Thursday, 26 June 2014
Economics References Committee; Report
I present the report of the Economics References Committee on the performance of the Australian Securities and Investments Commission, together with the Hansard record of proceedings and documents presented to the committee.
Ordered that the report be printed.
by leave—I move:
That the Senate take note of the report.
The tabling of this report represents the end of a year-long review of the Australian Securities and Investments Commission, Australia's corporate, markets and financial services regulator, ASIC. The inquiry into the performance of ASIC was an important inquiry and, in my opinion, long overdue.
In essence, the report consists of a number of smaller reports that sit within a wider comprehensive examination of the performance of ASIC. It draws on the personal accounts of hundreds of Australians who shared a common experience.
Generally, the submitters were hardworking, honest Australians—many approaching or already in retirement who, through no fault of their own, lost significant amounts of money and, in some cases, their nest eggs. Their loss and suffering was the result of irresponsible and self-serving advisers, brokers or other financial service providers who, for their own gain, peddled bad advice or unsafe products. Many of the submitters asked us: where was ASIC? Where was the corporate watchdog?
The committee understands that ASIC has limited resources but, even allowing for that constraint, ASIC appears to miss or ignore clear and persistent early warning signs of corporate wrongdoing or troubling trends that place the interests of consumers or investors at great risk. To be blunt, the committee found ASIC wanting. It was unable to connect the dots with information in its possession. It allowed itself to be lulled into compliancy while corporate wrongdoers continued to abuse their clients' trust.
The committee has reviewed many cases of ASIC responding slowly to misconduct reports or an emerging problem. I want to focus on one case study—Commonwealth Financial Planning, a subsidiary of the Commonwealth Bank. Between 2006 and 2010 several of its financial advisers and other staff exploited clients and engaged in serious misconduct. Advisers deliberately neglected their duties and placed their personal interests far above the interests of their clients.
Assets were allocated into high-risk products without the clients' knowledge and to the financial benefit of the planner. These actions were facilitated by a reckless sales-based culture and a negligent management, who ignored or disregarded non-compliance and unlawful activity as long as profits were being made.
In summary, the committee found that the conduct of a number of rogue advisers working in CFPL was unethical, dishonest, well below professional standards and a grievous breach of their duties—in particular, the advisers targeted vulnerable, trusting people. Both ASIC and CBA seemed to place reports of fraud in the 'too hard basket', ensuring the malfeasance escaped scrutiny and hence no-one was held to account. The CBA's compliance regime failed, which not only allowed unscrupulous advisers to continue operating but also saw the promotion of one adviser, thus exposing unsuspecting clients to further losses.
There was an inordinate delay in CBA recognising that advisers in its CFPL business were providing bad advice or acting improperly and when this conduct became apparent, the CBA failed to act promptly on that knowledge and inform clients and ASIC. ASIC was too slow in realising the seriousness of the problems in CFPL, instead allowing itself to be lulled into complacency and placing too much trust in an institution that sought to gloss over its problems. ASIC did not pay sufficient attention to the whistleblowers who raised serious concerns about the conduct of one of the most serious offenders and the actions of CFPL.
The committee's doubts about the handling of the CFPL matter only grew as the inquiry drew to a close. Recent developments, whereby both ASIC and the CBA have corrected their testimony about the compensation process for affected CFPL clients have intensified the committee's misgivings about the integrity and fairness of this process. It is concerned that many clients may not have received adequate compensation.
The committee is now of the view that the CBA deliberately played down the seriousness and extent of problems in CFPL in an attempt to avoid ASIC's scrutiny, limit adverse publicity and minimise compensation payments.
In effect, the CBA managed, for some considerable time, to keep the committee, ASIC and its clients in the dark. This case highlights how trusting the regulator is of big business. ASIC either did not understand or did not demonstrate sufficient scepticism of the information put to it by the Commonwealth Bank. It was only since May this year that ASIC has begun to understand how the compensation schemes were being implemented.
Clearly, there were fundamental and widespread problems within the Commonwealth Bank. It is essential that all rogue advisers are identified and that any conduct that may amount to a breach of any law or professional standard is pursued. Further, all affected clients must receive just compensation. As noted earlier, the current compensation arrangements are far from adequate.
At this stage, the committee's confidence in ASIC's ability to monitor the CBA's implementation of its new undertaking regarding the compensation process is severely undermined. Furthermore, the CBA's credibility in the CFPL matter is so compromised that, to my mind, responsibility for the compensation process should be taken away from the bank. The time is well overdue for full, frank and open disclosure on the CFPL business.
Given the seriousness of the matter, the egregious nature of the conduct, the potential number of clients affected, and the lack of transparency surrounding the compensation process, I believe that a royal commission should be established. This is not a recommendation that the committee has made lightly. However, the evidence is so compelling that a royal commission is warranted. This scandal needs to stand as a lesson for the entire financial services sector.
Firms need to know that they cannot turn a blind eye to unscrupulous employees who do whatever it takes to profit at the expense of vulnerable clients.
This inquiry underlined the critical importance of ensuring that Australia has a robust corporate regulatory system under the stewardship of a strong and effective regulator.
The committee's recommendations are designed to help ASIC become a self-evaluating and self-correcting organisation—to be a proactive regulator with teeth that acts decisively, but also fairly.
The recommendations recognise the need for ASIC to be alert to emerging business models or new financial products and to match the inventiveness and resourcefulness of those in the industry who seek to circumvent the law. The committee's recommendations go to matters such as:
As I said at the outset, this was an important inquiry. I regard it as a wake-up call for ASIC. One of the best outcomes of this inquiry so far is that ASIC itself has begun to examine its performance and consider how it can do things better. The regulatory system will be stronger and more resilient if ASIC keeps this up.
I commend this report to the Senate.
I congratulate Senator Bishop on doing a magnificent job chairing the Senate Economics References Committee inquiry into the performance of ASIC. When we kicked off I thought Senator Bishop might have been wondering whether this inquiry was really necessary, but he certainly changed his attitude as we went through it. I could tell some stories about Senator Bishop's deep involvement in this whole inquiry into ASIC.
The committee has made 61 recommendations. In my six years in this place I have never known there to be so many recommendations from a Senate inquiry. Perhaps there have been more, but it is an enormous number of recommendations. One of the things we touched on was raising the standards of financial planners. I find it amazing that, as I said in Senate estimates, you can walk out of a shearing shed, do an eight-day—not eight-week—crash course and you qualify under the Corporations Act to be a financial planner; you can advise someone how to invest their millions after only an eight-day crash course. Who can become a solicitor after an eight-day crash course, or a doctor or a surgeon, or a liquidator or an accountant? We strongly recommend raising the bar for the standards of financial planners.
ASIC needs powers. One thing I look forward to, and hopefully it will be pursued by the government, is licensing every financial planner in Australia—some 30,000. They would pay an annual fee, user pays, to finance ASIC, because at the moment ASIC is spending $33 million a year policing the financial planning industry, yet it is collecting less than $3 million in licensing fees. We need to reduce compliance costs for financial planners so that we do not face a situation where Australians cannot afford to seek financial advice, because it is vital that they do. Only one in five Australians seek financial advice, and we need to raise that enormously—especially given that some 30 per cent of superannuation funds now are self-managed—some $600 billion is self-managed—and these people need good advice so they can grow their superannuation and not be a burden on the taxpayer when they get to retirement.
Along with those licences I would like to see the powers given to ASIC as recommended so that with one phone call they can suspend a financial planner's licence. If they collect and collate the evidence of serious wrongdoing—fraud, forgery et cetera—they should have the power to make one phone call and put that person out of business. Of course that financial planner should have the right to appeal to the Administrative Appeals Tribunal—everyone has the right to appeal.
Whistleblowers were a factor in the inquiry. We did have in camera witnesses, and I have serious concerns about Macquarie Private Wealth. I urge ASIC to go in and make sure Macquarie Private Wealth is doing exactly what they should be doing with their enforceable undertaking, so that the wrongs are righted. We recommend that ASIC's funds be topped up for their legal action. It is expensive to go to court, and we must have a regulator who has the money behind it to do its job.
One of the great challenges we face now is to restore faith in the financial planning industry. I believe 99.9 per cent of financial planners are excellent, honest and do the right thing. Like with anything, it is the minority that destroys an industry's reputation. Let us get that figure to 100 per cent. As Senator Bishop said, we need ASIC to be proactive—we need them to be harsh, we need them to be forceful. We need to get rid of the shonky products for sale out there that investors may face. I was on the inquiry into Storm Financial. Storm Financial was destined to fail. Once the stock market went down some 20 per cent, it was a basket case. Those products should never ever have been out there for sale, and so much harm and damage was caused to so many people, many of them elderly, in the twilight years of their life. They had to face being kicked out of their homes—what a terribly stressful time they must have had. ASIC did do some good work in relation to that. We need to get rid of the bad products and clean out the bad planners. I encourage ASIC, where they see clear evidence of wrongdoing, to consider referring these matters to the DPP for criminal charges to be laid. Some of the evidence I have seen shows clearly that forgery and fraud were involved. People who undertake serious criminal activities like that must face a judge and jury.
In summary, it was a very interesting inquiry. I thank all senators involved—I thank Senator Bishop once again for chairing the inquiry and the way he carried out the inquiry; I thank Senator Whish-Wilson for his input into the inquiry, as well as Senator Xenophon and Senator Dastyari and others. I thank Kathleen Dermody and her staff, who worked so hard. There were 460-odd submissions—a lot of work for the secretariat and a lot of reporting. They did a magnificent job. Let us hope that following this report we in government act to see that people in Australia can have total confidence in financial planners in the future. I am sure we will get a good result, and ASIC will do its job better. There is certainly plenty of room for improvement. The Commonwealth Bank admitted their wrongdoing, and Mr Turner at their AGM said their culture was wrong, their policy was wrong and their advice was wrong, and they need to carry out their duties with their enforceable undertaking and see that people are compensated correctly. As I said, Macquarie ought to have a look in the mirror as well.
I would like to echo what Senator Williams just said to Senator Bishop while he is here in the chamber. He certainly deserves to go out on a high note on this. It has been a long inquiry, and I would thank you for allowing me to participate. I would also like to thank Senator Williams, who I bumped into in the corridors in July last year and who asked if I would be interested in getting involved in this ASIC inquiry, given that I had worked in the financial services industry. Following the September election, I got the consumer affairs portfolio.
It has certainly been a very interesting inquiry parallels the inquiries into the FoFA reforms. I think the critical point is that among the very strong recommendations from the inquiry, which the Greens support, is a large number of recommendations related to cultural practices at institutions like Commonwealth Financial Planning. I think the word 'culture' is really important. The chairman of ASIC, Greg Medcraft, has used this word himself in relation to the Commonwealth Bank, and it refers to more than just a few bad eggs. While it is very clear that we had some rogue financial planners who were falsifying documents and acting illegally and inappropriately—and I do not like using the word 'inappropriate' after Senator Bishop made it very clear on Four Corners that it is way beyond inappropriate—but it was the management and culture within the organisation that kept it buried.
When we look at things such as conflicted remuneration or putting the client's best interest ahead of that of the advisor, we do not really stop and question whether we are also putting the client's best interest ahead of that of the institution as well as the advisor. Or whether conflicted remuneration relates directly to what an advisor receives in a conflict of interest by providing advice, or whether the institution is also involved in conflicted remuneration because they have set up a structure that pools bonuses and continues to push a sales based culture.
The Financial Planning Association in the FoFA inquiry said it would take generations to change the culture in this industry, and I think this inquiry has made a very good start at that. It has been very hard-hitting, and has been followed by the media, including the Four Corners documentary in which Senator Bishop featured very prominently. It has certainly has put this into the public's mind.
When I think about the ASIC inquiry and what has been uncovered, it is very clear to me that this country, like every country around the world, has just been through one of the largest financial crises in living memory. The complacency that Senator Bishop talked about in his speech has come from the development of a culture around making profits, because those profits were made for a very long time—for decades. I was in this industry during the boom years leading up to the Asian crisis; I was there during the dotcom boom, and I got out just before the Global Financial Crisis, and during that time there was a long period where customers on one side were making increasing returns every year on their super funds and financial investments, and companies and advisors were making obscene amounts of money. Then we got a disturbance; an exogenous shock that has really shaken up the system. It is appropriate and timely to have an inquiry like this which looks at the resilience of our system, and how a regulator such as ASIC and the management of a corporation such as Commonwealth Financial Planning respond to these crises and at the systems they have put in place. I would agree with Senators Bishop and Williams that hindsight can be 20-20 vision. With that hindsight we can see that ASIC should have responded much more quickly, strongly and decisively in how they regulated the disturbance we saw at Commonwealth Financial Planning, which has left a lot of people out of pocket.
I would also say that where one inquiry finishes, another starts. Yesterday Senator Xenophon and I sponsored a motion for an inquiry through the economics committee into the damage and the culture around managed investment schemes, which will look at similar things in terms of how the system has failed thousands of Australians in relation to these schemes. It will also look at the role that government has to play in this and at how it ties into the appropriateness of financial advice. Another thing that has become very clear to me is that we have a large number of recommendations and a big wish list that we want ASIC and the government to enact at the same time that we are cutting funding to the Australian Securities and Investments Commission. Greg Medcraft was very clear that the funding cuts will mean ASIC will now have to be a lot more limited in what they do and do not do, and that they will have to be a lot more focused. He said you basically get what you pay for—that was the exact comment he made at estimates.
This committee has done fantastic work with this inquiry. I would also like to commend the committee staff for all of their hard work—because I am very new to this, I am only now starting to work out just how much work they do. We have made this long series of recommendations that we all hope will be listened to by the government, but on the other hand there has been a funding cut to the same institution we are expecting to go in quicker and harder to take on white-collar crime in this country. Clearly there is a disconnect.
One thing that makes me more hopeful is that ASIC were clear during the inquiry about wanting a new funding model. They want have a user-pays system in line with what we see with regulators overseas. I hope that the government, as the committee recommends, acts very quickly to implement that new funding model—because ASIC needs more funds, not less, if it is going to do the job we want it to do. In my opinion, that is absolutely essential.
I feel very strongly about higher standards for financial advisers. Similarly to Mr Medcraft, I did my exams to become a financial adviser in the US—Series 7 and Series 63. It is a six-hour sudden death examination where you press a button at the end of 300 multiple-choice questions—it had a very low pass rate. Quite often, even individuals I worked with at Merrill Lynch had to do it four or five times before they got their licence. Setting the benchmark high is a good place to start. It is not going to catch every bad egg, but I think the financial planning industry in Australia has been treading water on this for too long. You will never get the perfect situation, but we do need something along the lines of the US Series 7 and Series 63 examinations in this country if we want to achieve that uniform standard across the financial planning industry. Having said that, I met a lot of financial planners during this inquiry. I talked to 15 in Tasmania. Most of them are smaller financial planners who have been in business for a very long time, have fantastic relationships with their clients and do a very good job. It was interesting to get their perspective on this.
I was also pleased that Senator Bishop and the committee recommended that issues relating to the whistleblower within ASIC, James Wheeldon, be investigated by the Commonwealth Ombudsman. I think that is a good start. ASIC themselves are always talking about the value of whistleblowers and how important they are, yet we had a whistleblower situation arise within ASIC. The details were explored during the inquiry. In relation to this and to recommendation 33, I like the idea of ASIC keeping a register of their secondments. It is something, I think, Treasury should also think about. I raised this with Mr Parkinson at estimates—where their secondees go. They go, for example, to lobby groups like the Australian Bankers Association. He did not seem to think that was a good idea. In fact he thought it was offensive, yet this committee has recommended this in for ASIC. I think it is something all government departments should look at.
Lastly, the only dissenting view the Greens have on this very large and excellent report is in relation to penalties for white-collar crime. We would have liked to have seen specific recommendations about penalties. The committee has recommended that goes to another inquiry. My suggestion would be that the Economics Committee adopts that as a second inquiry and gets that work done—not leaving it to the government. We need stronger penalties for white-collar crime in this country.
I seek leave to continue my remarks later
Leave granted; debate adjourned.