Banks to develop individual approaches to remuneration

The report revealed that the banking industry has “revised” the first initiative of its implementation plan (Reviewing product sales commissions and product-based payments), cutting it from five milestone steps to two.

Notably, the revision has cut out the proposal to prepare and finalise “guiding principles” on remuneration, including broker remuneration, with the banks instead choosing to develop individual policies.

The report reads: “The [banking] industry has decided not to proceed with the development of industry-level guiding principles on overarching principles on remuneration and incentives. As a consequence, there are a range of approaches, methods being proposed by the banks to determine the principles at an individual bank level, and subsequent publication of those bank-level overarching principles.”

Mr McPhee noted that the ABA helped form the Combined Industry Forum (also known as the Mortgage Industry Forum) and is working with the broking sector on the implementation of changes to payments.

His report states: “The implementation plan specified… that the industry would work with regulators to implement changes to remuneration structures through regulatory approval or legislative reform (where necessary). When this measure was identified, it was prior to the Sedgwick recommendations being made or the establishment of the Combined Industry Forum by the ABA.

“Banks and the ABA are also working with the mortgage industry on implementation of changes to payments. At this point, it is the intention of the Combined Industry Forum to proceed without the need for regulatory or legislative intervention to achieve the outcome of improved payments and governance practices.

“Separately, the participating banks are working through their overarching principles on remuneration and incentives, including consideration of the most appropriate mechanism to externally report on these changes.”

McPhee slams decision

The decision to back away from producing a sector-wide guideline to remuneration has been criticised by Mr McPhee, who wrote in his report: “As part of the work on remuneration and incentives, the ABA has confirmed that, at this stage, it will not be preparing industry-level guiding principles on remuneration separate to those published by individual banks, as initially envisaged.

“In taking this decision, the industry has forgone the opportunity to demonstrate strong leadership in an area which has traditionally had a high profile, by building on the momentum of change stimulated by the Sedgwick review and ASIC’s report [on] mortgage broker remuneration.”

He concluded, however, that the decision “does not alter the industry commitment for each bank to develop and publish their overarching principles on remuneration and incentives” and allows resources to be directed to “other initiatives and reforms”.

Indeed, a spokesperson for the ABA commented: “Australia's banks are implementing the Sedgwick recommendations to improve how they pay staff. This involves making changes to payments to staff and mortgage brokers and to governance and performance management systems.

“Banks are on track to implement their own overarching principles on remuneration and incentives without the need for industry level work. As Mr McPhee noted in his report, four banks have published their principles ahead of the December 2017 deadline. 

“The ABA is working with the mortgage broking industry through the combined industry forum on reforms to remuneration in mortgage broking that support good customer outcomes.”

FBAA welcomes move

The executive director of the Finance Brokers Association of Australia, Peter White, has welcomed the ABA’s decision to step away from producing overarching guidelines on remuneration.

Speaking to The Adviser, Mr White said: “I’m very glad to see that this is how it has played out. We were very vocal on day one when the Sedgwick report came out, when I said it was potential industry regulatory manipulation… it seemed like [it was] trying to railroad that process so that we [the broker market] wouldn’t have a voice.

“We were concerned that [the banks] would beat their chest and we would all be left in the dust. I was exceptionally against that sort of thought process, so I’m glad to see that that time has passed and the Combined Industry Forum is working exceptionally well together.”

Mr White emphasised that the Combined Industry Forum would not be browbeaten into producing an outcome, but instead ensure that all voices are represented in its final report.

He said: “There are about 30 people who sit at that table and they [the ABA] are just one voice. I know there might be some cynicism in the marketplace where cynics might think the ABA might try and manipulate the Combined Industry Forum to get their [own] outcomes anyhow, but if anybody is thinking that, then I can reassure them that that is not the case at all. 

“No one can change what the banks are going to do on their own individual, commercial decisions. Whatever the banks decide to do commercially is one thing, but the CIF is about putting out an industry-wide overview on the six proposals by ASIC. 

“So, I’m glad to see that [the ABA has] walked away from [some] of the original proposals… and I think that this is the right approach.” 

The Combined Industry Forum has said that it will release its response to ASIC’s review on broker remuneration by the end of the year.

[Related: ASIC on broker remuneration and ‘good consumer outcomes’]