Rabobank admits incentive scheme breaches ABA’s new rules

Australia’s largest rural lender Rabobank has admitted it has policies that will “fall short” of rules on salaries.

Bradley James leaves the banking royal commission hearings in Brisbane yesterday. Picture: AAP

Australia’s largest rural lender Rabobank has admitted it has policies that will “fall short” of rules designed to stop banker salaries being driven by sales targets, as required by the Australian Banking Association industry lobby group.

Under questioning at the Hayne financial services royal commission yesterday, Rabobank regional manager Bradley James said the group’s bankers were “still incentivised to grow our business through loan sales”.

The royal commission heard how Queensland farmers Wendy and Adrian Brauer ended up $1 million worse off after they were forced to repay Rabobank more than they had borrowed. It came after the pair were encouraged to buy a massive property with a $3.7m loan by a banker who was set annual lending targets.

Last year, former head of the Australian Public Service Stephen Sedgwick called for banks to end the tie between how much a banker lent and how much they are paid, among 21 recommendations stemming from a year-long inquiry. The Australian Banking Association told their member banks to adopt all the recommendations.

Counsel assisting, Rowena Orr QC, yesterday asked Mr James if Rabobank was compliant with the Sedgwick recommendations, given that sales were still the “primary driver” of banker pay at the lender.

Mr James agreed the bank was not compliant and was unable to say what changes would be made to align the bank with the ­recommendations by the 2020 deadline.

“The current system would fall short of that, I would suggest,” Mr James said.

In a report compiled by former auditor-general Ian McPhee, who was overseeing the banking sector’s implementation of the Sedgwick proposals, Rabobank by the end of last year said it had “full alignment” of recommendations relating to bonuses for retail bankers and third party payments, along with proposals for performance management and culture and conduct, including that of their senior and mid-level executives.

A Rabobank spokeswoman said remuneration and bonuses for Rabobank’s rural managers were not “linked directly” to financial targets. She said any bonus was “discretionary” and that a 17.5 per cent weighting was given to “asset growth and revenue” targets, below the 30 per cent requirement stipulated by the Sedgwick rules by 2020.

Meanwhile, the royal commission heard a “champion” bank manager at Commonwealth Bank subsidiary Bankwest, whose excessive lending won him a trip to Hayman Island, later left the company after he was found to have allegedly overvalued loans.  It was the second instance heard by the royal commission sitting at the Brisbane Magistrates Court yesterday in which huge bonuses paid to bankers in reward for pushing loans on customers had left farmers in a precarious financial position.

In the case of Mel Ruddy, a Queensland cattle farmer, his Bankwest manager was set to double his take-home pay through the bonus payments.

The Bankwest manager in western Queensland convinced the farmer to take a larger loan on his two cattle properties when he had originally planned to sell one of them, after valuing the properties at a generous $2.3m.

But after signing with Bankwest in late 2011, Mr Ruddy’s farm was hit by a savage drought and cattle prices plunged after the government’s 2013 live export ban.

A 2014 revaluation of the properties by Bankwest saw them valued at $1.65m and outside the lender’s loan-to-valuation ratio, forcing Mr Ruddy to sell one of them. Mr Ruddy ended up needing to borrow $160,000 from his mother to cover costs and buy farming equipment to stay in business after the debacle.

Mr Ruddy said he would not have entered the deal if the banker hadn’t approached him. “But Bankwest offered such a good deal. Being an optimist I thought I would give it a go,” Mr Ruddy said.

Sinead Taylor, head of personal and business banking at Bankwest, revealed 60 per cent of Bankwest bankers’ key performance indicators were tied to financial targets, including a massive 30 per cent for sales targets.

Mr Ruddy’s banker, whose name was suppressed, had been named “Rural and Regional Champion” at the bank for exceeding sales targets in 2011 and was sent on a trip to Hayman Island after he lent $33.5m against his $25m target.

However, the next year the banker left the business after several “conduct issues” were raised that included “overstated valuations” and inaccurate information in case files. Three “major risk” incidents tied to the banker also resulted in Bankwest losing almost $400,000. He acted as the sole valuer on Mr Ruddy’s loan.

Ms Orr had outlined a Bankwest incentive scheme from 2012 that urged the bank to “dangle the carrot and reward top performers” for selling loans. Bankwest, which was taken over by Commonwealth Bank in 2009 at the height of the global financial crisis, controversially tipped numerous borrowers into default for breaching loan-to-valuation ratios after it was discovered the lender’s loan book was of a poorer quality than first thought.

In mid-2012, Bankwest’s executive committee called for a cultural overhaul and Ms Taylor said a “major risk culture program” began in late 2013. However, she said Bankwest could not find program documents and could not say whether it was implemented.