- What does conflicted remuneration mean?
- Why is conflicted remuneration a problem?
- Who does it affect
- So what is the solution?
The abridged version of the definition provided in Australian law (Corporations Act s.963A) is that;
Conflicted remuneration means any benefit given to a representative of a financial services licensee (where) the benefit:
(a) could reasonably be expected to influence the choice of financial product recommended to clients; or
(b) could reasonably be expected to influence the advice given to clients by the representative.
The conflict occurs when the remuneration incentive encourages behaviour that puts the interests of the financial services provider ahead of the interests of the client, e.g. in a situation where a customer wants to borrow money to purchase a new car but the banker has an incentive to sell credit cards with a revolving credit facility as opposed to cheaper forms of credit such as secured personal loans represents a potential conflict between the banker’s and the customer’s financial of interests.
This is a problem because it leads to poor customer outcomes, potential illegal or unethical behaviour and an erosion of trust and confidence in the financial sector. There have been a number of serious financial sector crises over many years where conflicted remuneration has been a common factor. These have included the collapse of Storm Financial Services, recent financial planning scandals that have led to over 200 planners losing their jobs and the 2016 exposure of fraudulent accounts for over 1.5 million Wells Fargo Bank customers in the USA. During the Global Financial Crisis of 2008-2010 a series of corporate collapses uncovered widespread use of conflicted remuneration where literally millions of businesses and consumers had been signed up for inappropriate products and services. The Financial Conduct Authority in the UK says, “Inappropriate remuneration policies were widely identified as a contributory factor to the financial crisis.”
Trust is an essential element of a successful financial system and that trust requires ethical standards that include a financial institution having a duty to put the customers’ best interests ahead of its own. Similar professional ethical standards apply to doctors, lawyers and teachers.
Conflicted remuneration impacts both consumers and workers in financial services. Consumers are impacted because of the risk that they are sold products and services that do not meet their best interests. Workers are impacted because they are encouraged to behave in certain ways that place them in a conflicted position between the interests of their customer, their employer and themselves.
Regulators around the world have begun imposing a legal “best interest duty” on financial services providers in an effort to ensure that those working in financial services put the interests of their customers ahead of the interests of the financial services provider. This includes a ban on conflicted remuneration. Alternatives to conflicted remuneration include pay models that reward skill and encourage ethical behaviour. Australia, the UK, Canada and USA have all made some changes to remove or limit the existence of conflicted remuneration in financial service. In Australia conflicted remuneration is banned in connection with ‘wealth’ products such as superannuation, life insurance and term deposits but there is no current ban on conflicted remuneration for ‘debt ‘ products like loans and credit cards. In the UK all conflicted remuneration is banned. FSU has secured new pay models that begin to de-link pay from targets in major enterprise agreements in 2016. A combination of industry wide regulation banning conflicted remuneration by legislation and new pay frameworks in Enterprise Agreements will ensure that pay in finance adds to trust and confidence rather than erodes it.