tip off

ASIC, financial planners and nightmare-based regulation

When it came to Commonwealth Bank financial planners ripping off clients, regulation was all a bit too hard for the corporate regulator ASIC.

It’s hard to know whether to laugh or cry at the performance of Australian Securities and Investment Commission officials yesterday at the Senate Economics Committee inquiry into ASIC. Laughter is the only sensible response to the extraordinary way ASIC dealt with malpractice and outright fraud by financial planners at the Commonwealth Bank’s Commonwealth Financial Planning arm, but the joke is on us, and most particularly on the victims of  some of CFP’s planners.

It was a long day, stretching into the night when the committee eventually went in camera to discuss confidential issues. That caused Senator Nick Xenophon, who had dialled in from Adelaide, to be kicked off because his phone line wasn’t secure. Labor chairman Mark Bishop, Nationals Senator John Williams, who pushed for the inquiry in the first place, Liberal South Australian David Fawcett and Tasmanian Green Peter Whish-Wilson, dialling in from Hobart, were the other interrogators. At one stage, inexplicably, Bishop launched an unprovoked attack on Whish-Wilson, far more aggressive than his questions of either the Commonwealth Bank or ASIC officials. But, as I said, it was a long day.

A quick recap: ASIC learnt of problems with financial advice being provided by CFP planners as early as 2007. It wrote to the Commonwealth Bank in early 2008 raising its concerns. By that stage — as we know from the excellent and extensive work of Fairfax journalists Adele Ferguson and Chris Vedelago  — the Commonwealth Bank was aware internally of concerns about one planner, Ricky Gillespie, later to be permanently banned from the industry for forging client signatures. But ASIC wasn’t interested in enforcement action against CFP — instead the bank was allowed to establish and run a “continuous improvement compliance program” itself, under which it reported to ASIC. This wasn’t even an enforceable undertaking (that eventually came in 2011) — simply a process by which the bank hired an independent monitor and reported to ASIC.

Did ASIC bother to tell anyone there were issues about CFP? Nope — it stayed schtum. It certainly didn’t alert any of CFP’s clients to its concerns.

Later in 2008, a whistleblower (who also gave evidence yesterday) tipped ASIC off to concerns about CFP financial planner Don Nguyen, also later banned for seven years for allegedly forging client signatures, as well as wider problems at CFP. In response, ASIC did nothing — it simply slipped the Nguyen case into the CICP process. In May 2009, ASIC received another tip-off about CFP. By this stage, clients were complaining about the huge losses they were incurring as a result of bad advice from CFP planners. Internal Commonwealth Bank investigations revealed that not merely had signatures been forged but that files had been tampered with or were missing key documents. Then in June 2009, ASIC received another alert about CFP — this time relating to Gillespie’s activities. Who did it come from? From the bank itself, as part of the CICP.

ASIC still did nothing, because it lost the report.

Lost it.

Shortly afterwards, CFP also reported to ASIC about the result of its findings about Nguyen’s behaviour. ASIC still did nothing. By that point, he had resigned. In late 2009 and early 2010, ASIC received more complaints from whistleblowers that CFP was doctoring and reconstructing the files of CFP clients. It was only in March 2010 that ASIC finally abandoned the co-regulatory route and decided “the matter should be dealt with by its Enforcement team”.

To hear ASIC officials tell it yesterday, from chairman Greg Medcraft down, it had all been a solid learning experience for the regulator, and, they assured the committee, they would do things differently now. Presumably starting with not losing reports, for which they repeatedly issued a “mea culpa”. There was much talk of “cultural change” and repeated use of “with the benefit of hindsight”.

The difficulty with the ASIC story is that this isn’t some regulatory babe in the woods …”

The difficulty with the ASIC story is that this isn’t some regulatory babe in the woods whose education in the ways of the world is being funded by taxpayers. By ASIC’s own admission, in its very submission to this inquiry, it had long known that financial planning was a highly problematic area:

… ASIC had long-standing, publicly-expressed concerns with the quality of advice provided by the financial planning industry in Australia. ASIC’s surveillance work, as well as our industry ‘shadow shops’ (including in 2003 and 2006), demonstrated that poor quality advice was widespread in the industry… At the heart of these problems were conflicts of interest embedded in financial advice distribution and remuneration that led to poor quality and inappropriate advice. Additionally, ASIC had flagged the need to raise professional standards in the industry.”

That was before it identified problems at CFP. One wonders what action ASIC would have taken about CFP if it didn’t already have long-standing concerns about financial planning — if, that is, it could physically have taken less action than in fact it did.

Why didn’t ASIC respond to clients themselves, who approached the regulator to complain that their signatures had been forged and their investments lost, Bishop asked? The regulator couldn’t respond to every complainant who comes in, officials replied. This seemed to gobsmack Bishop, who repeated the question several times. Apparently ASIC officials aren’t interested if you tell them you’ve been the victim of fraud. They’d have to get a handwriting expert, one official complained, and check whose forgery it was. It was all too hard.

This was the regulator talking.

What about file-tampering? Why hadn’t ASIC asked the Commonwealth Bank to properly reconstruct the files of clients of the hundreds of clients who had been the victims of, as Commonwealth Bank officials put it earlier in the day, “inappropriate conduct”? That would cost the bank a lot of money, an ASIC official replied. Perhaps tens or hundreds of millions of dollars.

So what?” replied Bishop, presumably resisting the urge to facepalm. “What concern is that of yours?”

ASIC’s response summed up why ASIC didn’t go after the Commonwealth Bank despite multiple detailed warnings — including, remarkably, from the bank itself — and why it doesn’t think it “appropriate” to ask the bank to spend a lot of money fixing up the files of its victims. ASIC is more interested in looking after big companies than regulating them. You might use the common bureaucratic phrase “industry capture”, except there’s no evidence ASIC was ever loose to begin with.

Of course, it’s a different story if you’re not a large company. If you’re an activist and you pull off a prank to draw attention to corporate misbehaviour or demonstrate the gullibility of the financial press, it’s straight to the “enforcement team” for you. ASIC has you charged and in court within months. There’s been no “continuous improvement compliance program” for Jonathan Moylan, who faces 10 years’ jail.

There are many different approaches to industry regulation, from self-, to co-, to complaints-based, to constant monitoring. For victims of CFP’s planners, ASIC’s regulatory approach is best described as nightmare-based, resembling those bad dreams where no matter what you do or how much you run, you can’t escape a looming threat.

Luckily, however, it’s been a great learning experience for ASIC.

The thing about ASIC is, there are so many different ways in which it is a hopeless joke that it’s hard to even list them without running out of room. A second matter discussed in detail yesterday, that of former ASIC officer James Wheeldon’s evidence about corruption within the regulator, deserves its own piece. We’ll cover that next week.

12
  • 1
    klewso
    Posted Friday, 11 April 2014 at 1:38 pm | Permalink

    Laugh or cry? Whenever I see Medcraft (or anyone else “running” ASIC) out there “explaining/defending what they do” I always think of Sue Thomson’s “Paper Tiger”?
    …. As if any regulator is bigger than industry? They’re there for show - and to clean up after the grits hit the pan.

  • 2
    ailie.bruins@gmail.com
    Posted Friday, 11 April 2014 at 3:14 pm | Permalink

    From a NSW perspective, there almost seems to be a smell of corruption surrounding ASIC. The same smell that has been hanging around government in NSW.

  • 3
    zut alors
    Posted Friday, 11 April 2014 at 3:59 pm | Permalink

    Pinch me, I’m having a nasty dream. BK, if we didn’t know better we’d assume you were making this up.

    For consistency Jonathan Moylan should be let off the hook & required to appoint an independent monitor to report any future suss activities of his to ASIC. All people created equal, right…?

  • 4
    leon knight
    Posted Friday, 11 April 2014 at 4:43 pm | Permalink

    Head of ASIC could be the next big career move for Arthur Sinodinis…
    I agree with Ailie, there is a smell about this.

  • 5
    AR
    Posted Friday, 11 April 2014 at 5:32 pm | Permalink

    Considering their resources, legal, criminal, intelligence etc ASIC has been astonishingly bad at what little it did - what is the ration of convictions to prosecutions, few though the latter are despite the egregious corporate culpability on daily show??

  • 6
    klewso
    Posted Friday, 11 April 2014 at 5:34 pm | Permalink

    It’s done the best it can on such limited intelligence.

  • 7
    AR
    Posted Friday, 11 April 2014 at 5:35 pm | Permalink

    … or even ‘ratio’?

  • 8
    stephen Matthews
    Posted Friday, 11 April 2014 at 5:46 pm | Permalink

    with respect to ASIC convictions against me it’s a perfect 4:0 .And with lost appeals it’s a truly impressive 12: 0 record. But that has more to do with the subversion of justice by the 20 judges who heard the proceedings .
    Mind you ASIC’s costs in these proceedings must have been tall. Hiring lawyers, barristers and silks to conduct matters in the Federal Court, the Federal Court of Appeal, the Supreme Court of NSW, the NSW Court of Appeal and finally the High Court costs big money.

  • 9
    Daly
    Posted Friday, 11 April 2014 at 7:17 pm | Permalink

    All working Australians are contributing 9.5% of their wages to super. These leeches are sucking on their money without qualifications or permission legally. ASIC is doing nothing and Sinidonis and friends are repealing the minor changes legislated after long fights to give a little more protection to the ‘bambies’ (there to be fleeced).
    We are all captured by the big banks! Watch out for your super, they’ve been fleecing you without mercy or retribution! Thanks Bernard and the Senate Estimates Committee.

  • 10
    64magpies
    Posted Friday, 11 April 2014 at 8:17 pm | Permalink

    Captured indeed. Really they are worse than useless because they give people a false sense of security. Get rid of ASIC and start again. And while we’re at it, get rid of the state governments’ environmental agencies. They were captured long ago.

  • 11
    Ben Liddicoat
    Posted Monday, 14 April 2014 at 9:20 am | Permalink

    Those looking to ASIC for protection are looking in the wrong place. When there is no structure in place, or political will to investigate (or even simply respond) to individual complaints, then we must take action into our own hands. Sack your bank, your “adviser”, and notify your community of your actions. I’m tired of watching people wait for government to save them, it will always end in tears.

  • 12
    Wayne Williams
    Posted Monday, 14 April 2014 at 1:24 pm | Permalink

    For me - our obsequious (to big business) friends in government and their budget red tape emergency and the Financial Planning Industry(?) = growth in SMSF - the only puzzle to me is who on earth do they think takes them seriously? At the very least they should be interviewed like the AFL players with the sponsors logo in the background.

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