Commonwealth Bank CEO Matthew Comyn admitted variable remuneration and financial incentives encouraged misconduct by frontline staff, under examination from senior counsel assisting Rowena Orr QC in the first day of the final round of the banking royal commission,
Orr opened the floor by stating the royal commission was not here to listen to “more apologies” but instead understand the cause of transgressions at CBA.
Along with work culture and customer relations at CBA, one area of concern was variable remuneration and the impact from potentially removing this incentive from frontline staff.
Orr heard from Comyn examples of staff acting inappropriately in 2014 in relation “to the sale of certain products, including consumer credit insurance” and the link between the incentives currently in place at CBA.
Despite linking poor staff conduct and variable renumeration at CBA, Comyn said the bank has yet to move away from this incentive.
Whilst Comyn could provide no answer as to why he had not begun these changes, he did say CBA had made a number of amendments to variable renumeration in response to the Sedgwick recommendations.
Comyn stated “nothing would need to happen” other than for him to make decision on changing the structure on how variable renumeration is applied.
Orr went on to ask if issues would arise should CBA be the first bank to remove variable numeration from frontline staff.
Comyn stated there would no major be impediments “in the vast majority of roles” however, he went on say he did think “there would be implications” in the lending job family as renumeration is tied to sales targets.
“One other observation has been my experience with other international organisations, it’s quite a substantial change. Sometimes that loss of performance is not because incentives are removed but it’s just the effect of change,” Comyn.
In an email, Comyn wrote to CBA boss Ian Narev and stated: “incentives will continue to play an important role in attracting, retaining, motiving and regarding our people to our customer’s needs and realise the potential of our vision”
When pressed further by Orr, Comyn noted that he did not recognise that CBA would need to do more to retain its favorable position against competitors.
At present CBA has now removed sales incentives from its tellers after much consideration in the hopes it will improve customer outcomes in the future.
A high risk move
The Commission also heard that Comyn had wanted a FOFA style remuneration to be applied to mortgage remuneration, advocating for the bank to adopt a flat fee structure.
The Future of Advice reforms were introduced in 2012 to scale back trail commissions to financial planners introducing a fee for service.
Comyn believed a similar change in the remuneration structure would lead to better consumer outcomes.
However, in email correspondence between Comyn and former CEO Ian Narev, it was understood that the industry would not follow the bank’s initiative.
Narev had written to Comyn saying that “history is littered with banks, even the big banks who try to take on the broker channel and lose”.
The former CBA chief questioned whether any bank would follow the bank’s lead given “NAB and ANZ had a heavy reliance on brokers”.
Finally, the bank decided to remain with the status quo with Comyn telling the Commission that the bank felt it was a “high risk move to reshape the industry by ourselves”.
While CBA’s plan to move to a flat fee would include the grandfathering of trail commissions and transition payments to brokers the “the change to the economics” for many brokers would not be well received.
“No one likes their income reduced”, he said.
The push for a flat fee structure was in part driven by the bank’s internal analysis back in 2016, the bank found that applications through the broker channels had higher loan-to-value ratios with customers paying more interest.
Comyn was inspired by a model adopted in the Netherlands – he had met with the country’s regulator – which adopted a flat fee and led to better consumer outcomes.
He also wanted to ban trail commissions to brokers – a payment provided to the brokers because of their ongoing service of clients.
Comyn was aware of a Productivity Commission report that proposed a ban on the remuneration payment, agreeing broadly with the view of the Commission clients did not receive ongoing service – although he believed some brokers do “much work on an ongoing business”.
During the hearings, it was revealed that broker remuneration had increased 45 per cent since 2009 because of the high house prices – with 1,300 brokers earning more than $1 million a year.
Orr also questioned the bank chief over APRA’s concerns that the bank’s reliance on the household expenditure measure of HEM was the highest of all its peers – that is 75 per cent of its loans were defaulting to the HEM.
However, Comyn said the concerns – and statistics - only referred to a few days in October – 9th to 13 October 2017 which has since improved and hopes the level moves to 40 to 50 per cent.