ASIC urged to reload and take a long hard look at other AFSLs

Anyone who thinks they’ve dodged a bullet while Commonwealth Financial Planning (CFPL) has been in the sights of the Senate Economics References Committee had better think again.

The committee’s “hugely significant” report, tabled yesterday, recommends that ASIC undertakes “intensive surveillance of other financial advice businesses that have recently been a source of concern, such as Macquarie Private Wealth, to ensure that ASIC’s previous concerns are being addressed and that there are no other compliance deficiencies. ASIC should make the findings of its surveillance public”.

ASIC is unlikely to tread as lightly around Australian financial services licensees in future as it apparently did around CFPL.

The seriousness and the extent of the wrongdoing there has convinced the committee that a royal commission is warranted to get to the bottom of what really took place, and who is responsible. Its report should be compulsory reading for the head of every single AFS licensee, and the management and executives of every financial institution.

Potential to transform

Lucinda McCann, a partner specialising in financial services law for Henry Davis York, says the report has the potential to transform the industry.

“The report is hugely significant because of the wide-ranging recommendations of the committee which, if adopted, would involve a major overhaul of financial services regulation,” McCann says.

“It would be difficult for the government, despite its current de-regulatory agenda, to disregard the committee’s recommendations.

“Specifically, the recommendation that the Financial System Inquiry [FSI] consider the adequacy of the current framework regulating financial product issuers and product disclosure could lead to a blanket ban on the offering of some complex products to unsophisticated investors.”

McCann says the report recommends “not only beefing up the way in which ASIC uses enforceable undertakings as an enforcement tool, but also that ASIC undertake surveillance of those financial services institutions who have recently entered into enforceable undertakings with ASIC”.

“The Committee has come out strongly in favour a far more rigorous framework for qualifying and regulating advisers, which utterly would transform the industry,” she says.

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The report tells a sobering tale of what goes wrong when financial planners, given incentives to put their own interests ahead of those of their clients, are encouraged by a management conspiracy, and overseen by a timid and too-trusting regulator.

Case study of shortcomings

The committee’s account of what took place within CFPL between 2006 and 2010 is a case study of all the shortcomings that the original Future of Financial Advice (FoFA) reforms sought to address – and which critics of proposed amendments to FoFA fear could re-emerge.

“One of the most troubling aspects of the conduct of some CFPL financial planners was that it was deliberate and systematic, not negligent or sloppy,” the report says.

“The conduct was targeted at vulnerable and trusting customers who sustained significant losses; it was a breach of the bank’s fiduciary duty and obligation to use reasonable care. The supervisors who knew of such behaviour failed miserably in their duty to report such misconduct.”

The report says CFPL advisers “deliberately neglected their duties and placed their personal interests far above the interests of their clients”.

“The assets of clients with conservative risk positions, such as retirees, were allocated into high-risk products without their knowledge to the financial benefit of the adviser, who received significant bonuses and recognition within CFPL as a ‘high performer’,” it says.

Forgery, dishonesty

“There was forgery and dishonest concealment of material facts. Clients lost substantial amounts of their savings when the global financial crisis hit; the crisis was also used to explain away the poor performance of portfolios. Meanwhile, it is alleged that within CFPL there was a management conspiracy that, perversely, resulted in one of the most serious offenders, Mr Don Nguyen, being promoted.”

The report says that the conduct of “a number” of rogue advisers inside CFPL was “unethical, dishonest, well below professional standards and a grievous breach of their duties”.

When this conduct was brought to the attention of CBA and the Australian Securities and Investments Commission (ASIC), it was dropped into the “too-hard” basket. CBA’s own compliance regime failed.

Both CBA and ASIC were too slow to act on what was brought to their attention, and in particular, “ASIC did not pay sufficient attention to the whistleblowers who raised serious concerns” about the conduct of CFPL advisers.

Intimidate and confuse

The committee says CFPL compounded the problems by mismanaging the compensation process for wronged clients. It points to the way CFPL advised clietns about the misconduct of their advices, which the report says “rather than reassure clients tended in some cases to intimidate and confuse them”.

It says CFPL was guilty of “obfuscation when clients sought information on their investments or adviser”.

It failed to investigate concerns relating to missing files and key records, and to fabricated documents and forged signatures.

“CBA deliberately played down the seriousness and extent of problems in CFPL in an attempt to avoid ASIC’s scrutiny, contain adverse publicity and minimise compensation payments,” it says.

“In effect, the CBA managed, for some considerable time, to keep the committee, ASIC and its clients in the dark. The time is well overdue for full, frank and open disclosure on the CFPL matter.”

The report says the committee has no confidence in ASIC’s ability to monitor CBA’s compliance with new compensation arrangements.

CBA’s credibility compromised

“Furthermore, the CBA’s credibility in the CFPL matter is so compromised that responsibility for the compensation process should be taken away from the bank.

“The committee considered five options to finally resolve the CFPL matter.

But, given the seriousness of the misconduct and the need for all client files to be reviewed, the committee believes that an inquiry with sufficient investigative and discovery powers should be established by the government to undertake this work. To resolve this matter conclusively and satisfactorily, the inquiry would need the powers to compel relevant people to give evidence and to produce information or documents.

“The committee is of the view that a royal commission into these matters is warranted.”