The Senate Economics References Committee Report on the Performance of the Australian Securities and Investments Commission used CBA’s financial planning activity as a case study of ASIC’s effectiveness.

Recommendation 7 stated:
The committee recommends that the government establish an independent inquiry, possibly in the form of a judicial inquiry or Royal Commission, to:

• thoroughly examine the actions of the Commonwealth Bank of Australia (CBA) in relation to the misconduct of advisers and planners within the CBA’s financial planning businesses and the allegations of a cover up;
• identify any conduct that may amount to a breach of any law or professional standard;
• review all files of clients affected or likely to be affected by the misconduct and assess the appropriateness of the compensation processes and amounts of compensation offered and provided by the CBA to these clients; and
• make recommendations about ASIC and any regulatory or legislative reforms that may be required.

UPDATE 24 October 2014: The Government has rejected the recommendation for a Royal Commission.

In response Ian Narev, Chief Executive Officer of the Commonwealth Bank has said: “We know a breach of trust is unacceptable and we unreservedly apologise to all customers affected. Poor advice provided by some of our advisers between 2003 to 2012 caused financial loss and distress and we are truly sorry for that.”

He has also announced an Open Advice Review program under which:

• Any customer who received advice from Commonwealth Financial Planning and Financial Wisdom between 1 September 2003 and 1 July 2012 and has concerns regarding that advice can request an assessment of any advice received in the review period;
• The review of the past advice will be conducted by a specialist Commonwealth Bank team;
• In conducting a review, the specialist team will share the information it has available with the customer;
• Once the review is complete the customer will receive an assessment and the offer of an independent customer advocate funded by the Commonwealth Bank;
• Any customer who does not agree or is concerned with the assessment will have the option of a further review by an independent panel, determining whether compensation is payable and, if so, how much;
• The Commonwealth Bank will be bound by the outcome of the panel’s determination. However, the customer will not be bound and will still have the option of taking the matter to the Financial Ombudsman Service or pursuing a claim in respect of the matter; and
• The Commonwealth Bank will also have the process overseen by an independent expert who will make their periodic reports public.

The proposal is reminiscent of the bank’s response to the foreign currency loans crisis in the 1980’s.

The Government is resisting calling a Royal Commission.

ASIC has noted that “In the event any breaches of law are identified in this program, ASIC requires those breaches to be reported in accordance with the law on breach reporting. The law requires that significant breaches or likely breaches are reported to ASIC as soon as practicable, or in any event within 10 business days of the licensee becoming aware of the breach or the likely breach.”

ASIC is still finalising its licence conditions with the bank, announced in May 2014, requiring Commonwealth Financial Planning Limited and Financial Wisdom Limited to undertake significant further work in relation to the compensation process for customers and to put in place independent monitoring of that work.

On 25 October 2011, ASIC accepted an enforceable undertaking from CFPL requiring CFP to assess the adequacy of its Risk Management Framework (RMF) against generally accepted risk management standards. On completion of this assessment, CFPL was required to develop an Implementation Plan that would not only address deficiencies in the RMF but also specifically address certain concerns raised by ASIC.

There will be both a political and a legal response to these developments with significant reputational risk to CBA, although the CBA’s CEO believes there will be no material financial effect. The delay in response has raised questions about the CBA’s compliance culture. The CBA has been criticised as too slow to respond by the Treasurer.

The issue also reflects on the FOFA amendments and the implications of bank ownership of financial advisory businesses.