Senate Committee Says Commonwealth Bank and ASIC Should Face Royal Commission

Friday 27 June 2014 @ 12.51 p.m. | Corporate & Regulatory | Crime | Legal Research

In a Media Release dated 26 June 2014, the Senate Economics References Committee (the SERC) advised that it had tabled its final report on the performance of the Australian Securities and Investments Commission (the ASIC). The SERC's report examined in detail the serious misconduct engaged in between 2006 and 2010 by financial advisers at Commonwealth Financial Planning Limited (CFPL), a part of the Commonwealth Bank of Australia Group (CBA) and concluded that a Royal Commission into the matter is warranted.

In criticising CFPL the media release claims that "thousands" of clients of CFPL were adversely affected by the actions of its advisers, and further that the actions were facilitated by the "reckless sales-based culture at CFPL and the failure of CFPL's compliance regime".

The media release states that "serious dishonest conduct" including forgery and a cover-up within CFPL are alleged, and quotes the SERC Chair Senator Mark Bishop who has described the past practices at CFPL as "appalling" saying:

"The conduct of a number of CFPL advisers was unethical, dishonest, well below professional standards and a grievous breach of their duties . . . The way in which vulnerable trusting people were targeted shows that the CFPL planners involved had a callous disregard for their clients' interests. That a major financial institution could have tolerated for so long conduct that included apparent criminal activity is not easy to accept."

SERC Critical of ASIC's Slow Response

The media release is also critical of "ASIC's slow response to the CFPL case" and highlights its apparent "lack of scepticism" with the SERC saying it found this "hard to explain". The view being that, ASIC allowed itself to be lulled into complacency and placed too much trust in the CBA and its efforts to "patch over its problems". As an example, the point is made that, only as recently as May 2014, ASIC still did not clearly and fully understand how the CBA was compensating clients affected by the serious misconduct at CFPL and another CBA financial advice business. The SERC also goes on to say that:

"Despite indications that positive changes are now taking place for current clients, the committee is not convinced by the assurances it has been given about the compensation process for clients affected by past practices. Further, all rogue advisers need to be identified and any conduct that may amount to a breach of any law or professional standard pursued."

Seriousness of Misconduct Warrants Royal Commission

Because the matter involved serious misconduct the SERC says in its media release that it believes a Royal Commission should be established to investigate the matter. A recommendation that the SERC say it has not made lightly. The SERC indicates also that evidence it has received is "so shocking and the credibility of both ASIC and the CBA is so compromised that a Royal Commission really is warranted". The SERC's Chair Senator Mark Bishop is quoted further on this point saying:

"The CBA's focus is on downplaying the extent of wrongdoing and minimising the amount of compensation it has to pay. Meanwhile, ASIC has shown that it is not sufficiently sceptical of the CBA's actions and cannot hold it to account . . . The CFPL 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 rogue employees who do whatever it takes to make profits at the expense of vulnerable investors."

Other Matters in the Report

The SERC's report also examined ASIC's performance finding that there was a need for ASIC to become a "far more proactive regulator ready to act promptly but fairly". The SERC also indicated that ASIC needed to be "a harsh[er] critic of its own performance with the drive to identify and implement improvements".

In all the SERC report makes 61 recommendations, an interesting one being that ASIC be funded by industry levies designed to encourage better self-regulation and that Australia's corporate whistleblower regime needed to be enhanced so that "informed people can more confidently come forward with valuable information about misconduct".

As well as seeing the need for ASIC to change the SERC also pointed to the need to reform the Corporations Act 2001, an example, being recommendations that civil and criminal penalty reviews and tougher monetary penalties were needed. There is also a recommendation which suggests improving insolvency mechanisms to encourage and facilitate corporate turnarounds.

The SERC sees the inquiry as a wake-up call for ASIC and states that it "looks forward to seeing how ASIC changes as a result".

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