ASIC and CBA: greater scrutiny of financial planners on the horizon?

The Senate Economics References Committee recently released its final report into the performance of ASIC (Report).

The Report was critical of ASIC's performance in a number of areas and examined ASIC's handling of an investigation into financial advisers working for Commonwealth Financial Planning Limited (CFPL), which is the financial arm of the Commonwealth Bank of Australia Group (CBA).

This article summarises the relevant content of the report, the government and CBA's responses to it and the subsequent potential for further scrutiny of financial planners.

 

The Report

On 20 June 2013 the Senate referred an investigation into the performance of ASIC to the Senate Economics References Committee (Committee) for inquiry and report.

The Committee's final report was tabled on 26 June 2014.

CBA case study

The Report was critical of ASIC's performance in a number of areas and included chapters targeting ASIC's response to allegations of serious misconduct of financial planners working for CFPL. From 2006 to 2010, CFPL advisers are alleged to have earned considerable commissions by placing their clients' funds into risky investments without permission. It is alleged that in some cases, the investments were effected by planners forging documents.

The Report was extremely critical of:

  • CBA's internal compliance regime;
  • how CBA handled customer complaints and compensation demands; and
  • ASIC's 'complacent' investigation and prosecution of financial planners.

ASIC's investigations into the CFPL matter eventually resulted in ASIC banning several advisers, CFPL providing enforceable undertakings to ASIC, and CFPL providing compensation to more than 1000 customers.

Nevertheless the Committee was critical of the considerable delay before ASIC launched its investigation (following information from industry whistleblowers) and ASIC's own accountability, relationships with other regulators, complaints management and whistleblower protection.

The Report suggested that CBA's management was involved in an attempted cover-up of the activities, and recommended the federal government hold a royal commission in relation to the matter. To date, the federal government has resisted those calls for a royal commission.

Open Advice Review program

Since publication of the Report, and the resulting media attention, CBA has announced the launch of an Open Advice Review program, being an internal review of the conduct of its financial planning businesses between the years 2003 to 2012.

Under the Open Advice Review program, if it is found that customers received poor advice during the relevant period from a CFPL financial planner or other staff member, an independent customer advocate funded by CBA will make an offer of compensation.

Customers who do not agree with the view of the independent customer advocate or, who are concerned with the assessment will have the option of recourse to an Independent Review Panel, led by The Honourable Ian Callinan AC. The Independent Review Panel will review individual cases and determine whether compensation is payable and, if so, how much. CBA will be bound by decisions of the Independent Review Panel but customers will have the option of taking the assessment to the financial ombudsman.

Greater scrutiny of financial planners

The inquiry has led to a call for a wider investigation into the financial planning arms of other industry participants.

It is not difficult to foresee how such egregious failings on the part of major participants in the financial planning industry may lead to greater scrutiny of all financial planners. This includes a rise in claims against financial planners and Australian Financial Services Licence holders and class actions in relation to perceived failures in management oversight and internal compliance programs.

Recently, FoFA has commenced and imposes important restrictions on how financial planners operate (see our earlier ClearLaw article titled "FoFA Update: FoFA reforms take effect, likely to survive"). In the context of FoFA, there are two obvious means by which greater scrutiny may arise:

  • ASIC is a regulator and, as with all regulators, is of limited means. There may be greater scrutiny as a result of ASIC being provided with additional funding and resources to roll-out, monitor and prosecute financial planners under FoFA;
  • the negative publicity may lead to a reduction in exemptions from FoFA, which have been introduced by the Liberal National Party but which will only stay in their current form until 31 December 2014. The new year may prove an opportunity for Parliament to unwind some of the Liberal National Party's more generous concessions to industry, such as the removal of the 'catch all' for the best interests duty.[1]

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[1] For more information please see our earlier ClearLaw article titled "FoFA Update: Bill tabled; Senate Committee review; FoFA reforms paused". However, generally when providing personal advice to a retail client, the provider must act in the client's best interests in relation to that advice — the so-called 'best interests duty'. Section 961B(2) of the Corporations Act 2001 (Cth) sets out 7 steps by which a provider can prove that they have satisfied the best interests duty. The seventh and final step is that the provider has 'taken any other step [in addition to the six preceding ones] that ... would reasonably be regarded as being in the best interests of the client'. This final step is known as the 'catch-all' provision.