Australia’s banks face pressure to radically change the way they pay staff including senior executives after the banking royal commissioner slammed the emphasis on rewarding sales and profits.
Kenneth Hayne QC has questioned why bank employees are paid bonuses for doing the job they are employed to do, unless the incentives are designed to maximise revenue and profit.
Mr Hayne’s interim report blamed greed and the pursuit of profit for the widespread misconduct in the banking and financial services industries, taking aim at the banks, financial advisers and intermediaries such as brokers.
‘There can now be no doubt that remuneration practices can drive, and in Australia have driven, conduct of staff and conduct of intermediaries that is not consistent with the interests of the customer,’ Mr Hayne said.
‘The emphasis given to sales and profit, and the rewards that were given for selling the employer’s product, are central reasons for the conduct of banks and intermediaries that has been identified and is criticised in this report.’
The report noted that for most of the last decade, remuneration arrangements for third-party intermediaries and all bank staff from the most junior employees to the most senior executives has rewarded sales and profitability, not doing the right thing.
The major banks all made changes to their remuneration practices after the independent Sedgwick review last year recommended an overhaul of the way employees are remunerated.
But Mr Hayne said banks continue to remunerate employees in ways that emphasise sales, even though the emphasis has been reduced.
The royal commission’s interim report and the Sedgwick review pointed to radical changes to remuneration practices in the UK with respect to incentive pay.
Mr Hayne said the different approaches by UK banks either severed or at least loosened the connection between individual conduct and an organisation’s profit.
He questioned whether any bank employee dealing with a customer should be rewarded, either by commission or bonuses, for selling a product.
‘If customer facing staff should not be paid incentives, why should their managers, or those who manage the mangers?
‘Why will altering the remuneration of front line staff effect a change in culture if more senior employees are rewarded for sales or revenue and profit?’
Mr Hayne also questioned whether value and volume-based remuneration of brokers and other intermediaries in the home loan industry should be forbidden, after finding it has been an important contributor to the misconduct.
He said reforms to broker remuneration agreed to by the industry, such as eliminating volume-based commissions, are limited and do not deal with the basic problem of people being encouraged to borrow more than they need.
UNSW Centre for Law Markets and Regulation director Professor Dimity Kingsford Smith said bank boards would have to find new ways to incentivise staff.
‘The commissioner’s view is that currently much of the misconduct ‘can be traced to entities preferring pursuit of profit to pursuit of any other purpose’.
‘Finding and instilling purposes that motivate bank staff to treat customers well may be the commissioner’s biggest challenge to bank boards.’