Sedgwick review accused of supporting ‘cartel behaviour’

From The Adviser.

A Melbourne-based broker and former CBA employee believes the ABA-commissioned Sedgwick review is looking to “support cartel behaviour” and has used the term ‘commission’ unethically.

Following the release of the Sedgwick review Issues Paper in January, Universal Wealth Management director and AFG broker Maria Rigoni sent a submission to the review. However, the independent reviewer reportedly decided not to publish it, citing “some legal considerations”.

The Adviser has obtained a copy of Ms Rigoni’s submission, which expresses her concerns over the Sedgwick review and its remarks about mortgage broker remuneration.

“Reading the ABA submission and associated legal advice it seems that the review is seeking options to support cartel behaviours,” the submission states.

Meanwhile, Ms Rigoni argues that the use of the word ‘commission’ for receipt of remuneration is being used “unethically” to create an illusion bias of how much money a mortgage broker actually earns as take-home pay and what they are required to do to earn it.

“Bank employees are generally paid a salary and a performance bonus, mortgage broker firms are not,” she said.

“The word commission has several different meanings, nevertheless in its most simple meaning, commission is the act of passing a responsibility to someone else. It is the action of granting certain powers or authority to carry out a certain task or duty.

“For example, the ABA may commission an individual to complete a review into a subject matter. The review has a specific set task, with terms of reference and authorisation to seek confidential information, and when complete a report would be provided to the ABA and then the commission ceases to exist.”

According to Ms Rigoni, remuneration for the completed commissioned task may be on a fixed price agreement, or a sliding scale of remuneration with incentives, depending on the agreement made directly between the parties.

“Either way a payment for the commission is made,” she said. “Has the reviewer sold a product? No! The reviewer has sold his ability to perform the required task.”

In her submission, Ms Rigoni states that credit providers outsource or commission contractors to do many things, such as printing, advertising, marketing, catering, legal advice, and lead generation.

She believes it is “nonsense” for anyone to say that the labour market for mortgage brokers is principally product-related commission-based.

“Mortgage brokers are not paid for the sale of a loan product. They are paid for ‘commissioned work’ required in the introduction of loan applications from a person the lender wants to deal with.”

Deutsche Bank Fined For Rigging FX Trading

The US Federal Reserve has announced two enforcement actions against Deutsche Bank AG that will require bank to pay a combined $156.6 million in civil money penalties.

The Federal Reserve on Thursday announced two enforcement actions against Deutsche Bank AG that will require the bank to pay a combined $156.6 million in civil money penalties. The bank will pay a $136.9 million fine for unsafe and unsound practices in the foreign exchange (FX) markets, as well as a $19.7 million fine for failure to maintain an adequate Volcker rule compliance program prior to March 30, 2016.

In levying the FX fine on Deutsche Bank, the Board found deficiencies in the firm’s oversight of, and internal controls over, FX traders who buy and sell U.S. dollars and foreign currencies for the organization’s own accounts and for customers. The firm failed to detect and address that its traders used electronic chatrooms to communicate with competitors about their trading positions. The Board’s order requires Deutsche Bank to improve its senior management oversight and controls relating to the firm’s FX trading.

The Board is also requiring the firm to cooperate in any investigation of the individuals involved in the conduct underlying the FX enforcement action and is prohibiting the organization from re-employing or otherwise engaging individuals who were involved in this conduct.

Separately, the Board found gaps in key aspects of Deutsche Bank’s compliance program for the Volcker rule, which generally prohibits insured depository institutions and any company affiliated with an insured depository institution from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with a hedge fund or private equity fund.

The Board also found that the firm failed to properly undertake certain required analyses concerning its permitted market-making related activities. The consent order requires Deutsche Bank to improve its senior management oversight and controls relating to the firm’s compliance with Volcker rule requirements.

ABA Welcomes McPhee Report

The Australian Bankers’ Association has welcomed today’s release of Mr Ian McPhee’s report which found the industry has made significant progress delivering the reform program it announced 12 months ago.

Mr McPhee noted that banks were making good progress in delivering the initiatives but also recognised that expectations are constantly changing and there are government processes which will need to be carefully factored into the reform program.

Significant milestones achieved in the quarter to April 2017 included:

  • The appointment of customer advocates by 19 banks to help customers resolve issues.
  • Major banks updating their whistleblower protections to meet the highest standard to encourage a ‘speak up’ culture, and three other banks doing this ahead of schedule.
  • The delivery of two key independent reviews into the Code of Banking Practice (Khoury Review) and retail bank staff remuneration (Sedgwick Review), which will result in significant benefits to customers.
  • Three additional initiatives1 to build on the ‘6 Point Plan’, which address consumer concerns about people in financial hardship, switching banks and small businesses and farmers.

ABA Chief Executive Anna Bligh said she was pleased Mr McPhee had acknowledged banks’ commitment to change.

“One of my first priorities is to work with banks to identify changes that can be implemented quickly and effectively, and which will make a meaningful difference for customers.

“In my own interactions with bank CEOs, I have been impressed by how committed they are towards this reform program and I was pleased Mr McPhee acknowledged this in his report.

“Ultimately it is action, not commitment, which will demonstrate that change is genuine. Banks understand that to build greater trust in banking, customers need to see, feel and touch evidence of change,” Ms Bligh said.

Mr McPhee’s report also highlighted that some reform initiatives – such as external dispute resolution arrangements and ASIC breach reporting – rely on government and regulatory action before banks can progress them further.

Ms Bligh said that in addition to the banking industry’s own reform program, there were a further 15 inquiries, reviews or investigations into banking underway by government or regulators.

“There is an enormous amount of scrutiny on banks at the moment and the industry is serious about change. Banks have made a lot of progress over the past year, but there is much more to do.

“The industry needs to get better at communicating its massive reform agenda which is transforming banking in Australia, and also measuring how well it has met the changing expectations of customers and the wider community,” she said.

A copy of Mr McPhee’s report is available at

MFAA boss rejects Sedgwick review, slams commission reforms

From The Adviser.

The association has warned that Sedgwick’s recommendations will give the banks “complete oversight” of brokers, erode independence, and further empower the major lenders.

The Mortgage & Finance Association of Australia (MFAA) has expressed serious concerns with some of the themes outlined in the Australian Bankers’ Association’s (ABA) Review, conducted by Mr Stephen Sedgwick AO, into commissions and payments, calling on banks to align with the “well-considered ASIC process” that is currently underway.

The association stressed that ASIC has recommended that the framework for the industry’s incentive structure should largely be left in place.

MFAA CEO Mike Felton said that while the ABA Review made a number of observations and recommendations regarding the third-party channel, it did not present realistic solutions.

“This is a review commissioned by the banks that aims to deal with the banks’ reputational problems, but as far as the broker channel is concerned does not create better consumer outcomes,” Mr Felton said.

“We are frustrated that this Review claims to be focused on a ‘customer-centric’ view. Brokers and aggregators already have a customer-centric view. Indeed, they are dependent on a relationship model and must focus on their customers in order to survive,” he said.

“The Review’s recommendations on the third-party channel appear to be based mostly on anecdotal evidence from its members. It is unfortunate that the Review process did not include meaningful consultation with the broader industry in developing this report.”

Mr Felton said there is no evidence provided in review that links consumer detriment to the current remuneration structure.

“This lack of poor customer outcomes has likely driven ASIC’s recommendation to leave the current commission structures in place, with a view to reviewing them again in four years to determine if consumer outcomes were affected by the potential conflicts identified by its Report,” he said.

“This was supported by comments made by ASIC chairman Greg Medcraft after the Report’s release, in which he said that brokers deliver great consumer outcomes, and that lenders are still responsible for lending.”

While the ABA Review assumes consumer detriment as a result of anecdotal evidence, Mr Felton pointed to MFAA data, which demonstrates that consumers are very happy with their brokers. The industry grew by 4 per cent in 2016, and 92 per cent of consumers reported they were ‘satisfied’ or ‘very satisfied’ with their broker’s performance, according to a 2015 Ernst & Young study.

“The data shows default and other metrics are closely aligned with outcomes driven by lenders’ staff,” Mr Felton said.

The MFAA boss further highlighted that the Sedgwick review recommends changes that go significantly beyond those recommended by the ASIC report, seeking to adjust or remove current incentives for mortgage brokers and potentially implement a lender fee-for-service approach.

“The ASIC Report does not recommend removing the link between loan size and commission, nor a fee-for-service model nor removal of trail commission — with good reason. A single, lender-funded, fee-for-service is likely to lead to a degree of standardisation of all fees, which ASIC is not calling for,” he said.

“It may also be considered anti-competitive by the ACCC, and therefore would not be able to be implemented. Ultimately, ASIC concluded these actions are not required because they do not create better consumer outcomes.”

The Review, which was released yesterday and included 21 recommendations, suggested that banks adopt, through negotiation with their commercial partners, an ‘end to end’ approach to the governance of mortgage brokers that approximates as closely as possible a holistic approach broadly equivalent to that proposed for the performance management of equivalent retail bank staff.

In effect, broker commissions would be governed by similar principles that banks would apply in assessing performance against a scorecard for their staff.

“Some commentary has questioned the role of ABA or the banks in this matter,” Mr Sedgwick noted.

According to Mr Felton, the Sedgwick review is essentially recommending a consolidation of power to lenders, giving them complete oversight of mortgage brokers.

“This would lead to a reduction in independence, would do little to enhance competition and tip an already precarious power balance further towards the big four and away from consumers’ interests,” he said.

Mr Felton said he believed the Review sought to re-interpret the ASIC report, providing unnecessary solutions to issues that ASIC had already reviewed and put aside.

“What really matters, in terms of remuneration, is the ASIC process and the regulatory outcomes from it. ASIC’s approach is considered and well-informed, and is based on extensive data and consultation with all parties,” he said.

ASIC found giving banks heads up on press releases

From Australian Broker.

Documents obtained in a freedom of information (FOI) request have shown that the Australian Securities & Investment Commission (ASIC) has previously worked together with banks in the drafting of press releases.

The FOI request was made by The Australian which received a number of emails sent between Adrian Borchok, senior manager at ASIC, and other staff around an investigation of Macquarie Bank’s wealth arm Macquarie Equities in 2013.

The emails showed how ASIC would permit the big banks to provide input when drafting press releases relating to financial services misconduct. However, there was no sign that Macquarie had any input into the specific press release sent out around Borchok’s investigation, The Australian reported.

In an interview with ABC’s The Business on Wednesday (19 April), Anna Bligh, head of the Australian Bankers’ Association (ABA), said the public and the system needed to have confidence that regulators were independent from the banks.

“I think the reports today would alarm many people. I’m not aware of any particular instances of this but if there is evidence of it then I do think it will erode public confidence that regulators are sufficiently arm’s length from the institutions they regulate.”

Bligh noted though that there was a role for ASIC to ensure press releases were factually accurate at all times. However, “there is no role for banks to play in affecting the tone, the message, the content of any statement from the regulator,” she said.

Major banks to change broker commissions

From The Adviser.

Australia’s big four banks will make significant changes to the way mortgage brokers are remunerated after they agreed to implement all recommendations of the Sedgwick review.

The final report of the Retail Banking Remuneration Review conducted by Stephen Sedgwick AO, released yesterday, made a number of recommendations relating to mortgage broker remuneration. These will see volume based incentives and ‘soft dollar’ payments scrapped, and for banks to cease the practice of increasing the incentives payable to brokers when engaging in sales campaigns.

The review also recommended that banks adopt, through negotiation with their commercial partners, an ‘end to end’ approach to the governance of mortgage brokers that approximates as closely as possible a holistic approach broadly equivalent to that proposed for the performance management of equivalent retail bank staff.

In effect, broker commissions would be governed by similar principles that banks would apply in assessing performance against a scorecard for their staff.

“Some commentary has questioned the role of ABA or the banks in this matter,” Mr Sedgwick noted.

“However, banks have a legitimate interest, especially because they both provide the funds that support the operations of mortgage brokers and bear the risks (financial and potentially reputational) if a loan is inappropriately large or inappropriately structured,” he said.

“Ultimately, a commercial negotiation would be required to establish such arrangements and preserve the financial viability of the mortgage broking industry.

“In broad terms, average remuneration per brokered mortgage may not be dramatically different to the current remuneration, but the risks (perceived and actual) of poor customer outcomes would be reduced. I would envisage that some form of trail payments would continue, with trails under existing arrangements ‘grandfathered’.

“To be clear, it is a fundamental principle of this recommendation that, in any new arrangements, competition should be preserved and the viability of the mortgage broking industry maintained. It is for this reason that client funded fee arrangements are not supported by the Review.”

Mr Sedgwick strongly encouraged ASIC to participate in the transition, particularly in light of potential issues with banks adopting the recommendation.

“I therefore propose that the banks with a significant recourse to the mortgage broker channel move to investigate and, as soon as possible, adopt an alternative payment system with strong oversight by ASIC,” he said.

CBA looks set to move quickly on the recommendations, with chief executive Ian Narev confirming that the bank will implement many of the recommendations by 1 July and will have “all changes in place” by the following financial year.

CBA group executive retail banking services Matt Comyn said the changes will involve significant reform.

“The recommendations affect all of our customer-facing teams, including branch, call centres, and mortgage brokers. Implementing them will require extensive consultation across a range of stakeholders, which we will commence immediately,” Mr Comyn said.

ANZ also confirmed that it will implement the recommendations.

“ANZ will work with both the broker industry and relevant regulators to implement the recommendations,” the bank said.

Meanwhile, NAB chief customer officer, consumer banking and wealth, Andrew Hagger, said the group is strongly committed to improving customer outcomes and building trust in the banking industry.

“These recommendations are a significant step for the industry and will require focus, discipline and strong leadership to implement them,” he said.

“In October last year, NAB committed to the Sedgwick reforms and now that we have the final recommendations our focus is to implement them well ahead of the 2020 deadline.”

In relation to the recommendations that impact third parties including mortgage brokers and aggregators, NAB agrees with Mr Sedgwick that any changes to their remuneration structure should be “viable” and “competitive”.

“We see mortgage brokers and other third parties as an important part of the future of our business. We will be working closely with the industry, Treasury and with the regulators, ASIC and the ACCC, to make sure we get the right result for our customers and the industry,” Mr Hagger said.

NAB does not pay volume-based incentives on residential mortgages to mortgage brokers

No outright ban on banker incentives

From The New Daily.

A review of banker pay has stopped short of abolishing incentives pay, meaning a third of employee performance metrics can be still be tied to how many loans, bank accounts and credit cards they sell.

The final Sedgwick report, released on Wednesday, recommended that no more than 33 per cent of the ‘balanced scorecards’ banks use to rate tellers and other staff be based on financial metrics such as sales.

These changes won’t be enforced before 2020. In the meantime, these ‘scorecards’, which are used to calculate bonuses, can be up to 50 per cent financial – leaving the door open to sales pressure from branch managers.

However, cash bonuses for ‘cross-selling’, say, an extra credit card when a customer asks for a term deposit will be abolished, along with all other direct sales incentives.

Former public servant Stephen Sedgwick, chair of the bank-funded review, found “instances” of incentive pay having “at least appeared to drive behaviour that was not in the best interests of customers and, on occasion, scandalously so”. However, he concluded the problem was not sufficiently widespread to warrant an outright ban.

Wednesday’s final report followed an issues paper published in January, which quoted anonymous tellers alleging they were pressured to up-sell “unnecessary” products to customers, and rebuked when they missed sales targets.

The report’s 21 recommendations “will assist in addressing a trust deficit that some key leaders believe has emerged in respect of the banking industry”, Mr Sedgwick wrote.

Six of the recommendations were aimed at compelling managers, senior managers and boards of directors to impose industry-wide culture change consistent with the “philosophy” of putting the customer first.

Consumer group CHOICE welcomed this focus on cultural change, but called for the 33 per cent cap on sales-based metrics to be an “evolving conversation”.

“What matters is bank culture. Even if incentives are a tiny fraction of pay, if a branch manager focuses on it, it can become a big problem,” CHOICE spokesperson Erin Turner told The New Daily.

“It’s up to the banking sector now” to prove it can continue to incentivise sales, albeit with smaller metrics, without hurting customers, Ms Turner said.

“The proof will be in the pudding,” she said. “Thirty-three per cent is better than 50 per cent, but zero is better than 33 per cent.”

The Sedgwick review was commissioned amid public backlash against a string of bank scandals and political pressure for a royal commission. It was accompanied by the McPhee review of new consumer protections, and the Khoury review of the industry’s voluntary code of practice.

Finance Sector Union national secretary Julia Angrisano also praised the report’s focus on cultural change, saying the 33 per cent cap would be meaningless without it.

Until the industry “genuinely shifts away from their emphasis on just the financial outcomes”, branch managers will find a way to pressure staff to oversell, regardless of how employee scorecards are weighted, Ms Angrisano told The New Daily.

“Some banks have already moved that way, but what our members tell us is that whilst its a ‘balanced scorecard’, the banks have just rebranded the financial outcome as something else, like ‘team behaviour’ or ‘customer service’.”

The union boss called for the recommendations to be legislated rather than voluntary, and for a royal commission to still be held.

All of the major banks – Commonwealth, National Australia Bank, ANZ and Westpac – pledged to implement the recommendations in full.

Australian Bankers Association CEO Anna Bligh also praised the report. She acknowledged that it “not only identified that remuneration arrangements need to improve, but also that it needs to happen alongside a change in culture and approach from management”.

ABA Releases Final Sedgewick Report

Public Service Commissioner Stephen Sedgwick AO was appointed by the ABA to review how bank tellers and other customer-facing bank employees, their managers, and third parties are paid by banks. The final report was released today. He concludes:

It remains my view that there is not sufficient evidence of significant systemic risks of poor outcomes for customers to support an outright ban on all product based payments in retail banking.

Nonetheless, as foreshadowed in the Issues Paper, some current practices carry an unacceptable risk of promoting behaviour that is inconsistent with the interests of customers and should be changed.

Some of these relate to management practices that may reduce the effectiveness of the bank’s risk mitigation strategies. Other practices relate to the way incentives and remuneration are structured. The need for change is true of both direct (i.e. staff) and some third party channels – a view reinforced by myreading of the Australian Securities & Investments Commission’s (ASIC) recent report into the mortgage broking sector.

The ABA says: Mr Sedgwick has concluded that while there are not systemic issues warranting the outright banning of product based payments, some practices need to be changed because they could promote behaviour inconsistent with customer interests.

“Mr Sedgwick has not only identified that remuneration arrangements need to improve, but also that it needs to happen alongside a change in culture and approach from management,” Ms Bligh said.

“Banks don’t underestimate the changes recommended by Mr Sedgwick. This will not be easy for banks and there will be challenges. Changes will need to be made to bank policies, workplace agreements, contracts, staff training programs, internal controls, and performance management systems.

“This is not just about payments; it’s about governance and leadership. It’s not just about bank tellers and their managers; it goes up the line.

“Banks have heard the criticism about the sales culture. The industry needs to embed a customer-focused culture so customers have confidence banks are doing the right thing by them,” she said.

Ms Bligh said individual banks would take action to make changes to their businesses, while any industry-wide response would need to consider competition and other legal obligations.

“Banks will focus on the best way to change payments for their employees,” she said.

“Mortgage brokers play an important role in supporting competition in the home loan lending market, and the industry wants to ensure competition is preserved and customer choice is maintained.

“The ABA will seek guidance from the Australian Securities and Investments Commission and liaise with the Australian Competition and Consumer Commission as appropriate, in particular around changing payments to third parties like mortgage brokers,” Ms Bligh said.

Mr Sedgwick’s final report contained 21 recommendations about what banks should do to ensure payments achieve better customer outcomes, including:

  • No longer paying retail bank employees incentives based directly or solely on sales.
  • Where incentives are paid, they should be based on a range of measures of which financial measures is not the dominant component.
  • Incentives paid should be product neutral and no longer include payments related to additional products or cross-selling products.
  • Examining workplace culture and leadership frameworks to ensure they are aligned with good customer outcomes.
  • Increasing transparency of remuneration arrangements with third parties, such as mortgage brokers, including stopping payments directly linked to loan size and introducing more robust performance management like that used with employees.

“The ABA would like to thank Mr Sedgwick and his team for conducting a rigorous and thoughtful independent review,” Ms Bligh said.

More information on the Sedgwick Review, and a copy of his final report, is available at


On 16 March 2017, ASIC published its report into the review of mortgage broker remuneration.

Mr Sedgwick’s recommendations are consistent with ASIC’s findings and proposals to improve consumer outcomes and competition in the home loan market. Mr Sedgwick’s final report identifies how the ASIC proposals could be implemented by banks and the mortgage broking industry working together to protect consumer interests, increase transparency and promote competition.

‘Tweaks’ to broker commissions not going far enough, says CHOICE

From Mortgage Professional Australia.

Consumer group sets out views on remuneration, soft dollar benefits and ‘not unsuitable’ obligations in exclusive interview with MPA

Brokers remuneration is “adding fuel to the fire” of Australia’s overheated housing markets and “needs to change”, according to consumer advocacy group CHOICE.

In a frank interview with MPA, head of campaigns and policy Erin Turner said that ASIC’s Review into mortgage broker remuneration showed how percentage based commissions encouraged consumers to take out bigger loans, putting them at risk: “we’re definitely taking a position that the current structure is unsuitable and it needs to change.”

Turner praised reforms in the financial advice sector, where commissions have been banned, whilst noting that may not be the solution for broking. However commission is just one of several issues exposed by ASIC’s review, according to Turner: “I know there are some parties that are saying the sector only needs tweaks. I worry about that spin: I think the message brokers need to hear is this report is significant, this report has many major findings that the outcome this sector is delivering to consumers isn’t ok…we’re not talking about a tweak: we’re talking about reform”.

Soft dollar and volume-based incentives have come under fire from many, although CHOICE is not entirely opposed: “obviously there are some things that are perfectly balanced: education – and we’re not talking about an education cruise in the Caribbean for high-performing brokers – but genuine education programs.”

ASIC’s review also found instances of broking franchises sending disproportionately high numbers of loans to the lenders that owned those franchises, naming CBA-owned Aussie Home Loans and NAB’s aggregators. Turner suggested that, rather than through increased disclosure, such problems of vertical integration could be tackled by raising the obligations upon brokers.

“We have to lift the obligation on brokers and I’ve been surprised how open some consumers are to discussing this. A ‘not unsuitable’ loan isn’t what consumers expect they’re getting and I don’t think what a lot of brokers think they’re giving either”

CHOICE also called for more transparency of referral networks and broker cross-selling, possibly through ASIC’s separate shadow-shop of mortgage brokers later this year. CHOICE will be setting out their views and potential solutions in a submission to the Treasury by the end of June, after which the government will determine which suggestions become law.