By Paulina Duran
SYDNEY (Reuters) - Australia's second-biggest lender, Westpac Banking Corp (AX:WBC), said on Wednesday it would stop paying its staff commission for selling its own products, a practice at risk of being banned following a banking inquiry.
Laws introduced in July 2013 let banks reward their financial advisers with commission for recommending their own investment and insurance products, provided the clients hired the adviser before that date.
But an independent inquiry has revealed banks have relied heavily on the so-called grandfathered provision to charge ongoing fees to clients, thousands of whom have not received the advisory services they paid for.
Lawyers running the quasi-judicial Royal Commission inquiry have suggested the country's largest banks put an end to the practice, a sign they may make a formal recommendation to ban it when the inquiry reports to the government in early 2019.
On Wednesday, Westpac said more than 140,000 customer accounts were exposed to the conflicted commissions and that it would stop the payments from Oct. 1.
"We have considered this position from both a customer and a stakeholder perspective and decided that it is the right time to draw a line under these past arrangements and eliminate them as far as we are contractually able," Westpac said in a statement.
The lender said it would honor existing arrangements to pay commission to external financial advisers who recommend Westpac and BT products relying on the legacy rule.
The move comes ahead of significant reforms expected to be recommended by the powerful misconduct inquiry into Australia's A$100 billion financial services in February.
The inquiry has already exposed widespread misconduct in the advice and wealth management units of the largest banks and financial services companies such as Commonwealth Bank of Australia (AX:CBA) and AMP Ltd (AX:AMP), which also rely on rolling product commissions.
Westpac announced the change less than a week after the corporate regulator filed a lawsuit against it for a financial planner who gave poor advice to customers or charged them fees without giving any advice, while employed by the bank.
In a submission to the inquiry, Australia and New Zealand Banking Group Ltd (AX:ANZ) argued against the removal of the provisions allowing legacy product commission.
The bank, which has sold the bulk of its advisory network to IOOF (AX:IFL), said in May it would stop paying bonuses to financial planners for selling its products in response to the widespread misconduct in the sector unmasked by the inquiry.