Secret Weapon Overlooked in Fight Against Financial Misconduct

A potent tool for cleaning up misconduct in the industry is being overlooked by the Royal Commission into financial services.

The Centre for Future Work has proposed to the Commission that a system of sector-wide collective bargaining in the financial industry could establish clear and ethical benchmarks for compensation, avoiding the problem of ‘conflicted remuneration’, which is behind much of the misconduct the Royal Commission has exposed.

The Centre for Future Work’s submission to the Royal Commission proposes a uniform compensation system, to apply across the whole industry, consistent with the principles of ethical banking:

  • Uniform compensation can be achieved via a sector-wide collective bargaining system, in which employer and union representatives negotiate standard compensation patterns to apply to all participants across the industry.
  • Compensation in each job to be tied to qualifications and experience; separate pay grids could be specified in various branches of finance (including major banks, insurance, superannuation, and financial advice).
  • Clear and enforceable limits on sales- or revenue-based incentives would be specified – eliminating what the Royal Commission has confirmed is a key motivation for misconduct.
  • Instead of depending solely on government regulators to stop misconduct, enforcement of compensation standards would become part of the regular administration of the collective agreement.

“At present, flawed pay systems create perverse incentives for banks and brokers to push debt, insurance, and financial services to Australians,” says Dr. Jim Stanford, Director of the Centre for Future Work.

“Financial professionals can reap tens or hundreds of thousands of dollars in commissions, bonuses and so-called ‘introducing’ fees; top executives pocket millions.

“It is inevitable that these incentives lead sales staff and executives to sidestep or ignore basic rules and standards such as ‘know your client’ rules, fee transparency and responsible lending.

“Consumers, many of them vulnerable, end up with expensive commitments they don’t need or – in many cases – even understand.

“Under a sectoral agreement, hundreds of managers, union officials and delegates throughout the financial industry would be responsible for enforcing the ethical pay practices spelled out in the agreement.

“Unfortunately, Australia’s current restrictive industrial relations laws generally prohibit collective bargaining on a multi-firm or sector-wide basis.

“These restrictions are unusual. Most industrial countries permit, and even encourage, multi-firm, pattern, or industry-wide bargaining as an efficient way to determine consistent benchmarks for pay and conditions, and ensure that ongoing economic and productivity growth translates into rising living standards.”

The Centre’s submission argues these restrictions on sector-wide bargaining should be reconsidered in light of the pervasive pattern of financial misconduct – and the key role of perverse compensation systems in motivating that misconduct.

“Sectoral collective bargaining could help reform compensation and reduce financial misconduct on a uniform, industry-wide basis,” Stanford said.

“The Royal Commission should explore standardised sector-wide collective agreements as a promising response to the problems it has documented, and the Commonwealth Government should eliminate its unusual restrictions on collective bargaining to allow this important reform.”

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