Clampdown on bank sales incentives could have unintended consequences for consumers

An expert warns that clamping down on banks could push vulnerable people into debt cycles, in which they rely on finance companies. Photo / Getty Images

A clampdown on sales incentives for bank staff could leave an uneven playing field in the finance sector with finance companies and insurers able to exploit it to the detriment of consumers, an independent bank expert is warning.

Regulators the Financial Markets Authority and the Reserve Bank have told banks to come up with a plan on how they will stop using sales incentives by March with implementation due to start from September next year.

The recommendation comes after an FMA report released last week found the strong focus on sales incentives meant there was a high risk of consumers being sold inappropriate products.

But John Kensington, a partner at KPMG who specialises in banking, predicted it would create disparity between the banks and other financial service providers like insurers and non-bank lenders.

"There is potential for some arbitrage behaviour," he said.

He said sales incentives also stretched beyond lenders, pointing to the car dealer industry where car sales done on finance also attract a payment from the lender to the car salesperson.

Kensington said while it was logical to focus on the banks now it may also need to be rolled out into other parts of the finance industry.

"In three years' time banks won't be allowed to have sales incentives but competitors will."

He said that could have unintended consequences for people who have a poor credit history and can't borrow from the banks but are then offered more debt by a finance company at a much higher interest rate.

"I do believe there could be unintended consequences."

And he warned it could see more vulnerable people pushed into cycles of debt.

Tim Barnett, chief executive FinCap - the body which oversees New Zealand's budget advisers, said he was pleased to see the regulator's call for an end to sales incentives for banks.

"We are hoping it will have a flow-on effect to the rest of the industry."

But Barnett admitted widespread industry change might be difficult without a mandate from the regulator.

"It does take the regulator to shine the light on it to bring it to people's attention."

He said consumers did not have the power to push through those changes.

While many of the people it dealt with were under-insured they were more likely to have life insurance than contents insurance because of the hard sell tactics used in that part of the industry.

"We work with people mostly on a low income - hard-sell tactics can be quite challenging for them to navigate through."

High commissions for life insurance advisers are already under the spotlight of the FMA which is due to release another report on the sector at the end of January.

An FMA spokesman said its view was that incentives based on sales volume had to be looked at and considered right across the financial services industry.

Lyn McMorran, executive director of the Financial Services Federation which represents non-bank lenders said many of its members already had remuneration structures for their staff that reward achievement of good customer outcomes rather than on the basis of sales incentives and others are currently reviewing their practices.

There are concerns that the changes could have an impact on Kiwis in financial hardship. Photo / Getty Images

"The key thing for our members is to continually ensure their staff are meeting their responsible lending obligations to ensure that the products being sold are suitable to meet the goals and objectives of each customer, that the borrower can meet their commitments without incurring significant hardship, and that the customer is making an informed decision about entering into the loan contract."

Richard Klippin, chief executive of the Financial Services Council - the industry body for life insurers said there were a number of key recommendations in the [Bank conduct and culture] report that showed significant work was required by the industry to improve board accountability, identifying and remediating risks, staff training and sales incentives.

"Remuneration is a key issue for the sector and getting the settings right are important.

He said remuneration models needed to be aligned to consumer outcomes. They needed to be appropriate, transparent and drive the longer-term outcomes for New Zealanders.

"Although this report was focused on retail banking, the financial services industry is working to deliver better outcomes for consumers."

He pointed to the FSC's new code of conduct which was currently being rolled out across its members and was specifically designed to deliver the type of good consumer outcomes highlighted in the report.

But the FMA's bank incentive report was quick to point out that even moves by the banking industry so far had not gone far enough.

It has told banks who do not move to ban sale incentives that they must come up with clear guidelines on how they will prevent inappropriate sales to consumers.