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"Our manager bullies staff by telling them that if they don't reach their revenue target she will send them to another branch and get someone who can."
Bank staff 'named and shamed' for not hitting sales targets: union
Australian Financial Review Sep 9 2016 at 6:08 PM
James Eyers
Bank tellers are "beginning to sound like a McDonald's employee" by offering unnecessary financial products to customers to meet sales targets, while others are being "named and shamed" in performance league tables for not meeting targets, says the union representing bank employees.
In an explosive submission to a review of bank salaries, the Finance Sector Union has urged the government to extend the Future of Financial Advice laws to all financial products and services, including loans and credit cards. The FSU also wants bankers to be bound by a duty to put their customers' "best interests" first, meaning they can only provide products and services appropriate to customer needs.
While new enterprise agreements in the big four banks have broken the link between pay and sales targets for many staff, the FSU says it does not go far enough. It argues there needs to be new legislation to remove conflicted remuneration from banking.
Its submission to the review by Australian Public Service commissioner Stephen Sedgwick paints a bleak picture of working conditions in the major banks, pointing to inadequate staffing, high levels of stress and anxiety, and aggressive management who push staff to sell products that don't align with the needs of customers.
The critique follows outgoing Reserve Bank of Australia governor Glenn Stevens' comments to The Australian Financial Review that banks and regulators must "take great care with incentives – be they financial incentives or any other kind – that they don't give too much temptation to do the wrong thing".
Following a survey of 1300 of the FSU's 33,000 members, the union said 71 per cent of bank staff say product and performance-based pay has undermined public trust in the industry. Staff are being told that if they don't meet sales targets "they won't receive a bonus and that their employment will be jeopardised", the submission said.
"The existing remuneration systems that reward product pushing and create potential conflict with customer's best interest duties is causing both reputational harm to the industry and leading to customers viewing interactions with banks with suspicion. These systems are eroding public trust and confidence in our banks," the submission said.
Comments in the submission from union members included: "We are pushed and pushed to reach targets that are unachievable unless you basically bully people into saying yes"; "Due to the focus on targets, some of our tellers are beginning to sound like a McDonald's employee [asking] 'Do you want fries with that?' Our version is 'Do you want a savings account or can I review your insurance arrangements?'"; and "Our manager bullies staff by telling them that if they don't reach their revenue target she will send them to another branch and get someone who can."
Submissions by the major banks to the Sedgwick inquiry are being kept confidential. Australian Bankers Association chief executive Steven Munchenberg said this was to ensure the banks "provide detailed information on how they remunerate staff, a lot of which is considered to be commercially competitive because banks compete for staff as well as customers".
The independent reviewer of the banking industry's examination of culture, former Commonwealth auditor-general Ian McPhee, met with representatives from the banks and the ABA on Friday.
Senior bankers recognise significant work needs to be done to repair the image that many customers have of their banks. George Frazis, chief executive of Westpac Banking Corp's consumer bank, told a Trans-Tasman Business Circle lunch on Friday that "banks have a significant perceived reputation problem right now ... Some people think we are just interested in profits. Some people don't fully trust us. That is the perception and the reality we face. The only way we can turn that around is to start earning back the trust of the people we serve – one customer at a time."
Mr Sedgwick, who is expected to publish an issues paper in December, has extended the period for submissions for his review until September 23.
No bank dividends for investors in next recession
Australian Financial Review Sep 9 2016 at 1:17 PM
Christopher Joye
I don't think Australian bank shareholders are cognisant of the risk that if equity capital ratios fall modestly, there are new automatic restrictions imposed by the regulator on the distribution of earnings that mean dividends may not be paid.
In fact, it is likely that some banks will stop paying dividends altogether in the next recession as they rebuild capital eroded by loan losses.
This column first publicly canvassed these hazards in August in the context of additional tier one capital (AT1) securities (or "hybrids").
The chairman of the Australian Prudential Regulation Authority, Wayne Byres, has since dedicated much of an important speech to the matter.
APRA concurrently released a letter it had sent in response to a submission from the banking lobby that sought to convince APRA that the "automatic restriction on AT1 capital distributions is undesirable as it could result in a loss of confidence in [a bank] and adversely impact the demand for its capital instruments, particularly at a time when additional capital may be needed". Thankfully APRA was staunch: the rules remain.
At his best, the nation's chief banking boss has traits of Guy Debelle in him: fearlessly frank and authentic even if it means breaking a few noses. (For those who don't know, Debelle is the Reserve Bank of Australia's notoriously blunt, guitar-playing deputy governor.)
Byres also has a handy habit of burying his best content in long footnotes that reward the studious – like the time he stealthily disclosed that all the capital the major banks held against their home loans was wiped out in the 2014 stress tests while smaller banks' capital was sufficient to cover their losses. (We were the first to publicly revealed that gem.)
Conversion trigger
Byres' latest speech confirmed our analysis that APRA will garnish 40 per cent of a major bank's earnings from being used for dividends, AT1 hybrid coupons and/or staff bonuses if their common equity tier one (CET1) capital ratio falls below 8 per cent.
If equity declines to less than 7.125 per cent (6.25 per cent), APRA will restrict 60 per cent (80 per cent) of total earnings. A formal stop on 100 per cent of all payments to equity and hybrids kicks in when the CET1 ratio hits 5.375 per cent of risk-weighted assets.
So the de facto equity and hybrid default thresholds start at 8 per cent CET1 and are absolute at 5.375 per cent, which are both notably above the 5.125 per cent equity conversion trigger hybrid investors have traditionally focused on.
Capital is only likely to be declining in a recession because banks are losing money as they did in 1991 when both ANZ and Westpac reported losses and slashed dividends.
Yet in the next recession if a bank suffers negative earnings and CET1 falls below 8 per cent, prudent investors should assume they are going to get no dividends or AT1 distributions. (In APRA's recessionary stress tests, CET1 ratios fell by more than 3 percentage points.)
For the avoidance of doubt, there is nothing stopping the bank continuing to making interest payments on deposits, senior debt and subordinated bonds.
But the "going concern" perpetual equity securities that count as Tier 1 capital – ordinary shares and AT1 hybrids – will be appropriately furnishing the bank with the buffer required to rebuild first-loss reserves.
This is why it's madness to think a defensive fixed-income portfolio can be solely made up of hybrids. Or in APRA's words, "viewing [hybrids] as simply higher-yielding substitutes for vanilla fixed-interest investments, let alone deposits, is something to be counselled against". (For the record, I do invest in hybrids.)
Greater losses
One Byres comment I did find fault with was the statement that hybrids "are providing the important first lines of defence that we can call into action [correct!], in some instances even ahead of shareholders [no!], to aid an orderly resolution".
This refers to the "inability event" clause whereby if APRA cannot convert the hybrid into equity, it can write it off completely ahead of shareholders. In all other instances the hybrid ranks ahead of equity and dilutes its voting rights in a conversion event.
Preserving the integrity of the capital structure hierarchy is a global best-practice regulatory principle and APRA should avoid like the plague any situation where hybrids suffer greater losses than shareholders, even though that is precisely what equity (and management for that matter) might call for to avoid dilution in a crisis.
In another footnote, Byres quipped that not every bank blow up "will necessarily imply a failure of the regulatory regime".
That's a direct response to this column's argument that declaring a "non-viability" event is a tacit admission of prudential supervisory failure and risks blowing up the banking system.
I think APRA agrees that broadcasting that a systematically important bank is non-viable could trigger catastrophic contagion across the system. Byres classifies these as "disorderly failures", which he says "are to be avoided".
"The potential for contagion to other financial firms, not to mention the widespread adversity it can impose on the broader community, means the failure or near-failure of a bank is no run of the mill matter," he says.
And it is technically possible, albeit unlikely, that a bank could go bust in an entirely unpredictable fashion that the regulator could have never realistically anticipated.
Two real tests of APRA's policy independence will come in the form of the final definition of what an "unquestionably strong" bank is (most expect a new target CET1 ratio of 10 per cent) and the related "total loss absorbing capacity" (TLAC) regime the government has asked it to introduce.
If APRA gets captured by the bank lobby (there is regrettably no counter-balancing "depositor lobby"), it may take the easy option of not lifting CET1 ratios while allowing banks to introduce a new non-preferred senior "or Tier 3" security between senior and subordinated bonds to boost TLAC ratios.
It is hard to fathom how a bank could be unquestionably strong with more than 15 to 16 times leverage.
And it would be very unwise for APRA to further increase the complexity of bank capital structures while permitting senior bondholders to continue to believe they are implicitly government guaranteed.
If APRA follows the Canadian or US lead, it will clearly state in statute that it can impose losses on all creditors bar protected depositors through its asset transfer powers before drawing on taxpayer equity injections.