What if...: Annette Sampson
The industry is gradually being reformed but there are still areas where standards need to be raised
THE STORY SO FAR
Regulations on how the banks treat consumers have been slowly increasing for several years. The financial advice reforms that banned new commissions and required financial planners to put their clients’ interests first, reforms to responsible lending and regulatory moves to limit bank lending to investors and on riskier interest-only loans have all come into effect in recent years. The Financial System Inquiry also made a number of recommendations that have resulted in the government boosting the powers of the Australian Securities and Investments Commission (or taking steps in that direction).
One recommendation being adopted is to give ASIC greater powers to police how products are designed and sold. This is intended to make institutions more responsible for their products rather than simply provide reams of disclosure and leaving it up to us to work out whether the product is a dud. The inquiry also recommended ASIC have greater powers to ensure there is competition in the market, though alternative measures have since been proposed.
There has also been a review of dispute resolution in the financial system, proposed measures for better disclosure of credit card interest rates and several initiatives by the industry to lift its game. The Australian Bankers’ Association has led industry action through measures such as its Banking Reform Program (which included reviewing sales commissions, recommending banks appoint consumer advocates, boosting whistle-blower protections and bringing forward a review of the code of banking practice). Earlier this year, it also announced its Better Banking campaign, including measures to better support customers in financial difficulty, deal with small business and farmers and make it easier for customers to switch accounts and credit cards.
SO DO WE NEED A ROYAL COMMISSION?
The federal government says not but Labor last year won senate support to set up an inquiry into consumer protection in the banking, insurance and financial sector. It is due to report next year. That’s a long time in politics (and banking) but some of the submissions make interesting reading on what type of problems remain to be addressed. Here are just a couple of the key issues raised:
CULTURE
The submission from the consumer group Choice points to the ongoing sales culture within the banks. The Australian Bankers’ Association’s retail remuneration review released earlier this year found that while there wasn’t a systemic risk to consumers that warranted a ban on product-based payments, some current practices carry an unacceptable risk of promoting behaviour by bank staff that is against consumers’ interests. It recommended banks stop paying incentives to retail staff based directly on sales and develop a culture which is “demonstrably ethically and customer oriented”.
Some worrying practices from the review were highlighted by Choice.
For example, one manager’s scorecard entirely comprised financial targets. Half the score was assigned to state sales with the rest relating to sales of the manager’s team. Unless 60% of that team achieved or exceeded their personal sales targets, and another 20% made at least 80% of their targets, no bonus was payable.
“Inappropriate incentive schemes … lead to consumer harm as people are sold products they can’t use, don’t meet their needs, or are high cost,” Choice argued. It said the harm was exacerbated when the sales pitch was completely unsolicited – such as when a customer asked to cancel their credit card but was upsold to a card with more features, or was sold other products.
At a minimum, Choice argued, banks should have to publicly report on incentives paid to, and performance indicators for, staff serving customers and their direct bosses.
COMPETITION
The Productivity Commission is due to report on competition in the financial industry shortly. Choice’s submission says that while three out of five Australians believe the banking system lacks competition, most of us have an account with one of the big four banks or their sub-brands (like St.George or Bankwest). The highest concentration is in transaction accounts and credit cards (both 77% of people), followed by home loans (71%) and savings accounts (66%). Many said switching was “too much hassle” or they wanted to keep their accounts in one place, reducing pressure on the big banks to compete for their business.
Several submissions pointed to the UK where regulators have been working to increase competition through activities such as trials to improve consumer engagement and understanding of specific products and triggers, such as putting last year’s premium on insurance renewal notices to prompt consumers to have a closer look at what they are paying for.