There is a high risk of inappropriate sales practices occurring through banks because staff incentives are highly sales focused and banks are not doing enough to monitor and control risks, a report by the regulator has found.

The Financial Markets Authority has released the findings of its dive into sales incentives at nine New Zealand banks where it focused on frontline bank staff and their managers.

It found staff were paid $71 million in variable pay in the year to March 31 - the majority of which was linked to sales performance - and because managers' incentives were linked to their salespeople it was likely to be adding more pressure on staff to sell.

"This means that the risk of inappropriate sales practices occurring is high. It is therefore unsurprising that we were told by some salespeople of inappropriate sales practices taking place," the report noted.


Liam Mason, head of regulation at the FMA, said that while there didn't appear to be widespread problems with inappropriate sales it was "more common than we would have liked."

The report did not look into what inappropriate sales were occurring but Mason said it had talked to bank sales people and managers across the five largest banks - ANZ, ASB, BNZ, Westpac and Kiwibank and found examples.

He said staff had seen colleagues sell inappropriate products, customers with complex needs were treated poorly or needs were not met because they did not involve the sale of a product.

In another case Mason said staff were found to be hording referrals rather than passing them on to staff who were available because of sales incentives which resulted in delays to customers getting what they needed.

The report noted that given that sales were strongly incentivised it was vital there be checks in place to ensure inappropriate sales were not made, but this was not the case.

Mason said: "We were disappointed in what we saw in the control environment."

The FMA found bank controls were often designed and conducted in a way that made it unlikely they would be effective at identifying inappropriate sales.

"This means poor customer outcomes are likely to go undetected."


It also found bank board members and senior managers were not kept abreast of the risks of inappropriate sales or how the risks were being managed.

"While boards and senior management receive information on the operation of incentive schemes themselves, some receive little information on the risk of inappropriate sales and how that risk is being managed."

The review was taken as of May 21 and the report noted that banks were in the process of changing their sales incentive structures with some partly removing sales incentives and others removing them completely.

The bank sales incentive review was taken into account by the FMA and the Reserve Bank as part of its Bank Conduct and Culture review released last week and the FMA today reiterated its call for banks to remove sales incentives for staff and managers or come up with better ways to mitigate the risks of inappropriate sales.

Banks have been given until March to come up with a plan to address conduct concerns raised by the regulators including sales incentives and make those changes by the first performance year beginning after 30 September 2019.

Last week the New Zealand Bankers Association welcomed the findings of the conduct and culture report and said its members would implement the recommendations.

The FMA said while banks appeared to be going in a positive direction in reducing the focus on sales incentives none of the changes made so far had gone far enough.

It also expects boards and senior management to step up their oversight of the risks driven by sales incentives.

"Boards and senior management should be more proactive at identifying and managing these risks.

"We also expect them to question whether a lack of issues detected means issues do not exist, or issues are not being identified."

What sales incentives are used

The FMA drilled into the different types of incentives offered to bank sales staff labelling them as either increasing the risk to consumers, having the possibility or increasing or decreasing the risk and those that it saw as decreasing the risk.

Those that were seen as the worst for increasing the risk to customers included; incentives based solely on numbers of sales, sales gateways - where staff have to sell a minimum amount of products to be eligible for a bonus, marginal sale accelerator - where making an extra one or two sales is rewarded disproportionately, sales accelerator where rewards increase when the number or value of sales increase, and non-product neutral awards where some products were incentivised over others.

It found rewards for products such as home loans, investments and insurance were often based on the product value, not the number of products sold.

"This means staff are incentivised to encourage customers to borrow, invest, or insure more than they may want or need to."

It also found that incentive structures for mobile mortgage managers had higher risk than non-specialist sales staff because the amount of variable pay was significantly higher with salespeople rewarded for issuing larger loans.

For doing a $300k mortgage a mobile manager might get $1200 but for a million dollar mortgage they could get paid $4000. One mobile mortgage manager earned $196,000 in variable pay alone in the 2016/17 financial year.

It found sales gateways and accelerators were common where mobile mortgage lenders had to meet a minimum to qualify for the bonus but then it increased the more they lent.

However features that reduced incentive-related risks were also more prevalent for mobile mortgage managers with some banks capping variable pay, using a deferral system to pay some of the bonus a year later or clawbacks for when loans were repaid in a short space of time.

More change needed

While banks had begun to make changes to their incentive structures the FMA said the industry overall was at an early stage.

"The changes appear to be in a positive direction, with banks generally reducing the weighting given to sales measures in determining variable pay.

"In some instances, sales measures are being removed entirely from some roles. However, even in these banks, the removal of sales measures does not apply to all salespeople, such as mobile mortgage managers."

It found a number of measures had been put in place to control and monitor inappropriate sales including managers observing and assessing sales staff, undertaking post-sale reviews, and post sale calls as well as using mystery shoppers.

But said many of the control measures were not designed to assess the appropriateness of the sale.

Or those doing the assessing were not independent as they were incentivised by their staff selling more.

"We believe that, if carried out with a sufficiently risk based approach, effective controls are likely to identify inappropriate sales where incentives are based on sales performance.

"However, a number of banks told us that their controls had not identified any instances of inappropriate sales in the last year."

The FMA found some boards and senior managers received reports on the controls in place and effectiveness of them but it varied and some received very little information.

"This is of significant concern to us, as risks that are not identified cannot be effectively mitigated and monitored."

It said it expected boards and senior managers to proactively request information of the performance of controls and questions whether a lack of issues detected means the issues do not exist, or that they are not being identified."

Advice for consumers

Mason said anybody concerned that they have been sold an inappropriate product should go back to their bank and ask to have a discussion about it.

"All of the banks have internal complaints processes."

Those who were not satisfied with their bank's response should go to the Banking Ombudsman, he said.

But he admitted it was often hard for people to know if they had been sold something that was inappropriate and said the imbalance of power between the banks and customers was the reason why controls were needed.

He urged people to talk to their friends and family about their experiences to see if they matched up.

Which banks were reviewed?
ANZ Bank New Zealand, ASB Bank, Bank of New Zealand, Heartland Bank, Kiwibank, Southland Building Society, The Co-operative Bank, TSB Bank, Westpac New Zealand.

One on one interviews
The FMA also met with 68 salespeople and 22 managers from ANZ, ASB, BNZ, Westpac, and Kiwibank - the five largest banks by customer numbers.

Which products?
The FMA reviewed incentives relating to the sales of home loans, personal loans, credit cards, term deposits, transactional accounts, life insurance, general insurance and investments, including KiwiSaver.