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July 28, 2020updated 29 Jul 2020 4:13pm

Retail banks push ahead with fixing poor incentive schemes

By Jane Cooper

Retail banks around the world have been phasing out sales incentive schemes for frontline staff, in response to various scandals and increased regulatory focus on conduct and culture. While progress has been made across the industry, there is still room for improvement, reports Jane Cooper

Where there is a mis-selling scandal, there is blame – and sales incentive schemes have taken the brunt of it. Regulators have been moving to eradicate such incentives from the front line, believing them to be a driver of misconduct, and a conflict of interest for staff caught between their commission and what a customer may actually need or want.

Although the practice of tying rewards to sales volumes is now dying out, the industry is still grappling with the alternatives and finding the best way to balance their newfound purpose with profits.

Wells Fargo settlement 

The issue has been costly for the industry. In February, for example, Wells Fargo agreed a $3bn settlement with the Department of Justice for misconduct resulting from staff being pressured to meet unrealistic sales targets. The scandal was a huge fall from grace for Wells Fargo, a bank that was known for putting the ‘retail’ in retail banking and being a pioneer of cross-selling.

Under the leadership of Dick Kovacevich in the late 1990s and 2000s, the bank took inspiration the likes of Walmart, referred to branches as ‘stores’, turned ‘tellers into sellers’ and implemented a cross-sell strategy where a target of eight products per customer was ‘Going for Gr-Eight!’ The DOJ settlement addresses practices that occurred between 2002 and 2016, and since then the bank has been cleaning up its act.

A spokesperson for Wells Fargo tells RBI that the bank has made fundamental changes to its leadership, governance, processes, controls and culture to address the misconduct that occurred in the past.

“In addition to a new CEO and significant management changes at all levels of leadership within the Community Bank, which we now call Branch Banking, Wells Fargo eliminated product-based sales goals. We also implemented a new incentive compensation structure for retail bankers that rewards them based on customer outcomes and requires risk accountability at all levels.”

Roger Miles, faculty lead for culture and conduct at the UK Finance Academy, comments that the assumptions underlying cross-selling “and flogging more of the same to the same people” are now questioned by the industry. “The presumption that a customer on your list is happy is no longer taken for granted,” he says.

The C word? 

Since the scandal, cross-selling – and selling itself – has become something of a dirty word in the industry, says Tania Lennon, associate principal at ZS, a firm that works with banks on motivation, culture and sales.

“There has been a fundamental shift away from product-led selling to customer-led engagement. The narrative is now around financial well-being,” she says, adding that banks are now keen to demonstrate that customers are put at the centre of their purpose, and that the bank’s success depends on the customers’ success.

Does this new-found focus on purpose mean that profitability will suffer? The 2018 Banking Conduct and Culture report from the Group of Thirty – an international body of financiers and academics – says this is a “false dilemma”, and banks must pursue both goals of profit and purpose.

Lennon also thinks it is possible to be successful at both. She points to research by ZS indicating that when there was a focus on product selling, there were higher sales in the short term but that business was not sustained and led to a loss of trust. Where bank staff took the time to understand customers, there were lower sales initially, but a much better return on investment at a customer level over the longer term, Lennon says.

Incentives: a key driver

Incentives were traditionally viewed as being the key driver of revenue, explains Lennon. “It was felt that if you took incentives away, it would demotivate people,” she says, adding there was a fear that changing remuneration would be too disruptive.

However, one advantage of banks having “taken a kicking” in the wake of a number of scandals was that disruption became inevitable. “The disruption was imposed on the banks, so it gave them freedom: it enabled them to more rapidly transform the way they think and operate,” says Lennon.

Both Lennon and Miles are positive about the progress made by retail banks in reforming their culture. Miles describes it as a “road of progress”, adding: “The collective effort across the industry, especially the UK, is well over the half-way point – globally, less so.”

FCA guidance

The UK was one of the first to tackle the issue of remuneration, with the Financial Conduct Authority publishing its guidance on incentives back in 2013. The European Banking Authority similarly issued guidelines in September 2016, and other markets have followed, such as the Financial Consumer Agency of Canada’s review of domestic retail sales practices in March 2018.

Australia has been dealing with the issue for a number of years. The Sedgwick Review of bank pay was published in April 2017, which made 21 recommendations. Since then, there has been the Royal Commission investigation into misconduct in the industry, which called for all the Sedgwick proposals to be implemented, as well as some additional recommendations.

Remuneration legislation

David Jacobson, principal at Bright Corporate Law, explains that in June 2019, Australia’s banks stated they were on target to meet the 2020 deadline for the reforms.

Jacobson points to some upcoming legislative changes in Australia that will also address the issue of remuneration. From 1 January 2021, the National Credit Act will regulate conflicted remuneration for mortgage brokers, which, for example, will limit up-front commissions to the amount drawn down by borrowers rather than the loan amount.

Across the water, New Zealand’s regulators took note of the Royal Commission and have since published a report on bank incentive structures and another on conduct and culture. A spokesperson for the Financial Markets Authority explains that the Bank Incentives Structures report, published in November 2018, found that although banks were already putting customer focus into their product design and sales processes, significant progress was still required. Also, there was a significant gap in the measurement and reporting of customer outcomes.

New Zealand Bankers’ Association chief executive Roger Beaumont tells RBI that all New Zealand retail banks removed sales incentives for frontline staff and their managers following the Bank Conduct and Culture Review, which was also published in November 2018.

“The review found no evidence of widespread misconduct and culture issues across the New Zealand industry,” he says. “It did find that we had to put better systems in place to ensure good customer outcomes.”

He adds that the industry is currently finalising guidelines to help banks serve customer needs, which flow from NZBA’s code of banking practice.

“The guidelines outline how banks will do that, along with prioritising customer interests, communicating effectively, providing products and care that meet customer needs, and identifying and fixing any mistakes,” he says.

When asked what the biggest hurdle is for banks in addressing these issues, Jacobson says: “The issue is a cultural and behavioural one: how do you ensure that staff act in the best interests of the customer and at the same time reward performance?”

Challenger banks

This is a big question, and one that could be easier for challenger banks to answer because they do not have an ingrained culture to contend with.

As Miles comments: “The challengers are moving much faster. If the traditional banks do not get their act together, the challengers will eat their breakfast.” 

One such challenger is Metro Bank in the UK, which created its culture from scratch when it began in 2010. Pete Cooper, Metro Bank’s director of people, tells RBI that Metro Bank does not have sales targets.

“As a bank, our focus has always been on delivering great customer service, and therefore we place a lot of emphasis on our NPS [Net Promoter Score] and magic shopper feedback,” he says.

“We measure performance on behaviours demonstrated. Colleagues are given a rating on how well they live the Metro Bank culture, and objectives are set around what they have contributed to Metro Bank.”

Does the bank encourage its staff to cross- or up-sell? “No, at Metro Bank we encourage colleagues to have conversations with customers about what their needs are and how we can support those needs. We want to understand their situation and their finances in order to help them as best we can,” explains Cooper.

Such an approach is part of a wider trend in the industry that shapes incentives based on customer outcomes. Lennon gives an example of a bank that no longer rewards staff for opening customer accounts; instead, it rewards staff if those accounts are still open a year later.

Incentive schemes should not just reward outcomes, but also behaviour, says Lennon. It should be about “catching people doing good”, she says, and rewarding them for doing the right thing.

Miles comments: “Now we are seeing a move toward rewards by customer or client satisfaction, by long-term value building, and how good a firm is at looking after staff and customers in the long term.”

However, the move from quantity to customer satisfaction as a basis for rewards is not without its problems. “A satisfied customer might be a naive customer who has been mis-sold something,” notes Miles. This is still a work in progress, he adds, and comments that there are still poorly designed incentive schemes in the market.

One area for improvement, according to Miles, is “badly designed control instructions”. He explains: “The controls are often designed with one eye on the legal requirements, and banks don’t translate the legal into practitioner language.” If regulators fail to translate their guidance into language the front line would use, salespeople will think it is not for them, he adds.

More important, he says, is getting people on board – and feeling “psychologically safe” – in pointing out when customers are not well served, and questioning how things can be done better.

“There are legacy and other dysfunctional systems that need challenging,” Miles observes. “Often there is an attitude of ‘we know there is a bunch of stuff that doesn’t work: we have to live with it.’ No, you do not,” he concludes.

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