By George Gilligan, UNSW

SYDNEY: 19 July – On 26 June 2014 the Senate Economics References Committee (the Committee) released its much anticipated Final Report into the performance of the Australian Securities and Investments Commission (the Report).

The inquiry had been established in June 2013 with cross-party support and Senator Mark Bishop as its chair. Senator Bishop retired from federal politics on 1 July 2014, after continuously representing Western Australia as a senator since 1 July 1997, so the tabling of the Report in Parliament was Senator Bishop’s last significant act in federal politics. The report is a substantial document, 519 pages in length ranging across a diverse range of topics including not only general issues such as ASIC’s role, regulatory theories in relation to ASIC, credit laws, the Financial Ombudsman, corporate whistleblowing, ASIC enforcement, financial literacy, financial planners, governance and accountability structures, but also a very specific focus on Commonwealth Financial Planning Limited (CFPL). CFPL is a wholly owned subsidiary of Australia’s largest bank the Commonwealth Bank of Australia (CBA), CFPL operates under the business advice structure of Colonial First State (CFS) which is also part of CBA.

The media release accompanying the Report is withering in its criticism of CFPL and CBA. It describes past practices at CFPL as ‘appalling’, and the conduct of a number of CFPL advisers as: ‘..unethical, dishonest, well below professional standards and a grievous breach of their duties.’  For a discussion of some of these appalling practices by CFPL and the specific stimuli for the Senate Inquiry refer to my June 2013 analysis piece on the Centre for Law, Markets and Regulation (CLMR) portal. The Committee believes that: ‘The CFPL scandal needs to stand as a lesson to the entire financial services sector. Firms need to know that they cannot turn a blind eye to rogue employees who do whatever it takes to make profits at the expense of vulnerable investors.’  In particular, Senator Bishop lamented CBA’s response to the CFPL scandal: ‘That a major financial institution could have tolerated for so long conduct that included apparent criminal behaviour is not easy to accept.’  Senator Bishop went on to state that: ‘…the evidence that the committee has received is so shocking and the credibility of both ASIC and the CBA so compromised that a Royal Commission really is warranted.’

The Committee’s call for a Royal Commission into CBA and CFPL has been supported, unsurprisingly, by the federal opposition and victims of CFPL mis-selling. Opposition Treasurer Chris Bowen has written to Treasurer Joe Hockey demanding a royal commission, a demand which Mr Hockey did not endorse although he did criticise CBA for being too slow to admit its mistakes and compensate victims. Mr Hockey is reported as telling the Coalition joint party room in Canberra on 15 July that he is not only annoyed with CBA but also with ASIC: ‘ASIC has failed miserably and I’m very, very unhappy with its handling of this.’ Nevertheless, it is likely that there will be continuing political pressure on the federal government. Opposition leader Bill Shorten has said that he will seek to organise numbers for a new Senate Inquiry into CBA: ‘The new inquiry will be asked to consider, amongst other matters, the actions of the Commonwealth Bank and including its executives during this misconduct…Why financial advisors who were known to be acting unethically were promoted within the bank. I am not convinced that we have gotten to the bottom of what happened here. I am not convinced that the bank is doing everything it can to support its victims….Worse still, I am not convinced the Government is doing anything to prevent this happening again to thousands of other Australians.’

Mr Shorten’s statement is indicative of the continuing political fallout from the toxic sales culture at the heart of the CFPL debacle. This fallout is continuing despite the somewhat belated efforts of CBA itself to politically defuse the toxic political fallout. Most notably in July 2014 the announcement by CBA of improved compensation measures to victims via its Open Advice Review Program (OARP) and the appointment of former High Court judge Ian Callinan as chair of CBA’s Independent Review Panel (IRP), which will hear appeals from financial planning customers dissatisfied with compensation offered by the bank's OARP.

The OARP was announced on 3 July 2014 by CBA’s CEO Mr Ian Narev, who stated that for customers who received advice between 1 September 2003 and 1 July 2012 from CFPL or Financial Wisdom (FW) - another significant financial planning subsidiary owned by CBA,: ‘At no cost to customers, the program will provide an assessment of the advice received, access to an independent customer advocate and an independent review panel. The program will be fully transparent to customers.’  Mr Narev apologised to CFPL and FW customers who had been caused distress and hardship by receiving poor financial advice, noting that $52 million in compensation had already been paid to more than 1,100 customers who had received poor advice. If Mr Narev thought this very public mea culpa and improved compensation process would appease aggrieved customers and the financial press then he would have been disappointed by the response. For example, The Australian Financial Review noted that: ‘Narev’s failure of leadership is having a big influence on politics and policymaking. Timing matters, CBA’s new approach to aggrieved customers will be seen as too late – if no longer too little. It also means that the whole CBA scandal has become totally entwined with the political fight over the changes to the government’s financial advice laws.’ Mr Narev himself admitted that some might perceive the problems at the CBA as ‘emblematic’ of the controversy surrounding the Future of Financial Advice (FoFA) reforms.

This last point is further testimony to the political impact of the CBA fallout. The changes proposed by the current coalition federal government to the previous Labor government’s FoFA reforms have been bitterly fought over for many months, with the last two weeks seeing especially contentious wrangling between the current government and not only the Labor Opposition and the Greens, but also the recently elected representatives from the Palmer United Party (PUP), before the FoFA amendments were finally passed by the Senate on 15 July 2014. The key impact is that the federal government changes allow: ‘..sellers of financial products, such as financial planners, to receive incentive payments from fund managers so long as they are not a described as “commissions”. The reforms overturn laws passed by the previous Labor government that imposed a blanket ban on incentive payments to planners when they give general advice to clients.’

The support of the PUP for the FoFA changes was a dramatic change in their policy position, because only a week earlier, PUP’s leader Mr Clive Palmer, had told The Australian Financial Review that: ‘..in the wake of the Commonwealth Bank fiasco, neither he nor his senators would be turned by government lobbying. “They can stick it up their arse and you can quote me on that” he said. How can you have advisers not acting in people’s best interests?”. How indeed one might ask?  Nevertheless in accordance perhaps with Mr Palmer’s somewhat flamboyant tone of phrase and style, the PUP demonstrated that not only is a week indeed a long time in politics, but also the realpolitik of political voting numbers is very powerful and thus PUP gave their support to the FoFA changes. These changes by the Coalition Government remain controversial and for a discussion of their core features please refer to a CLMR opinion piece by my colleagues Dimity Kingsford Smith and Virosh Poologasundram.

Finance industry participants, especially financial advisers and planners, have been becoming increasingly frustrated and angry about the fallout from the CBA scandal. For example: ‘This is wider than the industry. It’s the whole idea of advice that has been tarnished, and do you get consumer confidence from this. No.’

Nevertheless, Mr Narev himself has stated that CBA has not seen a ‘discernible’ number of their customers not wanting to deal with the bank as a result of the advice scandal and financial market reaction in terms of CBA share price movement has been negligible. This was also noted by Justin Bratling, chief investment officer of Watermark Funds Management: ‘There was not a single research note written during the week from any of the analysts…and for a company that has generated $9 billion worth of profit this year, the advisory business is very small. It’s a rounding error really in the overall profitability of the bank.’

So the financial advice scandal has not seen CBA hurt on the Australian Securities Exchange indices to date but it is not yet clear just how much reputational damage CBA has suffered and what the specific impacts of that damage will be in the future. It is also not yet clear how many other Australian financial institutions will find the financial advice of their employees coming under media and parliamentary as well as regulatory scrutiny, but it would not be a major surprise if they did. For example, it is certain that Macquarie Group’s private wealth unit is viewed suspiciously by the Senate Committee which recommended that ASIC place Macquarie under intensive surveillance.

Former Senator Bishop publicly stated that Macquarie had similar systemic problems to those of CBA and that: ‘Arising out of confidential information provided to us, we wrote to Macquarie asking them to address the significant number of complaints we received…They wrote back and politely told us to mind our own business.’

Macquarie Equities Limited (MEL) is of course the subject of a current enforceable undertaking with ASIC because: ‘ASIC found MEL had failed to address recurring compliance deficiencies that involved a significant number of its advisers.’

Time will tell if there is more stringent regulatory action taken against Macquarie in the future, or indeed if other financial institutions come under intensive surveillance by ASIC. As discussed above any such developments will occur within an uncertain national political context, and as the Australian Financial Sector Inquiry (FSI) under the chairmanship of Mr David Murray, (former CEO of the CBA), proceeds towards the publication of its final report scheduled for late in 2014. Financial advice and its associated problems only accounted for only eleven (pp.3.63-3.74) of the almost five hundred pages of the FSI’s Interim Report released in July 2014, with issues such as: strengthening education and training requirements of financial advisers; an enhanced national register of financial advisers; and banning individuals from management given some consideration. However, the impacts of toxic sales cultures in financial institutions and their political fallout are likely to make these and other problematic financial advice issues assume a higher profile when the FSI issues its final report later in 2014.