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.”
The interesting thing amongst all the FoFA, Storm Financial and Commonwealth Financial Planning debate – is that, by and large – most of the Proper Authority holders in question were meeting the “letter of the law”. What I mean – is that – they had produced there 100 page Statements of Advice, with appropriate wording and disclosure.
The essential problem was the INTEGRITY of the individuals / organisations. The actual advice ITSELF was the problem. More and more Legislation / Regulation will do little to fix this. For example how can ANY employed Bank financial planner satisfy the “best interests” duty? Every time they walk through the door and sit down at their desks – they are compromised – because they work FOR the bank – not the client. Really – how can they have the clients best interests uppermost when they are told what products they can sell and what platforms they can use. Also, the Bank advisers are part of a sales driven culture, where the best performers (those most highly paid and recognised) are those who have the biggest sales.
ASIC will respond by threatening to send to prison some poor sole practitioner operating out of Hobart, who forgot to get an “Authority to Proceed” dated – whilst just hoping that the thousands of Advisers employed by the Banks would just disappear from the media spotlight. Notwithstanding that some of the most egregious examples of poor advice occur within the salaried sales force of Advisers employed by Banks. The response of more and more Legislation / Regulation to try to “codify” integrity will, of course, not work. All that it succeeds in doing – is making it increasingly difficult for those Advisers, who truly wish to provide an independent, unbiased and valuable advice service to their clients – to be able to effectively operate a business. In effect, it pushes more an more advisers into the aligned advice channel – which already accounts for over 80% of the financial advisers operating in Australia. This is the real issue – the “elephant in the room” needs to be confronted and dealt with.
At the moment – the issue isn’t even being addressed. I mean – allegedly, a senior manager in Commonwealth Financial Planning actually fabricated an SoA in an attempt to mitigate the genuine claims of one unfortunate investor. How bad do things have to get before ASIC will have the xxxxs to actually acknowledge, confront and deal with the issue!
I suspect that “they are too big to fail”. That is – the Banks are too big, too well resourced, have too powerful a lobby, too many lawyers and are therefore far to difficult for ASIC too do anything about.
What ASIC will do, is crucify some non-aligned sole practitioner and then say,”look we are cracking down on these rogue Advisers” and just continue to do nothing about the REAL issue.