedgwick, Former Australian Public Service Commissioner
Stephen: Welcome, Ross.
Ross Greenwood: Can you just explain the reaction of banks, the fact that they have also willingly adopted your recommendations. Does that suggest that the banks basically have said, “Look, game’s up. We understand we’ve been doing the wrong thing and we’ll now change our behaviour”. The question is, why they didn’t change their behaviour previously?
Stephen: I guess that’s a fair question. I think I’d look at it this way, the banks have asked me to see whether the intention of the future finance reforms that you were referring to earlier should be extended into the retail banking arena. Now, when I looked at that, we didn’t see anything like the same scale or risk, if you like, attached to the remuneration range between retail banking as was the course for financial planning.
It wasn’t a quote that I could see on the evidence before me. Not that we should ban outright incentive payments for staff in retail banks. Most of them, the tellers, for example, the amounts of money involved are relatively small.
Ross Greenwood: What you have done though is you’ve certainly made certain that there can be no, shall I say, mis-selling in the way in which they have mis-selling scandals in the UK, to make certain that the remuneration is not necessarily directly or increasingly linked to the way in which they sell those products.
Stephen: That’s right. Well, we found that there were some risks attached to particular management practices, or to the way the particular remuneration arrangements were structured that were unnecessary and were unacceptable. We recommended that they should be stopped. That’s because we wanted to minimize the risk that they would be mis-selling.
The banks have agreed. I understand that I haven’t seen all of the reactions to that, but it seems like lots of the banks have agreed to do that. I think that’s a very good thing.
Meeting Sales Targets
We also found, Ross Greenwood, though that it wasn’t just remuneration. I made the point to you that there were tellers in particular, for example, some was at risk, they’re very small. What we found often was that there was a target group, and sales called you sometimes. There’s certainly a target-driven culture within the institutions. The way that those targets were communicated, the way that managers were providing feedback about them, the way that the performance of individuals was being managed was putting excessive focus on meeting the target rather than necessarily doing the thing that was in the best interest of the consumer.
What we’ve said to the banks is that they should actually look quite holistically at not just the remuneration structures, but the way they set targets, the way they do their cultures in the organization, the way they develop their leaders and their managers, and the way that they manage performances. It’s actually quite a very fundamental recommendation that they look quite broadly at what they do.
Ross Greenwood: Where does the onus come then on the individual customer? Ultimately, if I walk into bank A or bank B, the product that they might each offer me could be quite different. It could have different costs, it could have different structures, or a range of different issues. Not every bank product is the same, nor should they be. There has to be some competitive force in all these.
When you walk into the bank, you trust the individual, the teller, whomever it might be behind the counter to give you what you’d hope to be the very best product. This is the difficulty here, doesn’t it? Ultimately, the customer has got to bear some of the responsibility.
Stephen: Yes, I think there’s lots of different expectations and there’s lots of different understandings of financial products when customers come into the bank. A lot of customers, they believe that banks operate under a social license, and that that social license requires that they be judged against a different standard than or example, when they go and buy petrol.
In some respects, the law does respect that social license difference. The intense legal obligations that financial planners have, for example, to operate in the best interest of their customers because of the social reforms that strictly apply when you go into a bank and you ask for information about the credit card. They’re not giving you advice, they’re just giving you factual information.
Ross Greenwood: The whole issue of general advice or factual information is obviously becomes a little more difficult when it comes to superannuation. I noticed today that the industry’s super fans have come out and indicated that they believe banks must address the cross-selling of compulsory superannuation urgently. Effectively, they’re saying that in this particular case, the general advice does not necessarily lead the customer with the best superannuation solution. Yet, the cross-selling will keep on going.
Stephen: I didn’t specifically look at that issue. What I certainly did look at is that in some circumstances– not every bank, in some circumstances staff can be remunerated on their capacity to cross-sell. Maybe wealth products, it may be a commercial kind of insurance, might be credit card, might be a mortgage, it could be general health insurance. We’ve made the same observation that we should not link remuneration directly to the ability to cross-sell.
When you measure good customer outcomes, then you shouldn’t define customer outcomes in terms of the number of cross-sells. We’ve done that sometimes. The banks were attributing a good outcome to cross-sells and we suggest that they map on to look at that.
Ross Greenwood: When this is implemented, when I walk into the bank, when you walk into the bank, how would you expect somehow we’d be treated differently than how we’re being treated today?
Stephen: I’m actually pretty confident that for a lot of individual bank staff, they’re highly ethical people. You’ll be treated no differently because that’s the way they’ve always behaved. The important part around this though is to ensure that the systems are put in place, to always favour ethical behaviour over behaviour that’s in the interest of increasing the pay of the person that you’re dealing with. It’s the dealing with the system that’s important here.
If this is done properly then I think what you’ll find is the customer’s satisfaction will rise because their perception of the institution, the bank always acting in their best interest will be much more firmly implanted in their mind than it may currently be.
Ross Greenwood: Steve Sedgwick, the former public service commissioner appointed by the Australian Banker’s Association to do this review into the banks. They’ve all tightened up very quickly. We appreciate your time here on the program this evening.
Stephen: Okay. Thank you, Ross Greenwood.