Bank staff are “hoarding referrals” and delaying customers, and bank management is largely blind to the risk of miss-selling of financial products by staff trying to hit sales targets, says the FMA.
Banks are failing to adequately monitor and control the inherent conflict of interest between customers and staff who are incentivised to sell them financial products, says the Financial Markets Authority.
In its report into bank incentive structures, released today, the FMA says the prevalence of incentive schemes that encourage high sales performance (and often incorporate minimum sales thresholds) means there is a “high risk of inappropriate sales practices occurring”, but banks are effectively blind to the potentially poor outcomes for customers.
Such outcomes may include: unknowingly switching to an investment product that actually has higher fees; opting for a credit card with a higher limit and higher fees when their current, cheaper card already meets their needs; or buying an insurance policy they would be unable to claim on.
Some banks even claimed their controls had not identified any instances where customers were sold unsuitable financial products in the previous year.
Some bank staff were found to be “hoarding” referrals so that they could meet their individual targets, rather than passing them onto less-busy colleagues, resulting in delays for customers.
And mobile mortgage managers, who often conduct their sales at a customer’s home or workplace, are “higher risk”, the FMA says – although some banks have been capping the amount of bonuses they can receive. The mobile mortgage managers commonly have a monthly dollar-value sales target, with their bonuses increasing according to how much they exceed that target.
The average bonus received by sales staff was $6,180 in the year to March 2018. However, it found one bank worker received $279,000. The average amount of “variable pay” for the top salesperson in each bank was $104,000.
The FMA says bank staff told it of inappropriate sales practices happening as workers tried to meet their sales targets, but the risk controls that banks have been relying upon are poorly designed and therefore unlikely to identify inappropriate sales and poor customer outcomes.
Some banks even claimed their controls had not identified any instances where customers were sold unsuitable financial products in the previous year.
Mystery shoppers are being used, but usually only report on the friendliness and efficiency of bank staff.
In addition, boards and senior management are often receiving little information on the risks of inappropriate selling by staff. Often the reporting on how any controls on inappropriate sales are performing is being monitored at middle-management level, and only escalated to senior management and directors in exceptional circumstances.
The FMA says some banks have already begun making significant changes to their incentive schemes, following Australian inquiries into the financial services industry and public outrage over bad customer outcomes there. But, overall, it says the industry is “at an early stage” of improving incentive schemes to reduce the risks.
The banks reviewed by the regulator were the “big four” (ANZ, ASB, BNZ and Westpac) plus Heartland, Kiwibank, Southland Building Society, The Co-Operative Bank, and TSB.
The FMA has said it wants to see the removal of all sales volume-linked incentives although it does not have the power to ban such incentives.
It will now be writing to the banks outlining its expectation that they all review their sales incentives structures for front-line staff and through “all layers of management”, and report back their planned changes by March next year.
“And if some banks have decided not to change their sales incentives then we will be talking to the Government about legislative options,” FMA chief executive Rob Everett said last week.
