“Most of what seems to go wrong in financial services comes off the way people get paid; the way they get incentivised to sell product; to give advice.”
This a key comment Financial Markets Authority (FMA) CEO, Rob Everett, made on Radio New Zealand on Wednesday, as he discussed his move to team up with the Reserve Bank, and on Monday challenge banks to prove their practises are different to banks in Australia.
The FMA has also committed to arranging a meeting with insurers to deliver a similar message to them within the next few weeks.
The moves come as damning revelations around the misconduct of the parent companies of the major four banks in New Zealand have emerged from Australia's Royal Commission on Financial Services in recent weeks.
Adamant we don’t need a royal commission inquiry into the banking sector here, Everett says one of the regulator’s main focuses has been looking at the conflicts of interest bank staff face when dealing with customers.
“A lot of our work is around understanding, what are the incentive structures, what are the rewards structures that make a salesperson or an adviser prefer one product over the other or give one type of advice versus the other one. That’s really the guts of it.”
Banks - we’re changing the way we incentivise staff
The Bankers’ Association of New Zealand, in a letter it presented to the FMA and Reserve Bank on Tuesday, says banks have been changing their remuneration policies to ensure retail staff no longer receive incentives based directly on sales performance.
The industry body acknowledges the changes follow recommendations made in an April 2017 report, commissioned by its Australian counterpart, and written by Australia’s ex-Public Service Commissioner, Stephen Sedgwick.
The Bankers’ Association says that while some of the recommendations made in the Sedgwick Review may not apply in New Zealand, or can’t be adopted here due to our laws, “the industry is committed to adopting the rest of those recommendations, as appropriate for each bank”.
“In some cases the work has already been completed and the relevant recommendations have already been implemented.”
ANZ’s retail and business banking managing director, Antonia Watson, in June detailed in a video interview what the changes in her organisation look like.
For example, she explained that from October 2017, 25% to 30% of frontline staffs’ bonuses would be derived from how much they sell. Currently this portion sits at over 50%, depending on employees’ roles.
Bank workers - the rhetoric’s changed, but the sales culture remains
FIRST Union, which represents financial sector workers, says banks have made varying levels of commitment to the recommendations.
Yet its national organiser of finance, Stephen Parry, maintains the changes made haven’t gone far enough to alleviate the pressures bank retail staff are under to meet sales targets.
This partially stems from the Sedgwick report stopping short of recommending sales targets be removed altogether.
“Our position is that sales targets have no place in the banking sector,” Parry says.
Speaking to interest.co.nz, Parry says the major banks in New Zealand have within the last year changed the “scorecards” used by their retail staff.
In the past, staff were incentivised to meet different financial sales targets in different product categories. IE, acquire $xxx in new mortgages, transfer $xxx to the bank’s KiwiSaver scheme, etc.
Now targets are “product neutral”, so staff are incentivised to sell x number of products regardless of the sorts of products they are.
The catch, according to Parry, is that banks don’t give staff as much credit for providing customers with products/services that generate less revenue. IE doing term deposit rollovers or issuing debit cards.
So while the rhetoric has changed and new targets appear customer-centric, the old sales culture remains.
Furthermore, Parry believes the sales targets are still too high.
“Our members regularly report feeling stressed as a result of high sales targets, as well as being uncomfortable about having to offer products which consumers do not necessarily need or want,” he says.
“If a worker fails to sell enough products, they not only lose out on bonuses [which he admits usually only make up about 5% of their pay] but ultimately risk being managed out of their jobs.
“For every 10 workers who are formally disciplined for failing to meet sales targets, there will be another hundred workers whose targets are being scrutinised on a less formal basis.”
Parry maintains the change necessary isn’t going to come from the banks themselves, so a royal commission is required.
He points out the union has been raising issues around sales targets for years, but it wasn’t until the release of the Sedgwick report, which was commissioned in an attempt to blunt public pressure for an inquiry, that there was some action.
Government - we’re changing laws so there’ll be more transparency around the way financial products are sold
Coming back to the FMA’s Everett, he also told Radio New Zealand a few pieces of legislation were being drawn up to address some of the issues facing the industry.
“I would rather let that work progress before anyone leaps to any conclusions about whether or not to have an inquiry.”
One of the key law changes he referenced was the review of the Financial Advisers Act.
Under the Financial Services Legislation Amendment Bill, which repeals the Act, all financial advice will need to give priority to the client’s interests.
The confusing ‘authorised financial adviser’, ‘registered financial adviser’ and ‘qualifying financial entity adviser’ categories will also be done away with, as those providing financial advice will be categorised as either ‘financial advisers’ or ‘nominated representatives’. Most bank advisers will be classed as nominated representatives.
Under the new law, advisers will also have to disclose much more about any conflicts of interests around the way they’re paid.
Commission payments however won't be banned or capped, as they have in Australia and the UK.
Having had its first reading in Parliament in December, the Bill is before the select committee today (Thursday). It’s expected to be passed in the middle of the year, from which time it will be phased in.
Everett also referenced the Government started work on a major review of New Zealand’s insurance contracts law.
Having announced his commitment to undertaking the work in an interest.co.nz interview in November, Commerce and Consumer Affairs Minister Kris Faafoi in March released the terms of reference for the review.
The review will consider whether there is a case to plug the regulatory gap, which sees insurers’ conduct virtually unregulated.
It will also address problems caused by the onus being on customers to identify and disclose material information about themselves to their insurers.
27 Comments
So, the first little bit of smoke.
Staff have been and are paid on an incentive basis. From October 2017 (what only six months ago and in light of the outing in Australia) banks in New Zealand have modified what they do.
Rather than these revelations assuring one, it does give cause concern.
It's tricky ... because obviously there's a balance, can't have someone who turns up to sit there and do nothing being paid the same as a high performer (because we know which staff member will stay and which will move on)... and that performance does need to be measured in some meaningful and clear way, not just a feeling of whether they're doing well.
Would the same scrutiny to be applied to all retail sales staff in all industries... they should get paid the same regardless of what they sell at work. For example, why do real estate agents and brokers get commission, and not an hourly rate? Do car dealers get paid part of their wages based on sales, should they?
Clearly, industries/roles that focus purely on sales commissions must have credibility issues on 'doing the right thing' particularly when those incentives are not transparent and make up most or all of in-pocket income (I note the comment from the Union, which was glossed over, that they are here talking about "bonuses" which make up less than 5% of pay... )
Certainly a tricky beast to crack without overly legislating it.
Good points MisterB. I had an interesting discussion with Stephen Parry from the Union about this. I raised the point that it isn't unusual to give staff (regardless of the sector they're in) numerical targets to meet. What Parry said his members wanted was for more emphasis to be placed on other performance indicators - IE leadership skills and ability to relate to other staff. Interesting thought to consider.
The challenge is, how does one measure "leadership skills" and "ability to relate to other staff"?
As a side, I would have thought that a weighting of 30% (of 5%) would indicate more emphasis is already on non sales indicators.... only 1.5% of take home pay evidently based on sales incentives.
As a matter of interest and for transparency, one wonders if any of Mr Parry's income is derived from performance bonus? And if performance is at all measured in growth of union members. ;)
In terms of Corporate Social Responsibility, one would be concerned if unethical behaviour having been occuring in our banks. I mean, given the amount we pay the leaders of our banks, they should almost be god like figures, perfectly functioning humans with almost flawless morals and chracter. But yet if they're not, why are we paying them so much to not act in the best interests of society (that is their responsibility), but instead only their own financial benefit?
If bank CEO's are getting paid so much and our banks are making record profits, their CSR profiles should be squeaky clean - I mean its not like they don't have the financial resources to have the right people having oversight of their culture and implementing change if they internally found themselves off track....surely?
So the union wants banks to move from targets that are easily measured to targets that can't be quantified at all. Gotcha. It's insanely easy to hit sales targets in banks in New Zealand. Really the only test for a sales process should be 'is it in the best interests of the client'? This push from the union to reward all members the same regardless of whether they're high performers or just showing up to kill time is exactly how you get a culture of mediocrity. And that's not in any client's interests.
I do not have a problem with performance pay and there is plenty of ways of measuring that. It is dangerous if a bank is to rely on sale of products with different commissions to determine performance. I would not have thought that banks would have needed to act in that manner.
The problem I have is is that traditionally customers have had a special relationship with banks and that banks would act in customers interest by providing sound advice. In many ways people put the same trust in in their bank as they would with the lawyers; to provide advice and act firstly in the customer's interest. So the issue is, that the bank representative is selling me a product that is in their personal/individual interest due to commission/performance bonus rather what is in my interest.
The trust by the public in banks is important to banks. As a former payroll officer signing up people to KiwiSaver, invariably the employee had a higher degree of trust in their bank compared to other providers and would more often opt for banks on that basis.
This trust in banks is reflected by the fact that banks feature highly on lists of most trusted brand names.
However, if banks are to act in the same way as car salesmen, that is to simply sell me a product that is in their interest, so be it and they will be held in the same esteem as car and insurance salesmen.
"The problem I have is is that traditionally customers have had a special relationship with banks and that banks would act in customers interest by providing sound advice. In many ways people put the same trust in in their bank as they would with the lawyers; to provide advice and act firstly in the customer's interest. "
Therein lies the problem. Many bank customers assume incorrectly that there is a fiduciary duty by the bank to the customer. There is no fiduciary duty whatsoever by the bank or bank employee to the bank customer. All bank employees are agents of the bank and act in the best interest of the bank. The relationship between the bank and customer is purely a sales relationship, not a fiduciary relationship .
This line is especially blurred in the area of investment advice - most are investment advisors and receive compensation based on commission on the product they sold to the customer. Only if the customer engages a investment advisor directly and pays a fee directly to the investment advisor and this is the only source of payment that the investment advisor receives (i.e no commission from products sold) then they might be free of conflict of interest.
A lawyer has a fiduciary duty to its client. An accountant has a fiduciary duty to its client. Note that the client specifically pays a fee for their services. There is a contract of engagement between the service provider and client. If a fiduciary fails to act in the best interest of their client, then they can seek legal recourse.
Frequently, I receive calls from bank representatives asking if I'm interested in some financial product that they have available. Are they genuinely looking after my own interest? No, they are clearly trying to meet some sales target. It is better to always assume that there is no fiduciary duty by bank employees to customers, always assume that they are there to sell you a financial product that the bank makes a profit on - that way you are protecting your own financial interests.
It's worth reading some literature on incentive systems and performance measures. While pay-for-performance superficially looks linear and attractive it is anything but. It's likely banks could get better performance and avoid misaligned incentives by adopting better management practices.
Blake from Glengarry Glen Ross. Crucial reading or viewing to understand the psychology. desperation, and loneliness of our sales- and debt-driven age.
".......we're adding a little something to this month's sales contest."
"As you all know, first prize is a Cadillac Eldorado. Anyone wanna see second prize? Second prize is a set of steak knives. Third prize is you're fired. Get the picture? You laughing now? "
"You got leads. Mitch and Murray paid good money, get their names to sell them; you can't close the leads you're given, you can't close shit. You ARE shit! Hit the bricks, pal, and beat it 'cause you are going OUT!"
Glad the discussions have started.
https://www.radionz.co.nz/news/business/356515/nz-bank-tactics-they-mad…
If more people come out if the woodwork with similar stories about questionable sales tactics etc. it might force the issue. I can't see fees being an issue because our savings products are more transparent and regulated (e.g. Kiwisaver) than the Australian superannuation scheme. At this point there must already be a scramble within banks to address these issues (compliance, incentives, fees) so that at least when board members are questioned they can talk about how the company has now "changed its ways."
Some pretty vague complaints in there...
"One customer, Ann, went to her bank to get a loan and was told she would have to buy insurance as well. She said she reluctantly agreed while feeling pressured."
What sort of loan? What sort of insurance? Perhaps it was insurance on the security (car or house etc).
The dude having to spend a bunch of time getting funds in credit off his credit card seems to have got a raw deal though. Presumably had no other accounts to transfer it to himself online. Not that WP online banking is particularly good.
At the end of the day, businesses exist to make a profit. And employees are there to contribute to the profit. Striking the balance between retainer and incentive/bonus varies between businesses and managers but there are an awful lot of commission sales people earning very little. There's probably a huge number of real estate agents for instance who haven't sold a house in 6 months or more and the FMA report identified that of non aligned insurance advisors selling insurance about 1/3rd are earning less than the minimum wage.
Banks are trusted and more's the pity because head office has no concern for their clients other than as profit drivers.
Isn't it funny that we have record low interest rates and record high bank profits?
The profits are record in terms of dollars, but I don't believe they are record in terms of % against assets. The absolute dollar amount is driven by ridiculous debt that people are getting into to buy houses.
This has been driven in fact by the low interest rates (which were driven by low wholesale rates).
There is a solution. In the depths of the Great Depression,the American economist Irving Fisher published a now famous proposal with the title 100% Money. Effectively,he proposed a system of Narrow and Wide banking. Effectively,a deposit that could be withdrawn on demand or used to make a payment on demand,should be backed by sovereign money-and banks which which offered such deposits,should be permitted to do No Other Business. All other activities,whether client-facing,whether wholesale or retail,would have no special sovereign support or supervision.
This has now been the subject of a study by the IMF,which found that it would indeed lead to greater macroeconomic and financial stability.
In that world,the bank with which you deposit cash and from which you take a loan,wouldnot be permitted to sell you insurance or Kiwisaver products. it would be boring but safe.
Banker have to sell insurance, credit cards and kiwisavers evertime you walk in to do some account maintenance. They have a target.
Have heard some banks train their staff to “create interest” and “handle rejections” when you say “no thanks” to a product such as insurance.
They are sales people. Makes you almost not wanting to visit the bank anymore.
Kev - we live in a consumer driven world, a world full of salesmen and woman who want to sell you something. Unfortunately we also live in a world where we now seem to blame others for the decisions we make - a bit of growing up and learning to say no is long overdue in society.
Beware, data mining is the future of spotting customer habits/spending and financial position, which will enable banks to pitch more products, more like the targeted advertising happening through the meta data captured by social media, etc. Not sure of the privacy issues in such trends.
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