Bank trust initiatives falling behind

The Australian 2:08pm October 21, 2016

Michael Bennet

The banking industry’s review of product sales commissions is at risk of falling behind schedule, while other actions to build community trust will miss the original implementation deadline, according to an update on a program being overseen by independent expert Ian McPhee.

The report also revealed five member banks of the Australian Bankers Association — Bank of America Merrill Lynch, Bank of China, Bank of Sydney, BNP Paribas and United Overseas Bank — were not participating in the reform package.

While the ABA argued these “wholesale and specialist banks” were appropriately sitting out of the consumer-focused reforms, Mr McPhee claimed their customers could benefit from them “adopting or adapting” the industry initiatives.

Amid intense political scrutiny following repeated misconduct and Labor’s push for a royal commission, the ABA in April unveiled six initiatives to improve consumer outcomes, transparency and “build trust and confidence”.

Mr McPhee, the former auditor-general appointed to review the progress of implementing changes, on Friday released his second quarterly update into the 18-month program.

It coincided with ABA chief Steven Münchenberg revealing he would step aside, once a replacement is found, after more than six-and-a-half-years in the role.

Mr McPhee said that while “good progress” had been made in the past three months and some milestones were completed ahead of schedule, there has been “slippage” on others, particularly the review of sales commissions.

It included the December 2017 deadline of working with regulators and politicians to implement changes being put “on alert for slippage against plan”.

“There have been some delays in interim steps on the review of product sales commissions and product based payments although additional resources have been allocated to that review to address this,” Mr McPhee said.

“Given the complexity of the issues involved in that review, and the active response to slippage relative to the original plan, this position is manageable at this stage, but requires appropriate monitoring.”

Mr McPhee noted that the independent review of product sales commissions and payments being undertaken by Stephen Sedgwick had commenced, including laying out the terms of reference.

The pay review focuses on retail banking services such as branch staff and commissions to brokers, aiming to build on the Future of Financial Advice reforms that banned conflicted remuneration across wealth management products.

The first major milestone is for banks to agree on remuneration principles in March following Mr Sedgwick’s review.

Along with data collection delays, Mr McPhee said the ABA advised that Mr Sedgwick was closely monitoring the Australian Securities & Investments Commission’s separate review of remuneration structures in the mortgage broking industry to ensure “alignment”.

He added while 10 banks hadn’t raised particular implementation risks, five were more cautious ahead of Mr Sedgwick’s report and another five raised potential risks, including that “banks cannot agree among themselves” and changes may have a “disproportionate adverse impact” on smaller players.

Overall, Mr Mcphee claimed that of the 12 planning milestones, eight had been completed, two surrounding commissions were on “alert” for slippage and another two relating to supporting ASIC that are contingent on government consultations won’t hit original timetable.

“In other words, four of the six initiatives are progressing well,” he said.

Mr McPhee noted that while variations weren’t unusual with extensive programs covering competitive industries and that banks were taking steps to improve pay structures independent of the industry program, further challenges lie ahead.

“By the nature of this process whereby trade-offs between various stakeholder interests and implementation issues may be required, it is to be expected that the task for the industry will get more challenging from here,” he said.

Commonwealth Bank and National Australia Bank welcomed Mr McPhee’s update, pointing to the “significant” work already undertaken.

“We are making long term change ... these reforms are substantial and complex. It’s pleasing to see real progress being made and we will keep working to ensure we raise standards to better meet community expectations,” said Matt Comyn, CBA’s retail banking boss.