Academic journal article University of Queensland Law Journal

Commission Culture: A Critical Analysis of Commission Regulation in Financial Services

Academic journal article University of Queensland Law Journal

Commission Culture: A Critical Analysis of Commission Regulation in Financial Services

Article excerpt

'It's no longer called "sales" but "helping customers". But everyone knows it is about selling'. (1)

I INTRODUCTION

A commission culture is deeply embedded in the Australian financial services landscape. Commissions are a form of labour regulation to increase sales of financial products. Industry worries it cannot 'incentivise' sellers without them. (2) They are not a gift to employees as they are not freely given, but calculated in relation to performance objectives. They may not be a bribe as ostensibly they are not for an improper or corrupt purpose. (3) Yet these incentives propel unnecessary and sometimes illegal risk taking and help create a 'bad' corporate culture. They increase sales of financial products that are inappropriate or unsuitable for the buyer.

Remuneration structures are not designed for good consumer outcomes. (4) Consumers do not understand how they influence the product they buy. There is no overall suitability requirement for the sale of financial products in Australia and commissions drive the sale and churn of inappropriate products. Commissions create conflicts of interest between the firm and consumers and within the firm. They have been justified as necessary to sell socially desirable products and critical for retaining market share. (5) This is for the benefit of the firm and the seller. The market refers to distribution channels, not sales, (6) and this obfuscating language is adopted by regulators. (7) Perhaps we should refer to sale gutters. There are arguments that commissions benefit consumers. These include greater access to a choice of products from a range of different providers, consideration of beneficial products not otherwise sought, and lower costs of recommendation and advice services. (8) Nevertheless, there is compelling evidence of poor consumer outcomes.

Australia has adopted strategies to disclose, ban, cap, and deemphasise commission payments. Other jurisdictions have banned or are considering banning commissions. Despite disclosure, consumers generally do not know how brokers get paid. (9) Despite banning, financial advisers still do not always give appropriate advice. Capping, the new approach, may not lead to optimal insurance outcomes.

This article critically assesses current developments in relation to commission payments. There appears little appetite to return to fixed salaries and relinquish 'at risk' (that is commission) remuneration models. There are large numbers of individuals who benefit from incentivised sales which do not necessarily benefit the buyers and may even be detrimental to them. Poor consumer outcomes should concern us all. It is ironic that the initial financial services law reform (FSR), which was designed to create generic regulation for all financial products by removing regulatory arbitrage, has resulted in the opposite for commissions.

This article outlines recent and current inquiries relevant to commission payments. It then sets out details of commission structures in different parts of the financial services industry, followed by an account of commission-induced consumer detriment. Finally, it assesses strategies to regulate commissions. It does not engage with debates on the meaning of culture nor links between commissions and Board or Executive remuneration. It is sufficient to reveal habits, patterns of behaviour, and beliefs that, in part, constitute a commission culture. The focus is on regulating the commission.

II THE COMMISSION REFORM LANDSCAPE

Public interest in the nexus between commission payments, conflicts of interest, bad sales practices, and unsuitable products has intensified since the inquiries that followed the global financial crisis that began in 2008. Some inquiries involved extensive data collection with detailed information on remuneration structures, which were previously imperfectly understood. Others assessed the impact of commissions. …

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