We’re all finished here.
After two weeks of shocking revelations out of the financial industry, today’s hearing culminated in the counsel assisting the commission recommending criminal charges against AMP and the financial planning firm Henderson Maxwell.
Here are the key takeouts:
- The senior counsel assisting, Rowena Orr, has told the commissioner, Ken Hayne, that it is open to find that AMP breached the Corporations Act by making “material” and “deliberate” attempts to mislead Asic about the “extent and nature” of the ongoing fee for no service conduct
- Orr also said Henderson Maxwell, the firm of celebrity financial advisor Sam Henderson, could face charges over information supplied in a financial document
- Henderson’s advice to FWC Donna McKenna might amount to misconduct under the Act, with Orr saying he may have breached his obligation to act in his client’s best interest and to give priority to her over his own interests.
- Orr has also recommended that AMP be charged for breaching Section 64 of the Asic Act, which is a criminal offence
- She has also found that it is open to the commission to find that the Commonwealth Bank of Australia breached obligations under the Corporations Act by not reporting fees for no service issues to Asic for two years
- She says it would be open for the commission to find that CBA’s Colonial First State breached the Corporations Act by charging investment platform fees inappropriately
- Earlier, it was heard that Asic had taken just one criminal action against any licensee in 10 years - that was in 2010
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Turning to Dover Financial and to Terry McMaster – who collapsed while giving evidence on Thursday – Orr says the three cases examined leave it open to the commission to find that the firm engaged in misleading and deceptive conduct in connection with the client protection policy and in failing to comply with financial services laws under the Corporations Act.
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Sam Henderson's firm recommended for criminal charges
Henderson Maxwell - the firm of the celebrity financial adviser Sam Henderson, which gave deeply flawed superannuation advice to a fair work commissioner – has been recommended for criminal charges.
Henderson advised Donna McKenna to roll her public sector super fund into a self-managed super fund to be managed by the firm. It would have given Henderson’s firm thousands of dollars in fees. But the advice would also have cost McKenna $500,000 for withdrawing early from one of her public sector super funds.
Orr says the firm may have committed an offence under the Corporations Act by issuing a defective financial services guide.
Henderson’s conduct might amount to misconduct, breaching his obligation to act in the best interests of Ms McKenna and to give priority to her over his own interests.
The firm also breached community standards by allowing its employee to impersonate Ms McKenna on five occasions, and Mr Henderson’s failure to assist the FPA and his personal criticism of Ms McKenna during the FPA’s investigation.
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Orr tells the commission it could make multiple findings of breaches under the Corporations Act against AMP in relation to the conduct of its financial advisers and against the advisers themselves.
In one instance, she says there has been a “culture of emphasising the growth of the business over ensuring advisers are appropriately qualified”.
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We’re on to the conduct of three AMP advisers. You can read our report on what the commission heard earlier this week here:
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Orr says ANZ accepted high risk in its wealth arm for years without doing anything to reduce it. She also says it placed a low priority on remediation of the problems of customers who were mistreated by the bank’s advisers.
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Orr finds that three financial advisers employed by ANZ, as well as two of its advice groups, RI Advice and Millennium 3, may have breached the Corporations Act in relation to financial advice given to clients.
She said one of the advisers – a Mr A – may also have breached provisions in the Asic Act not to engage in conduct that is misleading, deceptive or likely to deceive.
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We’re now moving on to financial advice provided by ANZ and its associated entities.
Orr has also posed the following questions:
- Do the remuneration and incentive policies that reward advisers for revenue generation create an unacceptable risk that they will prioritise revenue over their obligation to act in the best interests of the customer?
- How can companies incentivise good quality advice where the best advice is to do nothing?
- How can companies ensure audits are escalated when appropriate?
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Westpac may have breached the Corporations Act
We’ve returned from the break.
The senior counsel assisting, Rowena Orr, has immediately told the commission that it is open to find that Westpac may have breached its obligations under the Corporations Act in relation to two of its financial advisers.
Orr says it is open to commissioner Hayne to find that the conduct of two of Westpac’s financial advisers might amount to misconduct, and that Westpac conceded as much in its evidence. She said it was open to the commission to find the two advisers may have breached their statutory obligations under the Corporations Act to act in the best interest of clients and to provide appropriate advice to them.
Orr also said Westpac’s conduct in the period when both men provided the advice might amount to misconduct.
She says Westpac may have breached obligations under the Corporations Act to ensure advice provided by the advisers was efficient, honest and fair, and to take reasonable steps to ensure its financial representatives complied with the Corporations Act.
Wesptac may also have breached its statutory obligation to report significant breaches to Asic within 10 business days.
She pointed out that at the relevant period, Westpac’s variable renumeration scheme “directly incentivised the generation of revenue”.
“Westpac had a system of renumeration for employed financial advisers which incentivised revenue generation and created a risk [that] customers would not be provided with financial advice in the best interests of its customers.
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Lunchtime wrap
Well, we’ve very abruptly stopped for lunch.
Orr was outlining the evidence heard in relation to inappropriate advice and conduct by financial planners, specifically the conduct of Westpac advisers. You can read more about what the commission heard about the advice last week here.
Here’s what we’ve heard in a stunning session so far:
- The senior counsel assisting, Rowena Orr, has told the commissioner, Ken Hayne, that it is open to find that AMP breached the Corporations Act by making “material” and “deliberate” attempts to mislead Asic about the “extent and nature” of the ongoing fee for no service conduct
- Orr has also recommended that AMP be charged for breaching Section 64 of the Asic Act, which is a criminal offence
- She has also found that it is open to the commission to find that the Commonwealth Bank of Australia breached obligations under the Corporations Act by not reporting fees for no service issues to Asic for two years
- She says it would be open for the commission to find that CBA’s Colonial First State breached the Corporations Act by charging investment platform fees inappropriately
- Earlier, it was heard that Asic had taken just one criminal action against any licensee in 10 years - that was in 2010
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As Orr continues laying out her recommendations to the commission, there’s a mea culpa from the financial services minister, Kelly O’Dwyer.
O’Dwyer held a trainwreck interview on the ABC’s Insiders program last weekend, defending the government’s delay, but now concedes the government got the timing wrong.
“With the benefit of hindsight, we should have called it earlier. I am sorry we didn’t, and I regret not saying this when asked earlier this week,” she told a self-managed super fund conference in Melbourne on Friday.
Colonial First State may have breached Corporations Act
Orr has summarised evidence in relation to so-called platform fees.
Her advice is that it is open to the commission to find that Colonial First State may have breached its obligations under the Corporations Act to have in place adequate arrangements for the management of conflicts of interest that may arise in relation to the provision of financial services.
She says it is open to the commission to find that Colonial First State preferred its own interests and that of its related entities – CBA’s related advice licensees – to the interest of those who invested in its financial products.
She asks these questions about platforms:
- does vertical integration of platform operators with advice licences serve the interests of clients? If so how?
- why should platform operators get an asset-based fee from fund managers if it’s not passed on to clients?
- if platform operators continue to deduct advice fees, why should they not be required to ascertain that there is a lawful entitlement to the fees?
On to the Commonwealth Bank.
Orr says CBA’s culture had been aimed at “maximising revenue streams” rather than providing meaningful advice to its clients.
She says it is open to the commission to find that CBA managers were aware for 18 months before Asic was told clients were being charged fees for no service.
Orr says there was a “cultural tolerance” of risks and of “conduct detrimental to clients but to the financial advantage of CBA”.
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Further recommendations of potential Corporations Act breaches
Orr says it is also open to the commission to find that AMP breached the Corporations Act for describing a Clayton Utz report as independent. She says the conduct is “at least inaccurate if not misleading”.
She says changes to the Clayton Utz report by AMP’s general counsel Brian Salter appeared, “on their face”, to be intended to limit the findings about the knowledge of senior executives about the misconduct.
Orr outlines interventions by Mr Salter and the AMP chairwoman, Catherine Brenner. She says it is open to the commission to attribute this misconduct to the culture at the top of the company.
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AMP may have breached Corporations Act
We’re hearing that AMP may have breached the Corporations Act by making “material” and “deliberate” attempts to mislead Asic about the “extent and nature” of the fee for no service conduct.
Orr says that senior managers at AMP were aware that the conduct was a breach of their obligations but continued to do so, despite warnings from junior employees.
She says that between 2013 and 2015, AMP made 20 false or misleading statements to Asic, which may have breached the Corporations Act.
She says it is open to the commission to find that the statements were material because they were likely to “affect and appear intended to affect the manner in which Asic went about investigating the conduct”.
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Orr says that on the evidence, it is open to the royal commission to find that the charging clients fees for no service by AMP and its advice licensees “might have amounted to misconduct”.
In particular,
- by contravening their statutory obligation to do “all things necessary” to ensure financial services were provided efficiently, honestly and fairly
- by contravening the obligation to have adequate risk systems in place
- and by contravening their obligation to report misconduct to Asic within 10 days.
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Orr says AMP’s head of financial advice, Jack Regan, accepted under questioning that there was “no lawful basis” for the conduct.
She says Regan conceded the conduct was “unlawful, and ethnically and morally wrong”. He accepted that unless there was a customer complaint, the only way AMP could detect misconduct was through audits, which, Orr says, it did not undertake consistently and regularly.
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Orr begins on evidence of fees for no service by AMP.
She says AMP charged fees to clients “in circumstances where they did not and could not provide services to the clients for those fees”. Asic first became aware of the issue on 15 January 2009. The breach first occurred in 2007 and AMP first became aware of it in 2008.
But Orr says the practice continued for years after it was first reported to Asic.
She says the commission heard evidence that the application of fees for no service continued until at least January 2017.
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Orr’s opening gambit lays out what we’re in for:
Over the last two weeks the commission has heard evidence of misconduct, and of conduct falling below community standards and expectations in relation to the provision of financial advice by employees and authorised representatives of financial service entities.
Here’s the roll call of issues: fees being charged for no service, platform fees, inappropriate advice, improper conduct and the financial services disciplinary regime.
Orr proposes to lay out each of the case studies that have been the subject of evidence in turn, and to identify findings that counsel believes are open to the commission.
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Orr makes closing statement to commission
Orr is now up, about to begin her closing statement, which will wrap up the last two weeks of evidence.
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Steele concludes and now Orr is up entering a great raft of documents into evidence.
They all appear to relate to what we’ve heard about AMP’s fee for no service scandal. The evidence includes emails between Brian Salter from AMP and Asic representatives and Clayton Utz.
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Steele asks Macaulay how often Asic takes criminal action against individual financial advisers.
“Very frequently,” she responds, in cases of fraud or serious dishonesty cases.
In 2015, Asic asked the big financial institutions to provide it with information about advisers it suspected of serious compliance breaches.
The five big institutions reported about 147 cases. Of those, Macaulay says Asic was still working through about 60 cases.
However, she says, most of the 2015 advice “is now somewhat old”.
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Mark Steele, SC, counsel for Asic is now questioning Macaulay.
He’s taking her to the limitations of Asic’s powers, asking her to clarify, for example, the extent to which licensees share information with the regulator about the details of serious misconduct by advisers.
Not often, she says. Licensees often claim legal professional privilege to avoid handing over the results of internal investigations about advisers.
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Asic has taken on only six civil penalty proceedings against licensees since 2013.
Four of them were commenced this year.
Orr wants to know why.
“You can only use civil penalty proceedings to address conduct that occurred after [2013] so there needs to be a period in which the conduct occurred,” Macaulay responds.
She said the civil actions were taken against “egregious conduct which needed to be dealt with by way of a significant response”. Some of the proceedings included injunctions to stop the conduct occurring.
Orr concludes her examination.
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Asic has taken just one criminal action against any licensee in 10 years - that was in 2010.
“We’d usually look at the conduct of the individuals who were behind that licensee,” explains Macaulay.
“The consequence of a criminal finding against a corporate entity is that there would be a fine imposed. We generally address the motivating minds of the corporation and their conduct ... and take criminal proceedings against the individuals.”
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'Financial advisory groups used second licence to get around suspension'
The two entities suspended were solely because of giving poor financial advice.
They were suspended for six and eight weeks respectively, resulting in the advisers being unable to provide advice during that period.
But Macaulay’s understanding – for which she says she has no evidence – is that the advisers would have gone and used the licence of another licensee, either individually or en masse, to keep working.
One of the suspended entities held a second licence, so they all just used that during the suspension period.
Macaulay concedes the suspension had no practical effect.
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There are “a range of powers” to take action against licensees for breaches of general obligations, says Macaulay. Civil proceedings, revocation or restrictions on licenses, for example.
Seeking to remove a license is a “difficult process”, she says. It has succeeded once, and on two other occasions they have gained suspensions, under section 912A.
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Orr asks if the movement of advisers who have engaged in misconduct between financial licensees is a problem for the industry.
“Yes.”
95% of licensees are not members of the ABA and there is no obligation to share information about planners under ABA protocols, says Macaulay. Even within theABA, there are questions about how effective the protocols are.
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Macaulay is asked why the FPA and AFA aren’t proscribed disciplinary bodies.
She doesn’t know.
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Asic has no power to direct licensees to take corrective action, but has recommended it be given the power. The federal government has accepted this in principle but will consider it alongside findings from this royal commission.
“Why does Asic negotiate with entities about sanctions?” asks Orr.
If an adviser under investigation approaches Asic with “an offer”, they would consider that, Macaulay says.
“We would accept an enforceable undertaking if what was offered to us was better than we could get before a delegate. An example of that would be a period out of the industry which we thought was a realistic assessment of what a delegate might decide to impose, plus something else such as ... further education [before re-entering the industry], and pre-vetting of the files.”
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Asic can take up to three years to ban a reported adviser
It takes one to three years to get from a notification of misconduct by an adviser to a banning order from Asic.
It takes Asic about two months to a year to commence an investigation, another six to 12 months to get a brief to a delegate, and another five months for a delegate to make a decision about a banning order for misconduct by a financial adviser. Macaulay’s team of 60 receives about three notifications per week.
If it’s serious misconduct, it may take longer, Macaulay says.
There are also resourcing issues, the length of time for delegates to make decisions on evidence presented, requests for surveillance.
If it turns out an adviser is no longer in the industry, then Asic would set the investigation aside and “may” return to it if the adviser re-enters the industry.
“Just so I understand the purpose of a banning order is protection of the public,” says Orr.
“That’s right,” says Macaulay.
“But it might take a couple of years before Asic gets a banning order for that purpose?”
“That’s right.”
“Is that satisfactory?”
“No it’s not.”
Orr wants to know what Asic is doing to fix that. Macaulay says resources are part of the issue, but also licensees need to be more prompt in reporting misconduct and providing material.
They also try to speed things up where they can, like preparation of briefs. But other elements, like surveillance, take longer if there aren’t enough resources at the time.
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Louise Macaulay is discussing the lack of resources to investigate every case. She says in her view Asic should only become involved in cases of serious misconduct but she’s not confident Asic is made aware of all of them.
Ken Hayne wants to know whether “public denunciation” to call out bad conduct factors into how Asic approaches issues of breaches.
“I think you can say it doesn’t at the moment,” she says. “Investigations, surveillances are private, the decision is also private.”
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Asic is calling for a reversal of a 2003 law change that allowed licensees to subjectively determine if a potential breach was serious enough to be reported. It is proposing that law be returned to an objective test, as well as extending the reporting deadline from 10 days to 30.
Macaulay said Asic found the 10-day limit was leading to delays in reporting of potential breaches by licensees who take some time to “form their view”. The 30 days should allow for a licensee’s investigation without missing the deadline.
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Asic learns of potential misconduct through a number of ways, Louise Macaulay says.
- reports of misconduct from the public or other advisers
- notifications under the Corporations Act
- through surveillance or other sources of market intelligence
- information from the ombudsman or other associations
Asic received 170 reports last financial year, and investigated about 40%. 106 reports were received from financial service organisations, of which 46% were investigated.
Investigations are launched based on:
- the seriousness of the misconduct
- the impact on consumers
- the material Asic is provided with
- the age of the conduct
- Asic’s strategic priorities of risk areas (for example, currently professionalism and training)
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The hearing has begun.
The commissioner, Ken Hayne, has excused McMaster of further attendance. Hayne says he will consider any request from McMaster in the future to offer further evidence.
So we will start with Louise Macaulay, from Asic.
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Asic’s conflict of interest policies are under the microscope, reports Gareth Hutchens.
The Greens have written to request the auditor general investigate the declaration of interest and conflict of interest policies of the Australian Securities and Investments Commission.
The letter says the investigation is necessary after concerns “raised in the media in regards to the potential conflicts of interests between former Asic chairman Greg Medcraft and the, currently stood aside, senior counsel for AMP, Brian Salter”.
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Hello and welcome to today’s coverage of the royal commission into misconduct in the banking, superannuation and financial services industry.
Today will continue the second round of hearings into the financial advice industry. Yesterday heard from three witnesses – the chief executives of the Financial Planning Association and the Association of Financial Advisers, and the head of Dover Financial Group, Terry McMaster.
McMaster collapsed in the dock yesterday and was taken to hospital. He hadn’t finished his testimony but we haven’t heard if he’s well enough to reappear today, so I’m assuming we’ll begin with Louise Macaulay, senior executive leader of Asic’s financial advisers team.
You can read a wrap of yesterday’s hearings here, and below is quick summary of the day’s revelations.
- McMaster defended the company’s hiring of financial advisers who were under investigation and later sanctioned for serious breaches.
- McMaster was also questioned over clauses in Dover’s client protection policy, which absolved its advisers of responsibility for bad conduct.
- Dover appears to have not properly answered a notice to produce documentation from the commission, by supplying a truncated spreadsheet logging when staff reviewed statements of advice, instead of the full information. The spreadsheet contained no names.
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Dover Financial was the only large-scale financial advice group to decline to assist the royal commission.
- McMaster advised the company to retain him as a lawyer to review its statements of advice and “add gravitas”.
- Dante De Gori, the chief executive of the Financial Planning Association, defended the lack of resolution on a March 2017 complaint against the celebrity adviser Sam Henderson.
- De Gori also defended FPA practices that saw Henderson talk with both the investigator of the complaint and the FPA head of professionalism.
- The FPA continued to suppress the identities of expelled or suspended members for years after a change to its constitution that ended the standard practice.
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The FPA asked the royal commission to keep Henderson’s name suppressed to protect its processes and Henderson’s reputation.
- The FPA budgets the same to the department of the CEO as it does to its professional standards unit, with four staff.
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Philip Kewin, chief executive of the Association of Financial Advisers, told the commission there could be a tension between promoting the industry and its aim of being a co-regulator.
- The AFA only suspended a member who was found by Asic to have engaged in misconduct and banned for five years, because it believed it would be relying on “hearsay” unless it did its own investigation.
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