Questionable lending practices

With plenty of media attention given over to the questionable lending practices of individual brokers, a new industrial campaign launched by the Financial Services Union (FSU) has seen the spotlight swing back to the policies in place at the major banks. We look at the FSU's crusade and its relevance to brokers

The new FSU campaign is modeled on the Australian Council of Trade Unions' hugely successful "Your rights at work" campaign, which seeks to end the link between staff bonuses and debt sale targets.

"We don't believe that there is an issue with the concept of staff incentives," FSU national secretary Leon Carter tells Australian Broker.

"Our problem is that the banks are moving to a system where salary increases and performance is becoming more and more linked, in our view, to the credit and debt that [bank staff] sell to customers."

"What we say is that this drives behaviour towards just the selling component rather than genuinely meeting the needs of the customers."

Carter says this trend is particularly worrying given many Australians' spiraling debt levels.

"More broadly the concern is that the level of personal and household debt is going up exponentially and we have just come off another record Christmas/New Year credit card plunge."

"You've got the Reserve Bank sounding like they are at least going to put up the rates another time if not two more times, so that's another half a percent. And then you have the banks, and other lenders putting up their rates above and beyond the Reserve Bank."

"So we have the worst of all situations where you have the level of indebtedness at a personal level going up at the same time as the cost of repaying that debt is going up."

According to Carter, the banks' unbalanced focus on debt products is compromising their attempts to position themselves as responsible corporate citizens.

"What we would say is that being a responsible corporate citizen has always got to be about more than their bottom line," he said.

"They have a broader responsibility to the country and to the economy."

Media coverage

The campaign has generated quite a lot of coverage in the mainstream press with the Australian Financial Review devoting a January front page to the issue, while the Herald Sun also gave the story considerable space, reporting that lending staff at one major bank required staff to sell $28m in loans annually to qualify for bonuses of up to $12,000.

Coming on the heels of the FSU campaign came news the National Australia Bank had changed its lending practices in remote parts of the country after the Australian Securities and Investments Commission (ASIC) raised concerns about its lending practices.

In a press release ASIC's acting executive director of consumer protection, Delia Rickard said the watchdog had reviewed approximately 25 loans to borrowers in remote parts of north Queensland which had led to "wider concerns about NAB's eligibility criteria and the potential for borrowers to be provided with loans they could not readily afford."

Incentivised brokers versus incentivised tellers

For FBAA president Peter White, the FSU campaign provides a welcome change of focus from brokers' lending practices to the policies in place at the major banks.

"We've had much focus on brokers [remuneration] being commission-based and this practice has been questioned at times - I don't think banks are immune to that either," White said.

"You've got a commission-based broker who needs to put money in the bank to put food on the table, and you've got an employee who is trying to keep their job."

"When you are on a commission-based life style you are obviously trying to sell product, and when you are in a banking institution you're trying to meet budgets to keep your job and I think there is a fair and reasonable balance in all of that."

According to White, the problem for brokers is that while they are forced to disclose their commissions to clients, incentivised bank employees are not.

"[Brokers] now by law have to disclose what our commission arrangements are [and] I think the banks should be doing the same thing," White said.

"I don't see why anyone should be treated any differently."

"I think [the banks] should disclose to the consumers if the person they are dealing with at a bank is incentivised...and that should be quantified."

White says that while he supports a regulatory focus aimed at protecting and informing the consumer, the current regime is disadvantaging brokers.

"On one hand you have one group in the market place not disclosing almost anything (bank staff), and another group (brokers) disclosing everything under the sun, to the point of making business difficult."

"I think it's important that consumers are aware that it's not only brokers who are incentivised it could be the person you are talking across the desk at the bank."

When asked if the FSU believed banks had a duty to inform customers of the incentives offered to staff, Carter said he 'absolutely' agreed.

"I think the more open and transparent the disclosure is the better."

Carter says that if a customer is at a bank branch talking to a bank person they should understand what impact it will have on this person's salary if they manage to sign them up to a loan.

"It's not that sort of sales commission in a traditional sense but it is clearly an incentive to secure an outcome and they should be completely transparent," he says.

However, according to Carter any regulations regarding disclosure needs to be discussed at a national level.

"That sort of regulation needs to happen and be talked about at a whole of industry level," he said.

"We are certainly looking forward to working with the federal government to come up with a whole of industry approach about how regulation happens right across the lending sector, but equally about how they have to declare the practices that they are using."

From banking to broking

However, not all brokers agree with the FBAA stance on the need to for bank tellers and brokers to be subject to similar disclosure rules.

Banker turned broker Greg Sterland from Australian Property Finance in Charlestown in NSW says he strongly disagrees with the need for tellers to disclose their incentives.

"Having come out of [banking], they are not actually incentivised in the same way," Sterland noted. He said he believed it would be 'a travesty' if legislation was introduced to force tellers to disclose the benefits they garnered from the sale of debt products.

He also expressed dismay at the FSU's campaign against incentives, arguing targets are merely a way of making staff take responsibility for their jobs.

"[Bank tellers] are told by their union that this is a stressful thing they are being required to sell," Sterland says. "I mean have a look at McDonald's... you are going to be told 'Are you going to have fries with that.' I mean you don't take offense at it, sometimes you buy the fries."

He notes that on the whole brokers appear to have a more positive attitude towards sales than bank tellers, and consequently achieve better results.

"[Brokers] talk to you about the benefits of 21st century banking while the [tellers] talk about the fact that they have to sell you one more thing if they want to get paid," he says.

"We cross sell at a far better rate than the branches because if I'm doing a home loan for you it's illogical for you to have your account at Westpac, your home loan at the Commonwealth Bank, your credit card at the National and your savings plan at a building society because it's not cost effective."

Ethical sales?

According to Carter however the crux of the issue is an ethical one.

"[FSU members] want to use their expertise to meet the genuine credit needs of their customers not have a selling mentality that is better placed in a used car yard," he declares.

"The last survey that we did, over 50% of people in these sorts of roles [as tellers] came back to us and said that they feel obliged to sell their customers credit regardless of their needs."

He said the 'sales, sales, sales' approach of the major banks is 'souring the experience of banking' for customers and employees alike.

"It can't be the situation where [bank tellers'] employment practices are contributing to not only the level of debt but the cost of that debt."