Matthews, Ashley --- "The financial services industry: whistleblowing and calls for a royal commission" [2016] PrecedentAULA 65; (2016) 136 Precedent 35

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THE FINANCIAL SERVICES INDUSTRY: WHISTLEBLOWING AND CALLS FOR A ROYAL COMMISSION

By Ashley Matthews

INTRODUCTION

The financial services industry has been rocked by scandals and controversy over the last six years, most of which came to light as a result of disclosures made by whistleblowers. That has led to a number of inquiries and ongoing calls for a Royal Commission into the industry. With the re-election of the Coalition government; it is unlikely that a Royal Commission will be established in the near future but calls for one are likely to persist as further revelations emerge and consumer confidence in the industry and Australian Securities & Investments Commission (ASIC) remains compromised.

INITIAL CALLS FOR A ROYAL COMMISSION INTO CBA

Australia’s financial services sector is dominated by banks. The Commonwealth Bank of Australia (CBA), National Australia Bank (NAB), Australia and New Zealand Banking Group (ANZ) and Westpac, along with AMP, own around 80 per cent of all financial advisory firms. Historically, consumers have placed a large amount of trust in these institutions and their employees and representatives.

Throughout the global financial crisis (GFC) in 2007 to early 2009, share markets were highly volatile. Consumers who had investments (including superannuation) with any exposure to growth investments saw the value of their portfolios drop significantly. Many consumers had investments that were inappropriate for their circumstances and goals as a result of financial advice they had received from advisers who were receiving significant commissions in relation to those investments.

In 2008, three employees of the CBA approached ASIC and blew the whistle on widespread misconduct throughout CBA's financial advisory subsidiaries, the Australian Financial Services Licensees (AFSLs), Commonwealth Financial Planning Ltd (CFPL) and Financial Wisdom Ltd (FWL).

ASIC's investigation ultimately found systemic and pervasive problems throughout CBA, CFPL and FWL, with their employees and representatives placing their own interests over consumers’, an aggressive sales culture, consumers being sold high-risk products – sometimes without permission and on the basis of forged documents – and management ignoring or even encouraging such conduct by promoting and giving bonuses to those high performers who aggressively sold risky and commission-generating investments to consumers. Perhaps the most infamous such adviser was Don Nguyen, who was banned from giving financial advice but was permitted to resign, as revealed in a joint investigation between Fairfax journalist Adele Ferguson and ABC's Four Corners.^[1]

As a result of ASIC's investigation, CFPL and FWL were subject to enforceable undertakings, which required they review advice given by advisers who were known to have engaged in illegal and unethical behaviour, with a view to compensating those affected. Subsequently, an independent report by KordaMentha Forensic found deficiencies in the compensation scheme and ASIC imposed further licence conditions on CFPL and FWL.^[2]

REPORT INTO ASIC AND CBA

The timeliness of ASIC’s investigation was criticised given that it took ASIC 16 months to investigate the whistleblowers’ allegations, and in 2013, a bipartisan Senate Economics References Committee inquiry considered ASIC’s response and its regulatory capacity generally. The report issued by the inquiry (ASIC report)^[3] was critical of ASIC and was scathing with respect to CFPL. It confirmed the findings on ASIC’s investigation, and highlighted that CFPL and FWL advisers had exploited the trust and naivety of consumers, many of whom were vulnerable, lacking in financial knowledge and elderly.

The ASIC report recommended that a Royal Commission be established to consider the CBA and its subsidiary AFSLs conduct.

CBA CEO, Ian Narev, apologised to consumers and announced the Open Advice Review Program (OARP), which would assess advice given by advisers authorised by CFPL and FWL in the period 1 September 2003 to 1 July 2012. The OARP was to involve independent oversight, including by former High Court judge, Ian Callinan, and provide compensation to consumers if the advice they received was found to have been inappropriate.^[4] The government therefore rejected the call for a Royal Commission, stating that it was unnecessary, given the establishment of the OARP.^[5]

While focusing its criticism on the CBA, the ASIC report also found, among other things, that ASIC was under-resourced and overburdened by its range of functions, that it lacked capacity to keep pace with the dynamic nature of the financial services industry, that it had accepted the assurances of CBA too readily, that it had avoided dealing with allegations of fraud and forgery because they were too difficult despite their clear seriousness, and concluded that it was ‘a timid, hesitant regulator’.^[6]

WHISTLEBLOWERS

Although the ASIC report focused on CBA as a case study, the AFSL Macquarie Equities Limited (MEL), which is part of the Macquarie banking group, was also subject to an enforceable undertaking by ASIC requiring it to establish a remediation scheme and improve its compliance procedures. Some have speculated that the extent of MEL’s compliance failures was revealed to ASIC by a whistleblower, although that person or persons have not been identified.^[7]

It is clear that the CBA financial planning scandal came to light only because of the bravery of the CBA employees who blew the whistle. Mr Jeffrey Morris, in particular, remained employed at CBA throughout the time that ASIC investigated CBA and continued to provide it with information even while CBA undertook internal investigations to find who had leaked the information.

Mr Morris resigned from CBA in 2013, and he turned to Ms Ferguson. The Banking Bad report not only revealed the widespread misconduct at CBA, but the indifference shown by ASIC to Mr Morris, who accused ASIC of failing to provide him with any protection or assistance,^[8] which the ASIC report confirmed. Mr Morris has subsequently made a name for himself as a consumer advocate and crusader for reform in the banking and financial advice industries, as well as a mentor for whistleblowers.

Unfortunately, since then, further stories have emerged of poor treatment suffered by whisetleblowers. An IOOF whistleblower inspired by Mr Morris took his concerns to the company but has alleged that he was bullied and fired. He then went to Ms Ferguson. Ms Ferguson has subsequently spoken about the great professional and personal sacrifice of whistleblowers like him and Mr Morris, and the tactics used by companies to silence them. These, she has said, commonly involved allegations to discredit them and distract from the substance of what they have discovered and revealed about corporate misconduct. In the IOOF whistleblower’s case, this extended as far as an accusation that he was extorting the company, and had threatened to kidnap the children of several staff members. When Ms Ferguson asked for evidence of that serious accusation, none was produced.^[9] The IOOF whistleblower, Ms Ferguson has noted, will never be able to work in the financial services industry again, as his reputation in the industry has been destroyed.

Ms Ferguson has said he received little to no assistance from ASIC, which seemed disinterested in his revelations: ‘He said he had been contacted once for a 35-minute chat and that was only after he sent an email to the chairman Greg Medcraft and Cc-d me in it, complaining that nobody had contacted him or had asked about the 59,000 documents or how to navigate them. He is still waiting.’^[10]

In early 2015, a whistleblower at NAB leaked documents to Ms Ferguson which revealed that in August 2014, a report had been circulated within the company detailing how 37 representatives of NAB-owned AFSLs had been terminated for misconduct including ‘conflicts of interest, inappropriate advice, inappropriate practices or serious repeat compliance breaches’,^[11] which included document forgery and file manipulation. According to Ms Ferguson, those revelations came to light only because of client complaints and queries from ASIC, and were missed by NAB’s internal compliance controls. An internal audit had, in fact, given its compliance system the lowest score possible in 2010.^[12] This highlights that the issues revealed by the ASIC report were not restricted to CBA. NAB has now established its own remediation scheme in consultation with ASIC.^[13]

In August 2015, CBA was yet again the subject of allegations of impropriety by a whistleblower. Russell Phillips, a former assessment manager for the OARP, told a Senate inquiry into Scrutiny of Financial Advice that the OARP was unfair and opaque, and described how his employment was terminated on the grounds of threatening behaviour, after saying that the OARP ‘was a joke.’^[14]

In early 2016, Ms Ferguson and Four Corners revealed the experience of another whistleblower, Dr Benjamin Koh, who was previously Chief Medical Officer at CommInsure. Dr Koh raised concerns within CommInsure about outdated policy definitions which were being relied upon to deny claims. After elevating his concerns to CommInsure’s board, Dr Koh was dismissed, apparently for a breach of IT policy. Dr Koh then blew the whistle on CommInsure’s practices, including its reliance on outdated policy definitions and its treatment of claimants, including those who were previously employed and medically discharged from employment at CBA.^[15]

Ms Ferguson has spoken of Dr Koh’s bravery, and also commented that in her experience of giving a voice to whistleblowers, those who went straight to the media rather than to ASIC had the better experience.^[16] That is despite the fact that the protections conferred under the Corporations Act 2001 (Cth) in fact extend only to disclosure to ASIC, and not to third parties, such as journalists.

ASIC has recently been involved in a project intended to help whistleblowers in the private sector.^[17] Its chairman, Greg Medcraft, has also supported calls for increased compensation to whistleblowers^[18] which had been raised in hearings in relation to a Senate Economics References Committee Issues Paper on providing protections for whistleblowers.^[19] That paper suggested a range of reforms to whistleblowing legislation.

IS A ROYAL COMMISSION NECESSARY?

Since the ASIC report and the inquiry that led to it, a number of further inquiries has considered the financial services industry. This includes the Financial System Inquiry (FSI), headed by former CBA CEO, David Murray. However, its focus was wide ranging and macro-economic and it did not inspect the conduct of individual banks, although it did note that vertical integration^[20] should be proactively monitored.

The Senate Standing Committees on Economics also undertook an inquiry, called the Scrutiny of Financial Advice. There has also been the Review of Retail Life Insurance Advice (Trowbridge Review), authored by John Trowbridge.^[21] Amendments have now been introduced to the Corporations Act 2001 (Cth) in the form of the Corporations Amendments (Life Insurance Remuneration Arrangements) Bill 2015.^[22]

Yet calls for a Royal Commission have persisted. Prior to the recent federal election, the Labor party promised to convene a two-year, $53 million Royal Commission. The Coalition’s position has been it is unnecessary and that ASIC and APRA provide sufficient oversight and regulation. Unsurprisingly, banks have been resistant to the idea of a Royal Commission. NAB and ANZ’s CEOs have stated that there had been a number of inquiries already and that a Royal Commission may damage their reputations internationally.^[23]

The Australian Bankers’ Association (ABA) has recently proposed an independent review of product sales commissions and product-based payments.^[24] It will be overseen by Ian McPhee, former Commonwealth auditor-general. But the review’s Terms of Reference raise a number of concerns, including whether it will have the power to compel production of documents and witnesses, whether recommendations will be binding, and what role the consumers who are the victims of financial advice can have – currently, it appears they will not have any input. It is also disappointing that any inquiry will be undertaken ‘on the papers’ and not in public. The review therefore cannot be construed to be an effective substitute for a Royal Commission.

Moreover, the confidence and trust of consumers in banks has been shattered by the various scandals and revelations of their widespread obfuscation, and attempts to silence whistleblowers. Consumer confidence in the industry’s ability to self-regulate and review itself has consequently been seriously undermined. That a review is ostensibly independent is unlikely to cure this, given the accusations made by Mr Phillips in respect of the OARP.

In addition, these scandals have been exposed largely as a result of the actions of whistleblowers and the media, not proactive monitoring and enforcement by ASIC. Whistleblowers have an important role, but it should not be a substitute for ASIC’s role. That is particularly true given the experiences of other corporate whistleblowers, which naturally make those with insider knowledge reticent to reveal their experience and knowledge of impropriety, for fear of reprisal.

It cannot be denied that there has been systemic and egregious misconduct within the financial services industry. Even in the course of rejecting calls for a Royal Commission, Treasurer Scott Morrison noted the seriousness of issues in the financial services sector, although he said ASIC had more far-reaching powers than a Royal Commission would, rendering one unnecessary.^[25] But history suggests that ASIC does not have sufficient resources to effectively implement its wide-ranging powers; it is not just the regulator of the financial services industry that is tasked with enforcing legislation that applies to every company in Australia.

A Royal Commission would permit a public exploration of what has caused the pervasive problems in the industry, including the apparent lack of competitiveness and the role of vertical integration. It would also provide the opportunity to give a voice to the consumers who were the victims of the misconduct. As Dr Simon Longstaff has said:

‘the public airing of unethical conduct can be essential to the wellbeing of individuals and the community. It's not just the cathartic benefits of revelation. Nor is it the cleansing effect of “sunlight”. Royal commissions of this kind also provide an opportunity for the community to consider profound questions to do with the type of society we wish to be.’^[26]

These multiple roles have been highlighted by the Royal Commission into institutional responses to child sexual abuse.

Mark Bishop, the Labor Senator who chaired the inquiry which authored the ASIC report, called on the government to establish a Royal Commission prior to the election. He spoke of his disenchantment, having participated in the inquiry and reading the hundreds of submissions. Like many of the victims who implicitly trusted the banks and their employees and representatives, he was shocked bythe pervasiveness of misconduct in the financial services industry. Mr Bishop also noted his concern about the inherent limitations in any process where the documentary evidence is missing or forged, and how a Royal Commission could assist in circumventing these limitations by giving weight to the testimony of victims.

Consideration of a Royal Commission into the financial services gives rise to the question, whose interests do we privilege – those of powerful corporations, or of vulnerable consumers? Too many people have been left financially devastated by the conduct of powerful and wealthy corporations, which have profited significantly by exploiting consumers’ trust, naivety and inexperience. Their experiences deserve to be given voice by way of a Royal Commission, so the public can feel confident that the problems that have plagued the industry are being tackled effectively and so that history will not repeat itself.

Ashley Matthews is a lawyer at Maurice Blackburn Lawyers, practising in financial advice disputes (including the remediation schemes established by financial institutions, internal complaints, alternative dispute resolution complaints, and litigation) as well as superannuation and insurance claims litigation. PHONE: [phone] EMAIL: [e-mail].

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^[1] ‘Banking Bad’, reported by Adele Ferguson and presented by Kerry O'Brien, aired on Four Corners on Monday 5th May at 8.30pm on ABC. It also reported that Mr Nguyen had been receiving Income Protection benefits through the CBA owned life insurer, CommInsure.

^[2] Australian Securities & Investments Commission, ‘ASIC imposes new AFS licence condition on two Commonwealth Bank financial planning businesses’ (Media Release, 8 August 2014) 1 http://asic.gov.au/about-asic/media-centre/find-a-media-release/2014-releases/14-192mr-asic-imposes-new-afs-licence-condition-on-two-commonwealth-bank-financial-planning-businesses/. ASIC was also the subject of criticism because it appeared to be aware of these deficiencies.

^[3] Senate Economics References Committee, The performance of the Australian Securities and Investments Commission, Parliament House, 26 June 2014. Liberal Senator David Bushby disagreed with its Recommendations and published a dissenting report.

^[4] Open Advice Review Program (30 April 2016) Commonwealth Bank https://www.commbank.com.au/about-us/who-we-are/customer-commitment/open-advice-review.html. By that time, the remediation scheme established pursuant to CFPL’s and FWL’s Enforceable Undertakings had already paid $52 million in compensation to 1,100 consumers.

^[5] Acting Assistant Treasurer, Senator the Hon Mathias Cormann, Government response to Senate Inquiry into the Performance of ASIC, 24 October 2014 http://mhc.ministers.treasury.gov.au/media-release/043-2014.

^[6] Senate Economics References Committee, The performance of the Australian Securities and Investments Commission, Parliament House, 26 June 2014., executive summary.

^[7] Kate Kachor, ‘ASIC silent on possible Macquarie whistleblower’, Financial Observer (online), 24 February 2014 http://www.financialobserver.com.au/articles/asic-silent-on-possible-macquarie-whistleblower.

^[8] That is despite Part 9.4AAA of the Corporations Act 2001 (Cth) providing a regime of protection for whistleblowers who report allegations to ASIC. ASIC has since established an Office of the Whistleblower.

^[9] Adele Ferguson, ‘Adele Ferguson on the cost of whistleblowing and need for a bank royal commission’, The Age (online), 6 May 2016 http://www.theage.com.au/business/workplace-relations/adele-ferguson-on-the-cost-of-whistleblowing-and-need-for-a-bank-royal-commission-20160505-gomxc4.html.

^[10] Ibid.

^[11] Adele Ferguson and Ruth Williams, ‘Whistleblower’s NAB leak reveals persistent bad behaviour in financial planning, fuels royal commission calls’, The Sydney Morning Herald (online), 21 February 2015 http://www.smh.com.au/business/banking-and-finance/whistleblowers-nab-leak-reveals-persistent-bad-behaviour-in-financial-planning-fuels-royal-commission-calls-20150217-13hv1f.html.

^[12] Ibid.

^[13] Australian Securities & Investments Commission, ‘National Australia Bank to implement a large scale Financial Advice Redmediation program’ (Media Release, 21 October 2015) 1 http://asic.gov.au/about-asic/media-centre/find-a-media-release/2015-releases/15-306mr-national-australia-bank-to-implement-a-large-scale-financial-advice-remediation-program/.

^[14] Stephanie Ferrier, ‘Commonwealth Bank compensation scheme for victims of financial planning scandal ‘a joke’, Senate inquiry hears’, ABC News (online), 28 October 2015 http://mobile.abc.net.au/news/2015-10-28/cba-denying-compensation-to-victims-of-financial-planning/6892624.

^[15] Ruth Fogarty, ‘CommInsure: Who’s who in the Commonwealth Bank’s life insurance scandal?’ ABC News (online), 8 March 2016 http://mobile.abc.net.au/news/2016-03-07/comminsure-scandal-whos-who-four-corners/7226576.

^[16] See above note 9.

^[17] Tony Boyd, ‘ASIC backs project aimed at encouraging corporate whistleblowers’ The Australian Financial Review (online), 14 April 2016 http://www.afr.com/brand/chanticleer/asic-backs-project-aimed-at-encouraging-corporate-whistleblowers-20160414-go6jhv.

^[18] Adele Ferguson, ‘ASIC says whistleblowers need compo’ The Sydney Morning Herald (online), 7 November 2015 http://www.smh.com.au/business/workplace-relations/asic-says-whistleblowers-need-compo-20151106-gksfk4.html.

^[19] Senate Economics References Committee Issues Paper, Corporate whistleblowing in Australia: ending corporate Australia's cultures of silence.

^[20] http://fsi.gov.au/publications/final-report/. Vertical integration is where an adviser recommends a financial product which is owned by a company that is associated with the AFSL. These recommendations are often made to the exclusion of other more appropriate products, which raises serious concerns about the inherent conflict this process of ‘cross-selling’ entails.

^[21] John Trowbridge, ‘Review of Retail Life Insurance Advice’ (Final Report, 26 March 2015) http://www.fsc.org.au/downloads/file/MediaReleaseFile/FinalReport-ReviewofRetailLifeInsuranceAdvice-FinalCopy(CLEAN).pdf.

^[22] Reforms were also introduced in the Future of Financial Advice (FOFA) amendments to the Corporations Act 2001 (Cth) from 1 July 2013, which implemented more onerous obligations on advisers towards consumers.

^[23] Dan Conifer, ‘NAB, ANZ bosses say calls for royal commission in banking a “serious distraction”’, ABC News (online), 9 April 2016 http://mobile.abc.net.au/news/2016-04-09/nab-anz-bosses-say-banking-royal-commission-a-distraction/7313030.

^[24] Australian Banker’s Association Inc, ‘Independent review of product sales and commissions and product based payments’, http://www.betterbanking.net.au/wp-content/uploads/Terms-of-reference-Independent-review-on-remuneration-FINAL.pdf.

^[25] Anna Henderson and Dan Conifer, ‘What is a royal commission and why does Labor want one into the banking industry?’, ABC News (online), 11 April 2016 http://mobile.abc.net.au/news/2016-04-08/what-is-a-royal-commission-and-why-does-labor-want-one/7312216.

^[26] Dr Andy Schmulow and Dr Simon Longstaff, ‘For and against a royal commission into banks’, The Sydney Morning Herald (online), 15 April 2016 http://www.smh.com.au/business/banking-and-finance/for-and-against-a-royal-commission-into-banks-20160412-go4ed1.html.