The report, released this week and authored by former public servant Stephen Sedgwick, defines cross-selling as “sales in addition to the main activity of the seller (or additional to the original enquiry by the buyer/customer if they have approached the bank of their own volition)”.
“Such targets seem to carry particular risks of inappropriate outcomes, especially for products that are discretionary add-ons to the primary product such as insurance products sold in conjunction with a line of credit or a mortgage,” it said.
The report pointed to one example, the sale of credit insurance to a credit card holder who was ineligible to make a successful claim on the policy as set out in the Consumer Action Law Centre submission.
“A number of banks employ cross-sales targets or measures to encourage customer-facing staff to have conversations intended to assist customers identify and meet their needs for financial services (and thus identify sales opportunities for the bank),” the review said.
The report also flagged ‘accelerator’ incentives as a potential risk.
“The term ‘accelerator’ (or ‘stepped payment’) refers to an arrangement whereby a higher rate of reward is earned with higher levels of performance such as increasing volumes of sales. For example, a sale may attract a commission of 2.5 per cent for each dollar of sale above a threshold but a larger commission, say a percentage point higher, may become payable for sales that are 25 per cent above that threshold. The higher payment is typically applied to sales in excess of the last threshold,” it said.
“This form of incentive may create increased risk if staff try to maximise their sales before the end of the incentive period.”
The report noted that approximately half of the banks that use this approach apply accelerators to at least one of their reward plans.
Digital Finance Analytics principal Martin North said the findings of the report are interesting, given that it was instigated by the banks in response to political pressure.
“I think it is quite amusing really because the banks under the ABA were running this interference to negate the royal commission conversation,” Mr North told Mortgage Business.
“Essentially, the independent guy has been independent, in so far as what he is highlighting are some quite interesting and quite valid concerns.”
Following the release of the report, ABA executive director – retail policy, Diane Tate, issued a statement, saying banks have committed to changing or removing payments that could lead to poor customer outcomes.
“Importantly, the issues paper has not identified systemic issues warranting the outright banning of product-based payments. However, the paper does highlight the importance of culture, good governance, performance management systems, compliance checking, and communications across the organisation and by management, as all related to remuneration,” Ms Tate said.
“The ABA looks forward to providing another submission to Mr Sedgwick to help complete his review. This is a complex area with mixed views so we encourage interested parties to have their say.”
Mr North said the response from the ABA was a “misdirection” and that “the report was quite clear that there is a problem with commissions”.
“In this case, it looks like an inconvenient truth that has come out,” he said.
“Obviously, there is a second round of industry consultation and I’m sure the banks will be climbing over themselves to argue all sorts of reasons as to why this isn’t a problem at all.”