However, when it comes to fixing this mess, the Commission’s recent interim report provided no clear answers. Consumer education, self-regulation by banks, and even stronger enforcement efforts by government regulators all have their drawbacks. But there’s another solution that Commissioner Kenneth Hayne has so far overlooked: sector-wide collective bargaining to establish uniform, ethical pay practices across the financial industry.

At present, flawed pay systems create perverse incentives for banks and brokers to push debt, insurance, and financial services to Australians. Financial professionals can reap tens or hundreds of thousands of dollars in commissions, bonuses and “introducing” fees; top executives pocket millions. Inevitably these incentives lead them to sidestep or ignore basic rules and standards: like knowing your client, transparency and responsible lending. Consumers, many of them vulnerable, end up with expensive commitments they didn’t need or (in many cases) even understood.

To solve this problem, the financial industry should implement a uniform compensation system, consistent with principles of ethical banking, right across the whole industry. Professionals can be paid consistently (including bonuses for personal or group performance, where appropriate), while protecting the best interests of financial consumers. And a reliable and independent system of enforcement, embedded within financial firms, can ensure the rules are being followed.

These goals could be achieved through a sector-wide collective bargaining system, in which employer and union reps negotiate standard compensation patterns that apply to all participants across the industry. Compensation in each job would 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 a key motivation for misconduct.

This system would not rely solely on external regulators to monitor behaviour and investigate complaints. Instead, the enforcement of standards would become part of the regular administration of the collective agreement.

Unfortunately, Australia’s 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.

These restrictions should be reconsidered in light of pervasive financial misconduct – and the key role of perverse compensation systems in motivating that misconduct. Sectoral collective agreements could help reform compensation and reduce financial misconduct on a uniform, industry-wide basis. The Royal Commission should now explore standardised sector-wide collective agreements as a promising response to the problems it has so damningly documented. And the Commonwealth government should eliminate its unusual restrictions on collective bargaining so that this important reform could occur.

The Centre for Future Work recently submitted a comprehensive proposal for sector-wide collective bargaining in the financial industry to the Royal Commission, as a solution to the problem of conflicted compensation and financial misconduct. Download the full submission below.