ASIC ‘disappointed’ as CBA scraps bonus caps for home loan bankers

ASIC has labelled Commonwealth Bank’s move to officially scrap best practice bonus caps for home loan bankers ‘disappointing’.

CBA said it was officially moving the bonus cap for its bankers to up to 80 per cent from July 1st. Picture: NCA NewsWire / Luis Enrique Ascui

The corporate regulator has baulked at Commonwealth Bank’s defensive move to officially scrap best practice bonus caps for home loan bankers in an effort to stem defections to brokers and become more competitive against aggressive rivals.

The Australian Securities & Investments Commission, the regulator that polices responsible lending rules, said CBA’s policy to officially ignore best practice remuneration caps endorsed by the 2018 Hayne inquiry was “disappointing”.

Bonus caps for home loan bankers have been kept broadly at 50 per cent of base salaries since an industry-endorsed review by Stephen Sedgwick in 2017 called for the limits in order to reduce the risk of incentivising the mis-selling of products to vulnerable customers.

The Hayne Royal Commission inquiry then endorsed the cap in 2018, but the nation’s largest lender had been called out for ignoring it in some instances, offering home lending specialists bonuses of up to 60 per cent.

On Monday, in a move widely seen as part of its strategy to defend its market position from intense competition for both bankers and borrowers, CBA said it was officially moving the bonus cap for its bankers to up to 80 per cent from July 1st.

“CBA’s position on remunerating its lending staff is inconsistent with both the Sedgwick review and the Royal Commission recommendations,” an ASIC spokesman said.

“It is also inconsistent with the Australian Banking Association’s and CBA’s previous public position. This change is disappointing.”

The banking association said banks supported “legislative and regulatory safeguards” introduced after the Royal Commission to protect customers from misconduct, referring to prudential standards on remuneration, APRA’s new Financial Accountability Regime, and ASIC’s product design and distribution obligations.

“In support of these regulatory safeguards, banks continue to ensure that both financial and non-financial metrics are included in a balanced scorecard of performance for lending staff,” the banking lobby group said.

APRA, which polices the remuneration practices of banks to ensure they support “prudent risk management”, declined to comment.

ASIC said it “recognised” the move was a commercial decision for CBA, but said it would “monitor for complaints and be vigilant for emerging conduct issues.”

“There is ample evidence that variable remuneration arrangements and incentive selling result in poor outcomes for consumers,” the regulator’s spokesperson said.

In a statement, CBA head of retail bank Angus Sullivan said the bank had “significantly enhanced” its risk management frameworks in the past seven years, “to ensure strong links with customer outcomes, values and compliance”.

The changes, Mr Sullivan said, were meant “to reward excellent service provided to our customers by our lenders”, and he added that the remuneration packages will be regularly reviewed to ensure they are “in line” with customers’ own interests.

CBA head of retail bank Angus Sullivan.

CBA pays home loan lenders a base salary plus a variable bonus. The bonus depends on a balanced scorecard based on a range of factors, including loan volumes, customer satisfaction indicators and other role-specific metrics.

Bank insiders say measures related to sales volume more or less account for only up to 50 per cent of the overall factors considered when determining the bonuses.

“All our remuneration programs are regularly monitored to ensure they are operating as intended and in line with the interests of our customers,” Mr Sullivan said. “Extensive controls are in place in relation to all home lending.”

CBA writes two and a half out of every 10 home loans in Australia. But its market share has been shrinking over the past year, amid intense competition from the likes of Macquarie and ANZ, both of which rely heavily on sales via mortgage brokers.

UBS banking analyst John Storey said CBA’s move was clearly “a defensive move to try and incentivise their own agents to stay and ultimately also provide an incentive for the agents to actually go out and write business”.

“It’s very much a defensive move.”

Most home loans in Australia are now originated through brokers, but Commonwealth Bank is an exception.

The lender has made the strategic decision to step away from the trend, which commoditises home lending, and has instead invested in its proprietary channels to offer a differentiated multi-channel service.

That is even as the proportion of home loans sold through brokers in Australia has increased to 73 per cent, from about 55 per cent in 2019, according to UBS data.

At CBA, only 33 per cent of mortgages are sold through brokers, and 67 per cent are distributed through its proprietary network of branches, mobile bankers and online channels.

Mr Storey said that due to CBA’s differentiated strategy it was unclear whether its move on banker bonuses would trigger similar decisions across the industry.

“The cost of distribution in Australia is incredibly high,” Mr Storey said.

“(CBA) have clearly done the numbers on it, and they’d rather pay up for their own distribution force and provide higher level of bonuses to their agents that are doing a good job writing business through their own proprietary channels, rather than have to go through that disintermediated distribution channel, where arguably, that cost is even higher.”

Last month, CBA announced it would turn its Bankwest subsidiary into an online-only lender and shut all remaining branches.