About the book

Is the financial advice industry riddled with scandals because there are just a few bad apples, or is there an inherent conflict in the profession?

Financial advice in Australia started with insurance brokers going door to door dispensing advice, and that slowly edged its way into financial advice. Then compulsory superannuation set the industry off and racing. There have been scandals, collapses, mergers, soft approaches to regulations and a history of skewed priorities. The drive for competition saw a lack of self-regulation that led, ultimately, to the banking royal commission and an opportunity to expose the worst operators and the bad advice being dispensed. Incompetence, conflicts of interest and greed were all exposed.

Where to from here? ASIC and APRA have become emboldened, but where will ordinary Australians be going to receive the best direction for a secure financial future? Political reporter and host Annelise Nielsen has watched and studied the implosion of the financial services sector and here, in clear language, she wades through the weasel words to provide some clarity.

Introduction

The shame game

The first time I met Terry McMaster I was filming him as he was being loaded into the back of an ambulance. Propped up, with a blood pressure cuff wrapped around his arm over his business shirt and his tie pulled to one side, he seemed remarkably calm, if not slightly shell-shocked. The man beside him was yelling at the gathered journalists to bugger off. Only moments earlier I’d been watching the live feed of Terry sitting in the witness stand as it was beamed into the media room at the Commonwealth Law Courts building in Melbourne. Terry had been giving evidence at the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, and it was not going well. As the other journalists and I busily took notes, gasps, groans and eye-rolls were shared. Mark Costello, counsel for the royal commission, was drilling Terry on his company’s so-called ‘client protection policy’, which he was arguing did everything but protect the client. It was cringe-worthy viewing.

Mr Costello swayed from one foot to the other, then looked down at his notes and said, ‘Mr McMaster, I put it to you it is Orwellian to describe this as a client protection policy?’

Terry replied, ‘I agree with that. And this, of course, has been changed.’

Mr Costello went on. ‘It is entirely misleading, isn’t it?’

‘Yes,’ Terry replied.

‘Entirely misleading to call this a client protection policy?’

‘It actually wasn’t intended to be misleading. It sort of evolved …’¹

It continued on like this for a while, until we saw the colour draining from Terry’s face and heard his breath rattling through the microphone. We all instinctively knew what was happening. I grabbed my camera gear to wait outside for the ambulance that Commissioner Kenneth Hayne called for just as the video feed was cut.

So it was that I found myself standing on Melbourne’s busy William Street as office workers shuffled past, filming a man who’d collapsed under the pressure of some of the most sensational cross-examination Australia’s business world has ever seen.

‘You okay, Terry?’ I called out.

‘No I’m not okay,’ he replied.

‘What happened?’ I asked.

‘I collapsed,’ he said.

That banal exchange made news bulletins across the country – bulletins that, weeks before, had scarcely mentioned the juggernaut that was the banking royal commission. Now, as scandal after scandal rolled out from the commission’s proceedings, it was creeping up the rundowns and into the public consciousness.

When we met again several months later, I encountered a very different Terry McMaster. He’d ridden his bike to meet me, but instead of the usual lycra get-up you’d expect of a man his age he wore loose shorts and a well-worn polo. He looked a little worse for wear, too. I apologised for having to film him at what was a vulnerable moment for him, and he was very gracious. He was also remarkably upbeat given what he’d been through and what was still to come.

His turn in the witness stand had obviously taken its toll. ‘I went from running triathlons to having trouble getting out of bed in the morning. In the weeks after the hearing, my wife, Simone, had to work just to get me to walk around the block,’ he told me as he clasped a mug of black coffee. Before he fronted the commission, he knew he was in serious trouble when his (now former) colleague’s case was being examined. ‘I was on my bike in my garage. I’d taken a few days off work when the hearings were on and I was pedalling and watching them on my iPad. When I saw the evidence about Adam Palmer coming out I knew something was really wrong.’

Adam Palmer had been working as an authorised representative of Terry’s company Dover Financial, but had previously worked for AMP. It’s there, the commission was told, he received an ‘E’ rating in a performance audit – the lowest possible rating. He was accused of recommending clients invest in a property business that he owned a 60 per cent share of, without disclosing the interest. It took two years for AMP to move him on. And when he went to work for Dover, AMP consciously chose to avoid having the uncomfortable conversation to warn them about his track record of poor advice.

Terry McMaster maintains that he’d only been told that he was going to be asked about his onboarding processes for new employees at the royal commission. A number of his staff had been identified by the commission as chronic poor performers who’d found their way to Dover Financial. In contrast to this, he spoke to me with pride about the diversity of his staff, and that he favoured hiring women and people from different countries and backgrounds when he felt they’d been overlooked. Undoubtedly many could have been excellent performers under different circumstances. He said that he loved giving people a chance when no one else would. Finance is a world that often leans towards the homogenous. He joked that if he wanted Dover Financial to be more diverse, he’d actually have to hire more white men.

What his hiring process claimed in virtuousness, it certainly lacked in veraciousness. However, it was his ‘Orwellian’ client protection policy that proved to be his undoing in the eyes of the commission. The Australian Securities and Investments Commission (ASIC) has since cancelled his licence and forced him out of the industry, and is suing him for misleading and deceptive conduct, which he vehemently denies.

Terry McMaster’s almost comic crumbling on the stand was the crescendo to a well-orchestrated evisceration of an industry that rakes in A$4.6 billion each year.² The commission uncovered an industry riddled with conflicts of interest and unmitigated greed, and plenty of bad advice.

The trope traipsed out over and over again was that it is just a ‘few bad apples’ bringing the industry down. The truth is that hundreds, if not thousands, of advisers and businessmen and women at the top have been complicit in the outright rorting of consumers. But with more than 25,000 financial advisers working in Australia, there are also plenty of people out there genuinely motivated by a desire to help people and do their jobs well. And, of course, it doesn’t take a bad person to dispense bad advice. So what makes good people fall short?

Many are asking where the financial advice industry is headed now. I believe it has a lot to do with where it started. Skating the line between being professionals or salespeople, financial advisers in general have never achieved the discipline required to do either consistently well. The industry remains deeply fractured, no doubt because of the ramshackle way it’s grown in just a few short decades, but also because many of the key players remain ingrained in how things have always been done and are resistant to change.

There’s little sign of the appetite for financial advice slowing down. Some 20 per cent of adult Australians have sought advice from a financial planner. Since 2009,³ the number of advisers in Australia has jumped 40 per cent, from just 18,000 to more than 25,000.⁴ That’s despite the federal government Future of Financial Advice (FoFA) legislative reforms introduced in 2013 reining in commissions earned and legally forcing advisers to act in the best interests of their clients. At the time, those reforms were decried as the death knell of the industry by some, and actively resisted by many more, in a fashion not dissimilar to many of the arguments against change that we’re hearing now. What the royal commission has done is drag out the ugliest parts of the industry in an attempt to shock the wider world into holding it to account.

Shame is a visceral experience. More than one person who faced the commission from the stand has told me of feeling their heart pounding as they faced the forensic examination of the country’s top litigators. That pulse is racing throughout the industry, which knows the gig is up. Bad operators know it’s getting harder. The complacent are being forced to sit up and take notice. The good operators are emboldened by the shock waves that have been sent through their colleagues and competitors. And many are wondering how an industry that didn’t even exist forty years ago morphed into an unwieldy, multi-billion-dollar profit-spinner that brought the Big Four banks to their knees and triggered a revolution in Australia’s finance sector.

1

A punter’s royal commission

If you’ve never had the opportunity to sit through a criminal trial in Australia, you might not realise just how boring they are. Even the most salacious stories will be drawn out and filtered through strict rules of evidence that have developed over hundreds of years. What comes out of the process are highly curated questions designed to get past very specific points of law. Those who’ve never stepped foot in a courtroom might imagine barristers banging fists on tables, and witnesses screaming ‘You can’t handle the truth!’ More often than not, however, trials will be punctuated by long silences broken only by glasses of water being refilled, or yawns from the jury. Barristers are more likely to be saying ‘I put to you that you were in fact present that night’ than shouting ‘You did it, didn’t you?!’

One of the things that made the banking royal commission such extraordinary viewing was that it didn’t conform to the usual rules of evidence seen in other courts in this country. There are two types of legal system: inquisitorial and adversarial. Australia’s system is adversarial, where the prosecution or plaintiff is pitted against the defendant. Cases are argued on precedents from higher courts, with words and meanings endlessly analysed. In contrast, countries like France and Italy operate under an inquisitorial system. Inquisitorial systems usually have a set law designed by the parliament that is more important than past case precedents. The key difference between the two, however, is the role of the judge.

In our adversarial system, judges have cases put to them. The prosecution will usually make their case about how they’ve been wronged, and the defence has the opportunity to argue against those claims. It’s up to each party what they choose to put forward. In an inquisitorial system, the judge isn’t there to adjudicate a prosecution and defence, and advise a jury; they’re leading the charge. The judge decides what evidence they need to see and will decide on the truth of the evidence. Crucially, they can also question witnesses directly.

Royal commissions in Australia operate on the basis of the inquisitorial system. This royal commission was convened with the specific mandate to uncover misconduct, and the commissioner was given extraordinary powers to dig it up. It also meant the commissioner’s lawyers were unshackled from their usual restraints in questioning witnesses. This resulted in some of the most sensational cross-examinations many Australians would have ever seen, and many wouldn’t fully comprehend why they hadn’t seen anything like it before.

This royal commission was cranked up another notch by the fact that it was all live streamed. Anyone around the country could log on to the website and watch the commission’s proceedings as they happened. TV networks could take live dips whenever they liked as well, which Sky News and the ABC both did regularly. The best bits were played to millions of people in evening bulletins across the country. And hundreds, if not thousands, of people working in banks and financial advice firms around the country were logging on every day and watching their world crumble.

The right to question witnesses wasn’t Commissioner Kenneth Hayne’s only power. He had the right to demand that witnesses front the hearing, that documents be handed over and for reasons to be given if they weren’t. If the commissioner wasn’t satisfied with those reasons, he could authorise a search warrant to be executed by police, and if a witness didn’t turn up he could even order an arrest warrant, which could see the witness jailed. He started the commission by mailing letters to sixty-one ‘financial services entities’, including banks and financial advice companies, to identify ‘any misconduct by the entity that had occurred at any time since 1 January 2008’. If you think asking dozens of companies to disclose every single thing they’d done wrong in the previous decade was a monstrous task, consider the fact that the scope only got broader from there. He also asked each entity ‘whether it had identified “any conduct, practice, behaviour or business activity” in which it had engaged since 1 January 2008 that it considered had fallen below community standards and expectations’.¹

These entities weren’t going to be able to hide behind the black letter of the law; they were being asked to own up to every single thing they’d done in the past ten years that the public wouldn’t have liked. And all with a deadline to produce the necessary response and documents within six weeks. Kenneth Hayne wasn’t messing around.

Hayne was a surprising appointment for royal commissioner in that he was picked by a government that had resisted the banking royal commission for as long as it could. Some more cynical observers thought the government might find someone who promised to be a softer touch. A High Court justice for seventeen years, Hayne was known for being extremely analytical, and had no discernible political leanings. He rarely dissented in his decisions on the High Court, meaning he often ruled with the majority. The official statement from Prime Minister Malcolm Turnbull, Treasurer Scott Morrison and Attorney-General George Brandis upon his appointment as royal commissioner described him effusively: ‘He is renowned for his brilliant mind, his forensic skill, and his deep sense of justice.’² There are few who would disagree. It was also mentioned frequently that he was the son of a banker himself. Many in the industry therefore thought he’d be sympathetic to their cause because he understood the importance of banking. Those outside the industry thought it might make him a harsher critic, because his father worked in the old school of banking, before financing and favours. The appointment became something of an ink-blot test, with people seeing what they wanted to see. Hayne himself wasn’t giving anything away.

When I originally asked if I could cover the banking royal commission for my employer, Sky News, my boss said no. At Sky, live TV is our bread and butter and no one could see what I’d have to stand up and talk about in a live-cross. ‘It’s not really a punter story, is it?’ Our business channel colleagues would cover it by viewing the live stream and clipping out parts to analyse on their panels. But, for a mainstream news channel with a political focus, the interest simply wasn’t there enough to justify me sitting in on the proceedings day in, day out. At that point, the bosses were right – it wasn’t a mainstream story. Yet.

I persisted. ‘I think this is going to be really big!’ Still it was a no. Perhaps it was due to my unusual entry into journalism that I became fixated on covering the commission. I never studied journalism; I did law at university, and then spent a year working for a professional services firm as a graduate consultant. There I was shuffled into auditing, where I spent a long year setting up testing templates in Excel and checking invoices. It wasn’t long before I threw it all in to pursue journalism. During the first two weeks of hearings, I managed to get a few days of reporting in when they let me cover the consumer finance round. Watching evidence about bribery in bank branches confirmed my suspicion that there were punter stories to be pulled out of the finance jargon. Truthfully, I was also enticed by the fact they let me keep my video equipment inside the media room at the Commonwealth Law Courts. As a video journalist, I was filming everything myself, including my live-crosses, and finding somewhere safe to store twenty kilograms of camera gear was a constant battle. A quiet room where I could stay out of the rain for most of the day was heaven.

So, when the second round of the banking royal commission public hearings started, on the topic of financial advice, I told my boss I was going, and with no other major stories around there were no objections. By the time the AMP evidence started, the appetite was there. Our seasoned hosts and journalists were gobsmacked by the evidence that was coming out, and viewers were firing up. Once the Commonwealth Bank admitted it was charging dead customers fees for financial advice, I was wedded to the commission until the end. All of a sudden it had become a mainstream story.

The reason I knew I was on to something was not just the fact that the wiser, more experienced business journalists covering the royal commission were doing so in wide-eyed disbelief. It was the fact that those same journalists would just as often tell me, ‘Well, we already knew this.’ It was extraordinary how much misconduct was already known about in the industry but didn’t make it into the mainstream. That was to be the power of the royal commission – not to uncover the misconduct, although sometimes it did, while other times it re-trod old ground – it was to push the stories it uncovered into the public domain and force the question, is this behaviour your average Australian would expect? Is this reasonable? More often than not, the answer was no.

Out of all the weeks of the royal commission I watched, the round that stuck with me the most was Financial Advice. It was in many ways the spark that lit the fuse that would see the royal commission blow up. It produced the most outrageous revelations of the entire commission: of lying to ASIC, fraud, greed, and money for nothing. Until these revelations, I’d honestly never thought much about the financial advice industry at all. All the witnesses in that two weeks of evidence would return to the same point: that it was a young industry.

As the explosive revelations rolled out one by one, it opened my eyes to an industry that I knew little about but would soon discover more people than I could imagine were deeply invested in. I wanted to look at the origins of this already much-maligned profession. Where did it start? Why do we have financial advisers? Most importantly, where does this industry go now that it has been through one of the most intense public trials of its conduct and worth, and emerged far worse off?

Since moving to Sky’s Parliament House bureau in August of 2018, I’ve watched the commission wind down while the politics ramps up. It’s the same rhetoric from the same people who’ve watched this industry hobble along, from scandal to sideshow time and again.

2

Opportunity comes knocking

Former President of the Australian Senate Alan Ferguson had a career unpunctuated by any memorable scandals, which means he has now mostly faded into obscurity. Today it is a footnote of history that in 2001, as a South Australian senator, he was brave enough to stand up in parliament and defend financial advisers being paid commissions during the debate for the Financial Services Reform Act. He was alone among senators in bringing his history of working as a financial adviser into the debate. He certainly wasn’t pleased to hear his current colleagues criticising his former colleagues for taking a commission.

As the debate grew more heated, he declared, ‘I would like to place on record that earning a livelihood as a commission agent is a legitimate, respected and honourable profession and an honourable method of earning a living, which some people in this place would suggest that it is not.’¹ He was shouted down in the Senate for arguing in favour of the roughly sixteen thousand ‘life agents’ selling insurance policies and advice to Australians.

When I spoke to him on the phone from his home in country South Australia, he laughed off the comments but stood by them. ‘We used to get up-front commissions and that was all you got. And you checked in with your clients each year, but unless you sold them something else that was it.’ He admits he never anticipated the level of misconduct we’re seeing in the industry now. The work he did in his days as an adviser would be almost unrecognisable to today’s financial advisers. Ferguson spent almost twenty years working as a farmer in the town of Maitland, a few hours’ drive north-west of Adelaide, before a friend helped him get a job with Colonial Mutual, where he then worked for a number of years in the 1970s and 1980s.

‘We didn’t have names as such. Some people used to call themselves financial advisers. I was a life agent.’ This life-affirming title was used for brokers who helped people plan for their eventual demise, but it would soon evolve into one of the earliest professions resembling today’s financial advice when they started offering investment products too. While I’ve read academics variously claim that financial planning was born in biblical times and in writs issued by lords in the 1800s, the thing anyone would recognise as financial planning in Australia started in the 1980s with that knock on the door from a salesman selling you a sense of security.

‘When I was a young man there were three people you could trust: one was your bank manager, one was your doctor, one was your lawyer.’ Despite omitting his own profession from that list, Ferguson says there was a great deal of trust involved in selling insurance, and he and his colleagues sought to emulate those other three highly regarded professions. He says people would often take out an insurance policy for their children right after they were born. It was from this position of trust that many life insurance agents found themselves beginning to give clients advice on other areas of their finances, and of course, this was all in the days before compulsory superannuation.

Before the 1990s, superannuation was only used by a small group of white-collar professions and public service employees. For most of the twentieth century, workers generally relied upon living on the aged pension when they retired. The first workers to be signed up for anything resembling compulsory superannuation were workers covered by the 1985 Prices and Incomes Accord struck between the Australian Council of Trade Unions and then–Prime Minister Bob Hawke. While the employers party to that agreement only paid 3 per cent of their employees’ salaries into an account, it paved the way for what we know as compulsory superannuation today. In 1992 the Keating Labor government introduced the Superannuation Guarantee, which extended compulsory superannuation to 72 per cent of Australian workers, with a progressive plan to increase the required contribution to 9 per cent of an employee’s salary by 2002. By June of 1993, the year after compulsory superannuation was introduced, superannuation assets in the country reached $169 billion.

Insurance agents may have been early practitioners of something resembling financial advice in Australia, but the first steps towards a galvanised industry were taken under the influence of some opportunistic Americans, and an Australian who adored them. Now revered as the ‘first lady of financial planning’, Gwen Fletcher was fond of a pussy-bow blouse and in the 1980s and 1990s was photographed for industry magazines wearing enormous clear-rimmed glasses and bright lipstick. Originally a country girl, and a bright student, she got her start in accounting when the family moved to Toowoomba and she was headhunted by the town’s top chartered accountancy firm at just sixteen years old. It was not the last time she would work in a male-dominated industry. In 1941, at twenty-two, she served with the United States Army in Sydney, where she became head of the quartermaster movement control, eventually reaching the rank equivalent to Major in the Australian Army. After a stint working as an accountant for the United Nations Relief and Rehabilitation Administration, she followed her husband, a returned serviceman, to Orange, where she worked for the local federal MP, John Howse.

It was her move into the insurance industry after she returned to Sydney that exposed her to some of the first financial planning operators who’d come to visit from the United States, including the Insurance Company of North America. She then joined Stenhouse Insurance Brokers, before setting up her own company called Fletcher Green Financial Services. But it was perhaps her childhood, in which she was raised by a Baptist minister father, that saw her enamoured by the virtues of the financial planning profession. Many years later, in an interview upon her appointment as president of the Australian chapter of the International Association for Financial Planning (IAFP) in 1990, Gwen said, ‘It may sound trite, but the whole pattern of my life has been about wanting to help people, and that is what this industry is about.’

It was through IAFP reciprocal exchange visits to the United States that she met Loren Dunton, who’d come out to Australia a number of times himself to push for the profession. If seminars in stodgy hotel conference rooms have become synonymous with financial advisers, it might just be because that’s how it all started in the United States.

On 12 December 1969, Dunton, then an ambitious insurance salesman, called the first meeting of what he called the Financial Planning Association, at a hotel near Chicago’s O’Hare International Airport. He had recognised an opportunity waiting to happen in promoting financial advice as a profession. On the day, twelve other men showed up to Dunton’s meeting. Between them, they had some impressive sales and investment credentials. Despite boldly declaring itself the International Association for Financial Planning, much like the World Series it was an all-American affair. But it wasn’t long before Australians were visiting American conferences for the latest seminars, which they could write off on tax, and the Americans were coming to Australia to preach their profession.

In one trip to Australia in 1989, Loren Dunton did a slew of interviews, including one on the breakfast television program Good Morning Australia. In the grainy footage held on tape at the National Film and Sound Archive, host Kerri-Anne Kennerley is almost unrecognisable under a large mop of permed peroxide-blonde curls. Wearing a shock of purple eyeshadow that matched her shimmery, high-necked blouse, she introduced the segment with a cool, ‘Good morning, Australia,’ and continued on, ‘With last week’s tax cuts, many financial analysts are asking one question: what are Australians going to do with their money? Well, according to Loren Dunton, founder of the financial planning industry in the United States, we should take careful heed of the warning coming out of America. Put the money in the bank, put away the credit cards and save, save, save. Personal Investment editor Ross Greenwood spoke to Mr Dunton during his Australian visit on Friday.’

Ross Greenwood (who is still the resident finance guru for Channel 9 three decades on) sat opposite Mr Dunton with his thick strawberry-blond mullet cascading over his tweed blazer, which clashed unforgivingly with his thick-striped shirt and tie. It was the 1980s after all. In stark contrast to the hip GMA presenters, Mr Dunton wore a plain brown suit and had a short beard. His hair was trimmed close at the sides and was thinning on top. During the interview, Mr Dunton was reserved and paced in his delivery. What he was preaching was basically the financial equivalent of a chastity belt. He wasn’t a fan of credit cards, and felt it was a financial adviser’s duty to warn against the use of them. He explained to Ross Greenwood, ‘What we’re finding in the States, and I think it’s true over here also, is that people are abusing credit cards. They’re using them with very little thought.’

The story then showed vision of credit cards with little warning stickers plastered across the top that read ‘Warning: Overuse can be dangerous to your Wealth’. They were similar in appearance to the warning labels that had been placed on cigarettes in Australia since 1973. He said the warning ‘causes people to stop and think, should I really buy this? We forget about that person down the road, we are interested in being good to ourselves today. And unless we’re reminded, and that’s partly the role of the financial planner – that’s why the financial planner is becoming so much more important in the United States and I’m delighted to see it happening here.’

Then Ross Greenwood asked for perhaps the first, but certainly not the last, time in his life, ‘The question on a lot of people’s minds is how do we actually go about finding a financial planner? Because there are so many of them about, but of course trusting just one financial planner is a very difficult thing to do.’ Trust is indeed a difficult thing to quantify.

To which Loren Dunton replied, ‘Well, I often recommend that people talk to two or three. And they ask a lot of questions. And I give them a lot of clues to let them know whether they are talking to a financial planner when they finally sit down to meet with one. The true financial planner asks dozens, sometimes hundreds of questions about the individual, the family, the corporation before making any recommendations.’

Ross Greenwood quipped, ‘And is this really the guarantee of future wealth?’

In a true show of honesty, Mr Dunton replied, ‘No, but it certainly increases the chances for having it.’ The segment was quickly over before the hosts were throwing to their exclusive interview with Bananarama, but the publicity trail for Mr Dunton wasn’t. He did almost a dozen interviews during that trip to Australia, preaching the virtues of savings and the value of a financial planner.

Of course, life insurance salesmen weren’t the only ones banging on people’s doors and trying to sell them something. If there was a person selling a financial product in the 1980s in Australia, chances are they soon veered into the financial advice space too. Even footy clubs were in on it. Peter Johnston, executive director of the Association of Independently Owned Financial Professionals, was one of many who got his start in the industry through his local footy club. He explained the scheme started out as life insurance too, before taking on a life of its own. And it was all through contacts at his local footy club. ‘We set up what was called the Tigers Investment Insurance Service with the [Richmond] football club. The club advised the members that we have an insurance investment service that a player is operating, go and see him … The club got a share of it as well, so the club were incentivised and it was quite successful.’

The other significant group that morphed into financial planners was stockbrokers. It was a natural fit, when you had clients going to stockbrokers with surpluses of money to play around with, that they might not just funnel it into stocks but other financial products too. Their approach traditionally veered towards the high-risk, high-reward end of the spectrum.

In one revealing article published in the June 1991 Financial Planning Association Journal, an expert in professional indemnity insurance discussed the challenges she’d had convincing stockbrokers they needed insurance at all, because they didn’t consider themselves professionals. After all, stockbroking, like financial advice at the time, was something you could learn on the job, and everyone knew they were there to make money first and foremost. She wrote about a seminar she gave at a firm where one stockbroker complained, ‘I have a fundamental problem understanding why I need professional indemnity insurance. My job is just like that of a bookmaker, and don’t tell me a bookmaker comes within the definition of a professional in the Oxford Dictionary.’

‘Well, no,’ she said. ‘But neither does an insurance broker, and professional indemnity insurance is compulsory for us too!’

Stockbrokers were known for preferring high-net-worth individuals, and by the 1987 global stock market crash, trust levels in brokers had plummeted faster than their clients’ bank balances. In the 1989 edition of a journal published by the International Association for Financial Planning, the president of the Adelaide chapter Rod Kelley penned this delightful joke, which summed it all up quite nicely:

A woman was walking through the park when she was accosted by a large, wart-covered green frog. As she jumped back in startled terror the frog said: ‘Quick. Give me a kiss and I’ll turn back into a financial planner!’ The dismayed woman began to run off, then stopped, bent down and picked up the frog. As a crowd gathered, the woman quickly regained her composure and shoved the frog into her handbag. ‘Why did you do that?’ asked one puzzled man in the crowd. The woman answered, ‘I’m sure I can make a lot more money out of a talking frog than I can from a financial planner.’

You can’t fault the vision or enthusiasm of the early financial planners, as they banded together in the hopes of forming a profession. But their self-awareness would soon give way to an earnestly undeveloped industry trying to keep up with a rapidly changing world.

3

A short history of some long scandals

As the Australian chapter of the International Association for Financial Planning grew, the organisation began to put out regular journals. They included industry education, opinion pieces, event information and a significant number of photographs of attractive female financial planners in bold suits with big smiles, which I’ve come to learn is severely unrepresentative of the actual demographics of the industry. In one 1989 edition, there was an article urging Australian financial planners to adopt the same standards that had just been introduced in the United States for writing a comprehensive financial plan. The goal of the thirteen-step checklist was to formalise the process of preparing a financial plan, to help the public ‘accept financial planning as a profession’. The article went on to argue that, ‘Such guidelines, if adopted and publicised by the IAFP in Australia, would provide the public with standards it can reasonably demand and expect from financial planners.’

In one of those delicious coincidences of history, directly below that article was the bold headline ‘SKASE FOR ADELAIDE’, advertising a luncheon for members to meet with Christopher Skase of Qintex Ltd for his ‘personal discussion of wealth creation’. The article boasted, ‘This will surely be of great interest to financial planners who may be thinking of putting a little more special project planning into the financial consultations they hold with their clients.’

Of course, Christopher Skase’s story of wealth creation is one of the most sensational cases of corporate fraud in Australian history. Qintex started out as a financial services firm that quickly bought out companies to become a corporate behemoth, eventually owning both Channel 7 and Mirage Resorts among others. When the bubble burst, Skase left behind $170 million in personal debts and $1.5 billion in corporate debts to boot. The best chance any member of the public had to make money off him was by claiming the bounty of $250,000 offered by broadcaster Andrew Denton for anyone who could retrieve Skase from his self-imposed exile in Majorca. Apart from being entertaining in hindsight, the juxtaposition of the two articles reveals a lot about one of the key struggles the profession has been dealing with internally for the past three decades: How can the industry effectively professionalise when there are so many diabolical dealers in its midst? And why have the crooks been so cosy with the credible?

The rapid deregulation of financial markets in the 1980s threw the doors wide open for new business ideas and financial products to enter the market, with varying degrees of success. At the time that the financial planning industry was still finding its feet, corporate collapses verged on a national pastime.

Some estimates put the bust that followed the 1980s boom at $10 billion wiped out from the savings of Australians. The ‘Black Monday’ stock market crash of 1987 triggered a wave of financial disasters that would shape the financial landscape in years to come. The two defining scandals that engulfed the financial services industry were Storm Financial and Commonwealth Financial Planning, but they’d come much later on. Before massive schemes like these had the chance to take off and envelop large numbers of people with even larger sums of money, there were a lot of cowboys taking advantage in any way they could and doing a lot of reputational damage to the industry. In the long run these small indiscretions were equally as destructive as the big scandals, and they show that the industry has been plagued by a number of shady operators for some time. Any poor souls actually trying to do the right thing have been vastly overshadowed by some truly dodgy dealers.

Take, for instance, one woman by the name of Robin Sarah Greenburg, who was a financial adviser in Perth in the early 1990s. She may well be the only financial adviser ever to be simultaneously sentenced for both stealing from clients and starting a bushfire. The irony that her company was one heavily branded as being ‘ethical’ would soon become evident. The Perth-based planner was the managing director of Western Women Financial Services and Western Women Management, together forming the Western Women Group. Her companies were run to provide investment advice, with the primary objective being to give clients advice on ethical investments and a particular emphasis on empowering women through financial advice. Advertising material for Western Women stressed the importance of financial planning, including planning for the education of your children and your retirement.

Robin Greenburg’s stepson was the treasurer of the students’ guild at the Western Australian College of Advanced Education (now Edith Cowan University). The guild had accrued a tidy savings account and was talking about investing the extra cash. In February of 1989, the stepson handed Greenburg the guild’s financial statements. She suggested investing the money into bank bills through the Bank of New Zealand. In at least three different transactions, the guild transferred $80,000, $500,000 and $300,000 to Robin Greenburg. What happened next was complicated enough that at her trial the prosecution had to produce a diagram to chart exactly where all the money went. The prosecution explained that although ‘some bank bills were purchased, a large part of the funds deposited by the guild, after passing through a number of accounts, were transferred into her personal accounts’.

At the same time as Robin Greenburg was pilfering money from the guild, she was also running investment workshops targeting women. One of her customers was a woman who the court referred to simply as Mrs Roberto. Mrs Roberto had heard of the Western Women Group and went along to meet one of its representatives. She was told by the representative that she could invest her money in fully secured bank bills. She handed over a total of $77,000 and never saw it again. She was presented at Greenburg’s trial as a typical example of what dozens of other investors experienced. But Greenburg’s thievery ramped up to another level when she developed a bold plan to buy a defunct building society in Victoria and start the first ever ‘all-women’ building society. She went on a publicity campaign to promote the idea and herself, doing interviews for a number of newspapers, including one for The Bulletin, which called her the woman ‘who plans to lend money to the truly needy, not the truly greedy’.

While at various points money did seem to go into some bank bills and other investments, most went straight into her bank account to fund her predictably lavish lifestyle. Bills shown to the court included $79,000 spent on travel, $100,000 to Diners Club, $119,000 on her Visa, a whopping $284,000 spent at Myer and an absolutely eye-watering $954,000 spent on jewellery and antiques. All up she mishandled $4,063,184, with an estimated $2,918,184 going directly into her bank account.

Of course, what goes up must come down. Customers started getting edgy and were wanting their money back, or at least to see some returns on their investment. Instead they were finding their cheques were bouncing. Robin Greenburg kept telling her investors that she was in a spot of difficulty but would get through it. She told her employees to get more money in the door. As bad press started to circulate, she sent a memo to her advisers telling them the negative coverage was part of a personal vendetta against her and that they were to assure customers their funds were safe. She went a step further when she sent a letter to clients saying that the adverse publicity was deliberate sabotage, which she attributed to prejudice on the part of ‘male business men’ who did not want to see a women’s bank succeeding.

It all came crashing down when the receivers were called in and liquidators appointed. The Australian Federal Police raided her house and seized her jewellery. But it was when the court ordered her to hand over her company’s books to the Australian Securities Commission that this story went from the sensational to the absurd. When the documents weren’t handed over, the receivers arrived at the Western Women office to order that the documents be given to investigators. At this point Robin Greenburg had already taken everything to her home and stored it there. When the receivers asked for the documents she agreed to comply and sent two employees, including her personal assistant, to her home to collect them. It was her personal assistant who’d eventually tell the court the story of the next twelve excruciating hours, which involved a series of bungled attempts to destroy the evidence.

The personal assistant said that when she and the other employee arrived at the Greenburg house, they knocked on the door and Robin’s younger son answered. He helped them load as many of the boxes as possible into the car but only half of them fit. The assistant drove back to the office but when she spotted the receiver there didn’t say anything, instead quietly telling her boss later in the day that half of all the documents were sitting in her car in the garage. Robin Greenburg then told her to move her car out of the garage and take it to a public car park until they could get the rest of the records as well. The assistant said that that evening, she, Greenburg and her teenage son sat in the car trying to decide what to do, when the son said they should destroy everything. Robin Greenburg seized upon the idea and ordered her assistant to drive out to ‘the Ozarks’. The assistant started driving north from Perth, without any real plan. They drove for an hour and a half, only making a quick stop to buy food, drinks and kerosene. Eventually they found themselves at the rural town of Gingin, where they pulled up next to a farm gate. Robin Greenburg said she’d deal with the documents, then pulled out a rubbish bin and threw the documents inside. The son doused them in kerosene and she set the whole thing on fire. The once glamorous, jetsetting feminist financier found herself standing above a rubbish bin in rural Western Australia throwing document after document into the fire as her son and assistant took turns stoking the flames with a broom handle.

Halfway through this process Greenburg had a change of heart, and the three started loading the boxes back into the car. While they were doing so, embers from the garbage can drifted over to nearby bush, which caught alight. As the blaze took off, the assistant said, she begged to be allowed to call for help, but panic had set in and Robin Greenburg ordered her to drive them back to Perth. By this point it was 1 am, and as they flew back down the dirt road in the direction of the highway, the night sky was glowing with the blaze they’d carelessly started. While they sped along, Robin Greenburg sat in the front seat of the car, tearing up documents by hand and throwing them out the window, all the while ordering her personal assistant to never breathe a word of what they were doing or her ‘life would not be worth living’.

Their panicked journey took them next to Fremantle Harbour, where four garbage bags full of documents were thrown off the jetty. As the sun began to rise, the night ended with the three stashing the remaining documents right back where they had started, at Robin Greenburg’s home. It was around the same time the fire brigades that had been called to the inferno the trio started at Gingin eventually brought that blaze under control. As the firefighters picked through the smouldering bushland, they discovered the charred rubbish bin and fished out partially burned documents still bearing the distinctive Western Women letterhead. The police were called.

A reluctant guilty plea was entered when Robin Greenburg was finally taken to court on fifty-five different charges, after a plea of insanity due to severe depression and personality disorders was rejected. In the lead-up to the trial she also argued that she destroyed the documents to protect her clients’ privacy, and simultaneously that they wouldn’t have shown anything anyway. She was sentenced on appeal to at least twelve years’ imprisonment.¹

Of all the hundreds, if not thousands, of cases of financial adviser misconduct out there, you might wonder why I’ve picked this one to explore in such detail. Aside from the fact that the story is so extraordinary I wouldn’t believe it if I hadn’t read the sentencing remarks myself, this Bonnie-and-Clyde tale brings together so many elements common to financial advice fraud: virtue, lies and greed.

While Robin Greenburg was an extraordinary example of an ordinary crime, there was much fraud in the financial advice industry still to come, on a much larger scale. One of the most spectacular failures of the newly freed market was Pyramid, whose catastrophic demise would prompt one of the largest compensation schemes in Australian history. Originally established as the Farrow Group in 1959, when the company took over two building societies, called the Geelong Building Society and the Countrywide Building Society, it brought them together under the umbrella of the Pyramid Group, presumably in a time before the negative connotation of pyramid schemes would encourage ill feeling among customers. In the 1980s, Pyramid rapidly expanded its commercial lending practice. Between 1981 and 1989 its assets grew from $260 million to $2.9 billion.² The group was fuelled by cash generated from advisers charging large up-front fees. This was coupled with a business model that capitalised interest on loans where the borrowers weren’t able to meet their repayments, as well as exorbitantly higher borrowing rates than the banks, and left the group in a precarious position.

What tipped their business model over the edge was something called a ‘free tranche’ provision. The group created a ‘free tranche trust’, which allowed them to top up commercial loans beyond the government-regulated limits and let them take on much riskier clients. By the end of 1989, the cash was drying up and panicked customers started withdrawing their deposits. In 1990, between March and February alone $200 million was withdrawn from the fund. The Victorian Government, anticipating the enormous flow-on effects that would come from the company’s collapse, and not wanting to spark any panicked withdrawals, continued to insist that Pyramid Group was financially fine, even up until just two weeks before the group’s collapse in June of that year. While it’s impossible to ever know the full extent of the damage, it’s estimated that Pyramid held $1.473 billion in deposits from some 200,000 customers before it collapsed. The Victorian Government was forced to compensate victims, but they ultimately ended up getting just 25 cents on the dollar, and those with non-withdrawable shares got absolutely nothing back. The compensation payout coupled with the cost of administering the remediation and other overheads added up to a whopping $900 million loss for the government. This led to the introduction of a 3-cent-per-litre levy on petrol for five years, which meant that Pyramid’s collapse ultimately cost all Victorians.

Regional towns were in for a bad run, it seems, because the next great financial services scandal started just across the border in the town of Albury. The story of Trio Capital, an investment group that took advantage of vulnerabilities in the superannuation system and funnelled cash out of Australia and around the globe to places like the British Virgin Islands, Anguilla, St Lucia, the Cayman Islands, Belize, the Cook Islands and the island of Nevis, is one of the biggest cases of superannuation fraud Australia has ever seen. In 2003, the three company directors – Shawn Richard, Matthew Littauer and Cameron Anderson – bought a business called Tolhurst Funds Management and changed the company name and structure to form the subsidiary company Trio. The parliamentary inquiry into Trio singled out the role of financial advisers as being key to the fraud, saying, ‘There are clear “regional clusters” of victims of Trio based on the locality of operations of particular financial advisers, including Tarrants in Wollongong, Seagrims in regional South Australia, and Mr Paul Gresham on Sydney’s North Shore.’ It continues, ‘the evidence suggests that their recommendations were influenced by the high commissions paid by Trio’.

Around $176 million in Australians’ superannuation funds invested in Trio Capital was lost or went missing. A 2009 inquiry found that approximately six thousand Australians were caught up in the scam. Cash disappeared from two fraudulent managed investment schemes: $123 million from the Astarra Strategic Fund and $53 million from the ARP Growth Fund. Trio Capital held both schemes as the ‘responsible entity’. At each level the structure of the funds grew deliberately more complex, in order to throw up obstacles for anyone trying to follow the money trail. New South Wales Supreme Court Justice George Palmer described it as ‘an invitation to dishonesty by its promoters’ as he wound up the schemes in 2010. While some customers of dodgy financial services were the victims of bad advice, customers of Trio were the victims of outright fraud.

It would be one of the first times the watchdogs ASIC and the Australian Prudential Regulation Authority (APRA) found themselves the focus of intense public scrutiny over where they had been while all this unfolded, and it wouldn’t be the last time that ASIC was reliant on a whistleblower to uncover what was an elaborate and widespread scam. In September 2009, John Hempton, a man who had formerly worked at Federal Treasury and was now chief of Bronte Capital Management, wrote a letter to Tony D’Alosio, chairman of ASIC at the time. The letter described what Hempton said were suspiciously smooth returns being reported by Astarra. If they had been following the markets then the numbers should have been a lot more volatile. ASIC launched an investigation. While APRA had conducted five prudential reviews between 2004 and 2009, nothing came of any of them. It wasn’t until the federal parliamentary inquiry into the collapse of Trio Capital in 2011 that a former Trio director, Shawn Richard, would finally be jailed for engaging in dishonest conduct with respect to financial services.

The roughly five thousand investors who were caught up in the scam through their APRA-regulated super funds – that is, funds that were registered with and therefore regulated by APRA (the main exclusion of which is self-managed super funds) – were compensated to the tune of some $55 million by the government. But those who invested with Trio directly or through a self-managed super fund were left out in the cold. Over six years, five government reviews tried to figure out what happened.

In 2006, it was AMP’s financial planners who were caught in the scandal of the day. AMP advisers had been encouraging customers to switch from low-fee-paying industry super funds into their own products, in order to make a nice commission for the sign-on. As part of the legally binding agreement struck by AMP and ASIC after the fact, ASIC reviewed hundreds of AMP client files and found almost half of those had been given inadequate disclosures of the reasons for the switch. Between January and October of 2005, ASIC estimated 93 per cent of all new investments or superannuation products sold on the advice of AMP planners was for AMP products, with about 7000 customers in total told to switch products. By 2007, that was later revised to a number closer to 35,000 out of a total of 720,000 customers. AMP was at pains to say that while that’s how many they were contacting, a much smaller number of people actually chose to have a review, with just 5 per cent of the 5900 people who’d been sent letters offering a review actually taking it up. But later that year they were forced to admit that 1500 people who’d requested a review did require some form of rectification.

Craig Dunn, the managing director of Financial Services at AMP at the time, argued that the majority of affected customers were still better off because of the financial advice they received. ‘Our customers trust us with their money because they know that we always have, and we always will, stand behind the advice and product recommendations from their AMP planner,’ Mr Dunn said. ‘This instance will be no different.’³

The enforceable undertaking is typical in its conciliatory tone, including lines like ‘While AMPFP [AMP Financial Planning] does not agree with all aspects of ASIC’s concerns, it acknowledges those concerns and states that it has already commenced remedial action to address a number of the concerns.’⁴ At the time, media reports talked about how the enforceable undertaking signalled a serious toughening-up of the regulator; the Sydney Morning Herald said as much with the headline ‘AMP finds ASIC is super serious’. With the benefit of hindsight, we know this was more of a slap to the face with a wet piece of lettuce instead.

Craig Dunn, however, was showing the right level of contrition when he spoke to ABC’s Radio National, saying, ‘It’s largely around process, there are some things that we could have done better, particularly in terms of instructing and training our planners, we also did have a bit of a difference of legal opinion with ASIC, that meant we took a different approach to some things.’ He continued with one of the most well-worn lines in the financial planning industry: ‘It is disappointing, we are sorry it’s happened, and we are now going to work very quickly to correct them and fix them up so it doesn’t get repeated into the future.’⁵

But it did.

4

A Storm is coming

In 2006, the same year as AMP was caught out churning customers for commissions, the Financial Planning Association of Australia launched a three-year ad campaign called the ‘Value of Advice’, to convince Australians about the virtues of seeing a good financial planner. They decided the man to do it was Dazza. Dazza was a bloke with a bad mullet and an ‘ugly’ jumper very in keeping with a 1980s aesthetic. You might call the whole look ‘daggy’. In the thirty-second TV spot, Dazza is playing cards with his friend and presumably his friend’s wife, when the friend asks, ‘Well, we’ve got some retirement money in super but, um, how do we use it, Dazza?’

After a long ‘ummmmmm’, Dazza replies, ‘Do this. Buy a racehorse, put it in a race and with the money left over, bet on it! You get the prize money and the winnings! Kaching!’

The camera then dramatically pans to a wide frame, where there’s a bloke in a suit sitting on the lounge drinking a cup of tea, who scolds us, saying, ‘Don’t ask Dazza! Ask a real financial planner. Only they can help you with your real financial needs,’ before prompting you to visit the Financial Planning Association website.

The $3 million ad campaign was lauded as a success by the FPA, who said its research showed that 52 per cent of those who’d seen the ad campaign now intended to see a financial planner, compared to just 37 per cent among those who had not seen the advertisement. FPA chief executive officer Kerrie Kelly told Money Management magazine in 2006, ‘The campaign is arresting and memorable; and, most important, it is encouraging more Australians to visit a financial planner. People who have seen the advertisements are left in no doubt as to its key message: seek advice from a professional financial planner who is an FPA member.’

However, later that same year, the same publication would rank the campaign number two in its ‘Top 5 Flops of 2006’. Journalist Sara Rich wrote, ‘He might have been well-intentioned, but the Financial Planning Association’s television campaign anti-hero Dazza ruffled a few too many feathers at the FPA itself.’ She explained, ‘While working quite well among consumers, the campaign was received less favourably by the FPA’s members, with many concerned Dazza might be mistaken for a financial planner.’

Just consider that for a moment. Planners were worried that Dorky Dazza, with his ‘buy and bet on your own horse’ strategy, might actually be mistaken for a professional planner. This is where the industry found itself even before the worst scandal to hit the sector came to light.

Prior to its spectacular implosion, Storm Financial was one of those overnight success stories that had actually been around for a while. Emmanuel and Julie Cassimatis had fashioned themselves into North Queensland identities, known for their business prowess and ever-expanding empire. That expansion was fuelled by the acquisition of financial planning businesses across the country. At their peak they had more than one hundred employees, and an estimated thirteen thousand customers. Before it all came undone in dramatic fashion, it was a profitable company raking in $77 million per annum and holding $120 million in consolidated gross assets. Emmanuel and Julie were successful and weren’t afraid to flaunt their wealth. Stories of their extravagant purchases and flashy property have now become folklore in parts of Queensland. Their purchase of an $8.7 million jet in 2007 was something they’d eventually be forced to try to explain in the Federal Court of Australia two years later.¹

The business model of Storm Financial was to reel in customers and keep leveraging them up. They essentially provided standardised advice with minimal tailoring to the customer, and built everything around something called margin lending. If you’ve never heard of margin loans, that’s great, because it probably means you don’t have one. One financial planner described margin lending to me as the same as heading onto the casino floor with chips you’ve borrowed from someone else. Another described it as like combining heroin and crack. Either way, you get the idea: they’re risky. The ASIC definition is a loan that lets you borrow money to invest and uses your shares or managed funds as security. So, if you have $1000 in shares, you can use a margin loan to borrow $5000 and have $6000 to invest. If you really want to get the party started, you can try a ‘double-geared margin loan’. That’s where the customer borrows money against an asset like their home and uses the loan to buy shares, then takes out a margin loan using those shares, to purchase more shares. If that’s not riskier than a skydive with a hand-crocheted parachute, the sick bastards who invented margin loans also decided to up the risk even further with a strict ‘loan-to-value’ ratio. The ASIC MoneySmart website helpfully explains the concept under a large, bold type warning that says ‘don’t take out a margin loan’.² Despite the fact that the value of shares by their very nature rises and falls frequently, if the value of your shares falls too low the lender can call it in. For example, if you’ve got $10,000 worth of shares and you borrowed $5000 to invest using a margin loan, you’ve got $15,000 to play with. The value of the loan is 33 per cent of the total portfolio, and if the ‘loan-to-value’ ratio falls below 33 per cent your adviser can call and demand extra cash to top up the loan to get you back to the right ratio, or call in the lot. It’s also doubling down on your risk in a way that can see you owing more money than you’ve borrowed, and makes you as susceptible as possible to any market failures. Like, say, the global financial crisis.

In the aftermath of the Storm collapse, one investor told ABC’s 7.30 Report that he used to make $800 a week and ended up $1.2 million in debt. The Cassimatises say the global tanking of markets in 2008 was what caused their business to fail. ASIC disagrees. Almost 90 per cent of Storm’s clients were encouraged to take out loans against the equity in their own homes, then obtain a margin loan and use the funds from these loans to invest in the share market via index funds. Often, their customers were elderly men and women who had retired, or were close to retirement, and had few assets and little income. ASIC started circling in 2008, and Storm was completely gone by 2009. Many clients of Storm Financial were already deeper in debt than they had assets to back up. Thousands lost their retirement funds, their homes, their life savings. The regulator estimates the total loss suffered by all the investors who borrowed from various banks to invest through Storm is roughly $832 million.

One man who was very publicly caught up in the mess was Ron Jelich. He was a director of Ron Jelich Professional Planning, and he switched his business’s licence from MLC to Storm in 2004. He gave scathing evidence to the Parliamentary Joint Committee on Corporations and Financial Services about his experience with Storm. Jelich wrote about his long relationship with Emmanuel Cassimatis, saying they had known each other since they both worked for MLC in the 1980s. He said they’d talked about working together as early as 1994, when they both attended a conference in Boston. He described Storm as a business that, prior to 2007, was thriving.

He was confident enough in the business to take on a senior consultant role, effectively becoming Storm’s business manager. He was paid $100,000 a year, plus a share of the turnover from any of the businesses he lured to Storm. He managed to sign on seven different financial planning firms to become part of Storm. He argued that one of the benefits of dealing with Storm Financial had been that they centralised the compliance and regulatory works in their head office, but financial planners could retain control of their practice.

In 2007 Jelich transferred his business to Storm for an $8 million stake in shares when the company was publicly floated. He brought along some high-profile clients including former Australian cricket coach John Buchanan and champion Australian cricket all-rounder Andrew Symonds. In his statement to the inquiry, Jelich said this was the point that everything went wrong, that Storm quickly took control of his business in a process he called ‘Stormification’ and turned his planners into agents, taking away their precious face-to-face contact with clients and encouraging them to sell more loans.

He was also ‘livid’ about the amount of equity being allocated to the business owners through the Share Purchase Agreement, saying they were getting short shrift on the shares they’d been promised. He told the inquiry, ‘I didn’t talk to Emmanuel Cassimatis for a long time. I wanted to withdraw from Storm Financial and went through a period of disillusionment and despair about my decision to join Storm.’³

The Cassimatises pushed on with the floating of Storm, determined to make it a publicly listed company. As the collapse loomed in October of 2008, Ron Jelich attended a reconciliation meeting with Emmanuel and Julie in Townsville. Jelich told the parliamentary joint committee, ‘The meeting went relatively well and I recall when we were driving to the airport Emmanuel told us that the deal was done and that the company would be public tomorrow. He said that they had received unbelievable support from investors. When we got off the aeroplane in Brisbane a few hours later, we received a text message from Emmanuel saying that the float was now off. The reason we were given [was] that there was a lack of institutional support due to the credit crunch.’⁴

That public float went a bit like a boat at a Viking funeral, bursting into flames and sinking, with everything valuable on board disappearing beneath the water. The next year, ASIC brought proceedings against Emmanuel and Julie Cassimatis. ASIC alleged the Storm investment model was flawed for investors who were retired or approaching retirement with little or no income and few assets. The case centred on a small sample of investors. In August 2016, the Federal Court found that the Cassimatises had exercised their powers in ways which caused or permitted inappropriate advice to be given. The court found that, in permitting the Storm investment model of advice to be provided, the Cassimatises had breached their duties of care and diligence under the Corporations Act.⁵

The case has now dragged on for well over a decade. In March 2018, the Federal Court found that the directors of Storm Financial had breached their duties as directors and that Storm Financial had provided inappropriate advice. Julie and Emmanuel were each fined $70,000 and disqualified from managing corporations for seven years. The court found that the Cassimatises had focused on managing Storm’s profitability and paid too little attention to the interests of vulnerable investors. They quickly sought an appeal. Emmanuel Cassimatis later told the ABC TV’s Lateline program, ‘Till the moment I draw my last breath we are going to work as hard as we can, I am going to work as hard as I possibly can to find justice for all of these individuals.’

If margin lending is the crack-laced heroin of financial products, the banks in this case would be the drug labs. Commonwealth Bank of Australia, Macquarie Bank and Bank of Queensland soon had the spotlight thrust onto them for backing the loans in the first place. In 2012, ASIC entered into a settlement agreement with CBA for $136 million to compensate customers. CBA had already provided approximately $132 million to Storm Financial investors under its own resolution scheme. The case against Macquarie was more complicated, with ASIC forced to intervene in a class action brought against Macquarie about the fairness of their settlement arrangements. The Federal Court rewrote the agreement to force the bank to hand over $82.5 million. Bank of Queensland was the last to settle, in 2014, entering into an agreement to pay around $17 million as compensation.⁶

If you wondered whether the banks were rethinking their love affair with financial planning by this stage, you’d be right. But things were going to get worse before they got better. Storm Financial was the kind of failure that was so pervasive it became enough of an issue to see politicians inspired to act, but by the time they did the banks were already in too deep.

5

Banks and the big wealth experiment

Building a camp fire can be a painstaking task. Arranging the logs to trap the heat, lighting the kindling and stoking the embers until the logs catch on. Adding the right-size pieces of wood and fanning the flames as the fire builds to keep it burning and watch it grow. If the early years of the financial planning industry resembled this process at all, the banks buying up in the sector would be the equivalent of placing a jerry can of petrol on that fire.

Vertical integration has been singled out as one of the clearest premeditators for bad financial advice in Australia. It was also one of the biggest punts the Big Four banks ever took, which, for the most part, has failed spectacularly. Generally, vertical integration means that the same company owns different stages of the production line. Each of the Big Four banks had their own wealth arm, with multiple licensees within each one. For instance, if you’ve seen an adviser at BW Financial Advice, Financial Wisdom, Count Financial or Commonwealth Financial Planning, they would have been licensed under the Commonwealth Bank. If you’ve seen an adviser at Apogee Financial Planning, Godfrey Pembroke, GWM Adviser Services, JB Were or Meritum Financial Group, they would have been licensed under NAB. So while it might not necessarily be immediately obvious, customers are dealing with the banks’ own advisers, charged with selling their in-house products while simultaneously charging a fee for advising you to buy that very product. A good financial adviser shouldn’t necessarily be offering you their company’s best product, but the best product on the market. Therein lies the conflict.

The first guy to do the vertical-integration thing was an American railway tycoon called Andrew Carnegie, in the late 1800s. He owned steel companies and railway companies, and used his steel company to keep costs down for his train projects. He’s still one of the richest men ever to have lived. In financial advice terms, vertically integrated firms have financial advisers selling their own investment platforms and managed funds. It’s one of the main reasons you have a 75 per cent chance of receiving underwhelming advice if you visit a financial planner at a Big Four bank. That is, at least, according to one significant ASIC audit of client files from the biggest financial licensees, which found that in three out of four cases it couldn’t be demonstrated that the advice was given in the best interest of the client.¹ Smaller firms are guilty of this as well, of course, but more on that later.

The story of why the banks did it is mainly down to the opportunity presenting itself. For most of the twentieth century, banking was a straightforward business of lending, deposit-taking and transactions. These operations were low risk and highly regulated, and banks generally made money on interest, so they wanted their clients to be able to pay back their loans in the long run. Even through the 1950s and 1960s, the most exciting funds going around were mainly superannuation and insurance. It was in the 1970s, when the Australian dollar was floated and banking started to be deregulated, that the first opportunities arose for people to start playing around with different kinds of investments.

The biggest opportunity for advisers struck when compulsory superannuation was brought in. By 1990, there was already $123 billion held in super funds across the country, with 64 per cent of all employees having some coverage. By 1993, the year after the government made employer contributions to superannuation compulsory, that number jumped to $169 billion. All of a sudden people had money sitting in the bank and felt wealthy. Opportunists saw that there was a big pool of cash waiting to be taken advantage of.

With the opportunity came a touch of competitiveness. As Karen Maley of the Australian Financial Review wrote in June 2018, ‘Back then, bankers feared that their position at the epicentre of the financial system would be jeopardised unless they could find a way to get their hands on the hundreds of trillions of dollars that their customers would end up accumulating as a result of compulsory superannuation.’² To this day, superannuation dominates the financial advice market: one-third of all revenue generated by financial advisers industry-wide between 2016–17 was for services around superannuation and retirement. That’s not including self-managed super funds, which accounted for one-fifth of all revenue.³

While the race was on for the banks to get into wealth management, one man, David Murray, was the one really holding the jerry can over the fire. David Murray worked his way up to CEO of the Commonwealth Bank in June 1992 after starting with the bank as a teller in 1966. He oversaw the transformation of the bank into a privatised business, building its share price from $7 to around $30 over eleven years. His major achievement was heading up the merger with Colonial Limited in 2000, at the time the largest financial services merger in Australian corporate history. Arguably his most controversial action was overseeing the acquisition of Count Financial for $373 million in 2011. In the ASX statement about the acquisition, Grahame Petersen, Commonwealth Bank group executive of wealth management, said, ‘Our intention is to run the business on a standalone basis, supporting its business strategy, current open architecture platform philosophy and providing a platform for growth. It provides us further access to the important and growing self-managed super fund sector through a highly regarded network of accountant-based financial advisers.’ When he later left CBA, David Murray famously described that network of financial advisers as like ‘leaving a rattlesnake in the cupboard’ for his successor.

Before I can explain why it was such a dangerous move, there are some key concepts you’ll need to understand. When it comes to vertical integration in the financial services industry, the royal commission defined it as a ‘relationship between entities where financial advice, platforms and funds management are controlled by a single entity’.⁴

The financial advice part is fairly straightforward: it’s when an adviser sits across from a client and tells them what they should do with their money. The adviser will, more often than not, be selling a ‘financial product’, which is anything a customer puts their money into that either helps them make more money with it, or helps them avoid losing the money through things like taxes. Defining a platform is where it starts to get a little trickier. Generally, it’s a software system that a financial adviser will use to organise where they’re putting their customers’ money. It gives advisers a big-picture look at how all their clients’ money is doing, and is where the actual transactions will take place as money is transferred between the customer, the adviser and actual product manufacturer. Most customers will never lay eyes on a platform, but whichever platform an adviser uses has a huge impact on where their money ends up. It’s usually the step between taking a customer’s money and then transferring it into a managed fund.

A managed fund is one where customers’ money is pooled with lots of other people’s. The funds manager will then use the buying power of that big pool of money to buy and sell things like shares and other assets on the customers’ behalf, hopefully to turn a profit. If they do make any money, which isn’t always guaranteed, the customers are paid out some kind of distribution periodically. You don’t have to go through a financial adviser to access a managed fund – it’s also possible to access one directly through an online broker – but people often do. Either way, customers generally can’t pull their money out of a managed fund whenever they want to.

These definitions are important, because each place an adviser puts your money gives them a fresh opportunity to take some of it, and there’s a different name for money taken at each of these stages. If a planner takes money before they talk to you, it’s a ‘fee for advice’. If they take money after they talk to you but before they do anything, that can also be called a ‘fee for advice’ or a drafting fee for a Statement of Advice. One of the critical issues facing the financial planning industry is what it’s called when an adviser puts your money in a product and takes some of it each year. Commissions are an up-front incentive, taken at the outset of the investment, whereas often this yearly skim is also billed as a ‘fee for advice’. A critical issue singled out by Kenneth Hayne is the lack of clarity around what it’s called when an adviser puts your money in a product and takes some of it each year.

The potential for fees goes on. If the adviser uses a platform to manage your money, sometimes there’s a fee for that too, similar to a cafe charging you an EFTPOS fee to pay by card. Sometimes, there’s a fee from the managed fund too. If an adviser says they’re not taking a commission, it’s probably because they’re taking the money at another stage of the customer’s cash cycling through these different steps, which is known in the industry as ‘clipping the ticket’.

When you have this level of institutional control held by companies as large as the Big Four banks, the design of ‘vertical integration’ is ripe for clipping the ticket at every stage. It’s why one senior executive of a bank’s advice arm confided in me that he used to wake up every morning knowing, somewhere out there, one of his advisers was ripping someone off. It’s where the distinction between a good product and the best product for you can be completely ignored.

This difference is often explained using the example of buying a car. If you go to a Toyota dealership and say you want a van that can fit four kids, has good mileage per litre and is safe, they’ll show you their Tarago minivan. They’re not going to tell you that the Kia Sedona at the dealership down the road is cheaper and satisfies those needs as well, and most customers would never expect the salesperson to. And while the car salesperson usually gets the commission when you buy the car, it’s the pesky financiers who will be making money off the loan.

Many financial advisers will seem to be selling you their company’s product when in fact it’s not even theirs. ‘White label products’ are commonly used in the industry to rebrand generic financial products as a company’s own, like a managed fund, a platform or a superannuation fund. This happens because the product issuer makes it available to other companies to sell under their own branding. So, you might not realise your cash is actually in an AMP product because its subsidiary has self-branded. It often becomes an issue when you’re not immediately aware of what incentives might be flowing a financial adviser’s way, or who is going to handle your complaint if things go wrong. Advisers argue that white label products give them easy access to a broader range of products than they’d otherwise be able to supply.

Another thing to consider is that advisers will most often be given an ‘approved product list’ of financial products they’re allowed to sell to their clients. Ostensibly the list is a risk management tool, making sure each product is researched and verified. Theory doesn’t necessarily translate to practice, however. The potential for an adviser to not only talk you into a product that may not necessarily be the best for you, but also to switch you to other products as well in order to increase their cut, is huge. There are likely to be benefits flowing back to an adviser from each product on the list in some way. Even in a post-FoFA world, performance bonuses are often linked to advisers’ sale targets. It’s a bit like asking a friend for restaurant recommendations, only to have them tell you about their five favourite dishes at a cafe where they’re the owner.

In a major ASIC survey done across 2014–15 and 2017–18, the regulator found that the approved product lists of the Big Four banks and AMP were 21 per cent in-house products and 79 per cent external products. Doesn’t sound too bad, right? Until you see where the money is actually going. Advisers were much more likely to get their customers into in-house products, with 68 per cent of customers investing in in-house products after receiving personal advice, compared to just 32 per cent investing in external products. When ASIC singled out the quality of advice on in-house superannuation platforms, they found just 25 per cent of advice was compliant with the adviser’s duty to act in their customers’ best interest. Of the 75 per cent that wasn’t compliant, ASIC had serious concerns about the financial position of 10 per cent of the customers, who were switched into super funds that either had a much worse insurance policy attached or charged significantly higher fees.⁵

Remarkably, David Murray would go on to be the chair of a key government inquiry assessing how the industry he had helped kickstart was operating. The Financial System Inquiry, held across 2013 and 2014, looked at vertical integration, among other things, and – spoiler alert – did not recommend against it. In late 2014, as the full force of the Future of Financial Advice reforms came to bear and the findings of the Murray Inquiry were made public, he told 7.30’s Leigh Sales that, ‘It’s in this area that we have made a paradigm shift from the previous Wallis Inquiry. We thought long and hard about financial services as a product set versus other services in the economy. And we decided they’re just not the same as buying and selling potatoes down at the local market. People can have not so much their lives at risk with financial services, but certainly their lifestyle. And for that reason, we figured that financial services have to be manufactured and distributed differently from the way they have in the past. And there should be much more of an obligation on the people that do that, to ensure that they can earn the trust of their customers and build confidence in the system.’

Sales questioned, ‘Would people be protected under the reforms that you’re proposing such that we wouldn’t see those things ever happen?’

Murray replied, ‘We’ve said in the report that you can’t protect people from normal market risk. That’s the rise and fall of prices in markets and you can’t entirely protect them from their own decisions. But you can protect them from being sold things that are patently unacceptable for them. And the changes that we’ve recommended here are a step change, and they go further than the FoFA reforms that the parliament and the government has been considering.’

When it comes to financial advice, the idea that’s been put forward is that greater transparency is the best way to protect customers, because if they’re fully informed about what they’re signing up for they will make the best choice for themselves. In practice, however, the idea that openness fixes everything has led to stricter regulations that in turn have seen Product Disclosure Statements become drastically larger, with some starting to resemble small phone books.

Since 2016, a research project at the University of Melbourne has been looking into the concept of choice in commercial transactions, and it demonstrates a critical issue: humans are really bad at making decisions as soon as any degree of complexity is added into the equation. One experiment involves giving test subjects a backpack. They’re then given different objects, which are each attributed different values. The subjects are told they can only put a certain number of items into the backpack, and that the items combined must fall below a certain value. It’s their job to figure out the best value combination possible. It forces the test subjects to prioritise what goes into the backpack and to see how many items they can possibly fit in. As the test goes on, the researchers change the objects, making the combinations slightly more complicated. What they’ve found is that it doesn’t have to be very complicated at all for consumers to completely lose track of what the best value combinations are.

Professor Carsten Murawski from the University of Melbourne, an academic in the field of finance and decision-making, has been running the experiments. He explains, ‘We know from research that people don’t really pay attention to a lot of the information that’s provided because often that information is very complicated. But the other aspect is that if people read all the information that you gave them and understood it, a lot of financial products are still so difficult in terms of the mathematics involved that making decisions about them in many cases – for example, in the superannuation space [or any] more complicated product – is really beyond the capacity of even super computers.’

So how does this all come into play in vertical integration in the finance industry? One of the common comparisons made, usually unfavourably, is the difference in standards between doctors and financial planners – doctors being the most trusted, highly skilled and regulated profession, compared to financial planners who are not so. So let’s imagine that seeing a doctor was like seeing a financial planner.

Here’s the scenario: your hip hurts. It’s an aching pain that sometimes feels like it’s throbbing. It’s really bothering you, so you make an appointment with an orthopaedic surgeon. When you go into his office it’s a nice place. You sit there and tell him that your hip hurts. He asks a bit about how long it’s hurt and what it feels like. He also asks about your lifestyle, and what you’d like to be doing but can’t. At this point he still hasn’t looked at your hip or done any tests, but you feel like he really cares about your hip and wants to make it better.

Then he tells you he can take a look at your hip, but there will be a fee. After that he can write up a diagnosis and a recommended treatment, and there’s another fee for that. When you pay for those things he gives you a diagnosis that you need a hip replacement. You know there’s a big fee for that operation but you go ahead with it because it’ll make you feel better. Then you need your hip regularly checked to see how you’re healing, and there’s a fee for that too, of course.

Then imagine you find out that your surgeon has an arrangement with the company that manufactures the artificial hip bones, so they paid him a nice little commission when you got your artificial hip. You start to do more research and you realise that there are lots of artificial hip bones on the market, and the one he gave you needs replacing more often than some other types of artificial hip bones. You start to wonder if that was the best brand of artificial hip bone for you at all. Your mobility is much more limited now than it used to be, and you have some permanent numbness in your leg. You ask a friend who had a similar hip problem, but they say physiotherapy fixed them right up. They tell you they have another friend who went in for a procedure where they shaved the bone of their hip instead of replacing the whole thing, and they recovered really quickly. But your surgeon didn’t even mention that was an option. You trusted them to give you the best options. You start to wonder … did you need a hip replacement at all?

While a permanent physical disability and drained finances are not equal to be compared, the similarities and differences to be drawn are with what the processes are like. When you go to a financial adviser, no matter how nice they are or how much you trust them, they need to get paid. Essentially, at each step of the process there’s a different way they can make their money, and how they take your money severely impacts how good the advice will be. Where we really start to see some creativity is in all the different kinds of ways advisers have figured out how to charge fees, and it’s important to understand those before we look at all the ways they’ve been abused. As the banking royal commission would reveal, almost every instance of bad behaviour could be traced back to the incentives given to advisers and the advantages taken.

6

Commonwealth Financial Planning

At the Great Northern Hotel in Chatswood, Sydney, there’s a courtyard where ivy hangs heavy on the walls and green cast-iron chairs are clustered around aluminium tables. The terracotta-tiled floor and lanterns dotted around the perimeter set the scene for a relaxed drink or two as the sun sets. More than a decade ago now, there were three men who could often be found in the corner of the courtyard having a cosy little chat. They deliberately shrouded themselves in cigar smoke to discourage anyone from sitting too close and hearing their conversation. They weren’t there to socialise. They were plotting to take on the Commonwealth Bank. However, they’d soon find out the problem was not being overheard but that no one wanted to listen.

When Jeff Morris tells me about his life, it’s marked by confrontations. It takes a certain balance of confidence and conscience to become a whistleblower, in this case one of the most famous whistleblowers in Australia’s corporate history. His story starts with a degree in law and economics at the University of Sydney. He tells an anecdote about walking out of a presentation by a partner from a top-tier law firm, who was demanding any graduates who had the privilege of working there sacrifice any semblance of a personal life. ‘They were proud of the fact that, when other young people around the city were out enjoying themselves on a Saturday night, their young people were in the office working and he said, “If that doesn’t appeal to you, you might as well leave now.” So, I slung my bag over my shoulder and I walked out across the front of the lecture hall, flung the door open and let it slam behind me as I left.’

He took that same brusque attitude with him through an accounting career, becoming a taxation specialist. There was a similar scene when he left one place he’d worked in financial services, where he said he had been worked to the bone and was fed up with the culture. ‘I saw a number of people badly treated and it was a very macho culture. If you were a homosexual, or, god forbid, a woman, you got treated like shit … I saw a bit of this, and there was one case in particular where somebody was discriminated against. Basically, everybody else was prepared to forget what they saw. And I was sitting in a barrister’s chambers up in Macquarie Street, and the barrister was saying to me, “But you’re the only one who can remember this, is it possible that you’re mistaken?” And I said, “Are you telling me to lie?” “Oh no, no, no!” he said. So I said, “Well, that’s good, because I have a very clear recollection and I’m telling you you’d better go and settle this case, because my evidence is going to sink you. And I don’t want to do that but I’m not prepared to lie in court just to stop having to pay somebody compensation when they’re actually entitled to it.”’

It’s no surprise Jeff Morris left the job shortly after that. ‘It was part of my whole whistleblower mentality. I think after that I just went very sour. Because you’re either a company man or you’re not. And I guess, I decided that at the end of the day I’m my own man, I’m not a company man.’ Years later, when he found himself with a wife and young children, he wanted a job that was closer to home and less challenging, so he decided to go to work for the Commonwealth Bank as a financial planner. Jeff Morris had crossed over from adviser to advice salesman. He was immediately confronted with a very different culture and quickly became an outsider. ‘It was only meant to be a short-term thing, and the irony is I thought it would be a quiet life. And I get there and I find people just ripping off widows and orphans left, right and centre. The manager is egging them on and I’m thinking this is like Alice in Wonderland, they’re all mad and nobody could see that there was anything wrong here.’

Morris says he knew what he was getting himself into, to a degree. That the work he was doing would be more retail-oriented than the high-level advice he was used to giving clients with complex financial situations. ‘I had a pretty good idea, I knew that the advice would be appalling and there would be no real skills in use, but even I was shocked at just how bad it was.’ He soon found himself promoted by bosses who were impressed with his handling of complicated tax work, despite his growing contempt for them.

In the madness of the sales-driven culture, Morris honed in on one adviser in particular, Don Nguyen, who would later become known among the advisers and eventually in media reports as ‘Dodgy Don’. Don Nguyen was one of the stars of Commonwealth Financial Planning and was known as ‘a prolific writer of business’, which meant he signed up a lot of clients and brought a lot of cash through the door. As the global financial crisis hit, corporate crashes and drastic downturns in the United States and Europe saw people losing money all over the globe. As a steady stream of Don Nguyen’s clients poured into the branch, beside themselves about losing their money, it became easy for management to blame the GFC. But the reality was far worse than that. Nguyen’s clients had been left particularly vulnerable because he had been purposefully putting them in high-risk accounts, regardless of their situation, in order to make the most money out of them. This was the first sign his work was dodgy.

It was a particular incident, speaking to a couple of retirees who were in tears because they’d lost a huge chunk of their life savings, that proved to be the tipping point for Jeff Morris. ‘They were physically broken down in my office because half a million dollars of super had vaporised. He put them into ridiculous products that he used to put people into because he thought if you took a lot of risk, you invest in these aggressive funds with some even internal gearing, you do a bit of gearing on the side as well, that will grow the portfolio quicker, which would grow his ongoing fees on that bigger portfolio. And, to be fair to him, he knew nothing about investment. He didn’t understand markets go down as well as up. I genuinely don’t think he understood anything because nobody had ever taught him.’

Jeff Morris says management did nothing. ‘Compliance were aware of it and had tried to do something about it for years, but Compliance reported to the line management and they were told not to worry about it: “Fix up Don’s audit, he’s a big writer.” All the managers were getting their bonuses on the business that’s written, and you couldn’t touch Don.’

But, as the Senate inquiry into the performance of the Australian Securities and Investments Commission, held in 2013 and 2014, would hear, Nguyen’s bad investment decisions were just the tip of the iceberg. The inquiry heard that he had failed a file audit, and that he’d been caught paying $50 ‘backhanders’ to Commonwealth Bank Chatswood branch staff to give him client details directly. He’d also been caught ‘red-handed’ by a compliance manager, defrauding CommInsure ‘by tendering $5000 invoices for financial advice that was never provided’, and in some instances fraudulently signing customer signatures to authorise transactions that he would then make money from. This was on top of the other allegations that he’d been putting all his clients into high-risk investments and churning them through products to maximise his own returns. In 2008, Don Nguyen was suspended by CFP, two years after he was originally flagged as a ‘critical risk’ by the bank’s compliance team.¹

More misconduct came to light during his suspension, when Don Nguyen’s business phone was given to another adviser so that the bank could keep servicing his clients, who at that point were harassing CBA frequently, trying to find out what had happened to their money. Jeff Morris says one of the planners was told, ‘Can you just do something about all these phone calls, just bullshit to them and make them go away.’ Morris recalls that arrangement didn’t last very long. ‘He found out what these people were telling them about what Don had done and he literally threw the phone back to management and said “You can have that back, I’m not doing that.” So they had a problem then – how are we going to bullshit all these clients?’

Extraordinarily, the solution was to bring back Dodgy Don after about a month and promote him to the role of senior planner. Years later, at the 2014 Senate inquiry, CBA lawyer David Cohen was forced to explain it was because ‘[i]n this more senior position he would actually see fewer clients. He would supervise but he would actually physically see fewer clients. He was also relocated to Chatswood, where he would be under the closer supervision of his manager.’² Jeff Morris is much more cynical. ‘They brought him back for two reasons. One was to hose down the client complaints. The other was to sanitise his files. They gave him a second assistant to help sanitise the files. I saw him there, day after day, with liquid paper, going through changing things in the fact files.’

Morris says it was an incident later in 2008, at a Christmas function where the team went barefoot bowling, that proved to him nothing was changing. Don Nguyen was notably absent from the function. ‘Word rippled through the crowd: “Don’s done it again!” “How does he do it?” “Where does he find them?”’ Then one colleague excitedly explained that Don had a ‘ninety-three-year-old widow who’s going to invest $1.6 million. He’s got her to agree to a 2 per cent up-front fee. It’s like a $32,000 fee just to do the investment!’ Jeff Morris says he was horrified. ‘It was just a boilerplate word document, sixty-five pages long, but sixty-four-and-a-half of that is all the same stuff and then you just plug in the name, address, the dollar signs and the amounts and it spits it out. $32,000 for a boilerplate Word document you could turn out in an hour.’

As he watched this all unfold, Jeff Morris was biding his time, collecting emails and memos and keeping notes to build his case. In amid the blokey culture of the financial planning business, he’d gravitated towards two other men he sensed weren’t entirely comfortable with what they were seeing either. They began to have regular catch-ups to discuss what could be done about the rip-offs. Morris says the first meeting was when the three of them got together at the Buena Vista Hotel in Mosman. They were discussing what they saw as a blatant cover-up by the Commonwealth Bank of Australia and what they could do about it. Jeff says he told his two colleagues, ‘Look, we’ll have to write to ASIC about it.’

‘One of the other whistleblowers said, “The only problem with that, mate, is that ASIC’s shit, they won’t do anything.” And I said, “Well, I know, but if need be, we’ll have to force them to do their job, we’ll go to the media.” I said, “But there’s no reason why we should all lose our jobs. You guys just go away, I’ll do this, I don’t need anybody else involved. I can just do it and you can stay out of it.”’

Jeff’s colleague, who to this day has never gone public, replied, ‘Oh no, no, no, we’re all in this together.’ So Jeff Morris said, ‘All right, if you guys want to do this then we need to come up with a codename. What about the Ferrets – like, you know, we burrow and we find stuff.’

What started as a joke became a codename for a coordinated campaign to bring down Dodgy Don. Jeff Morris says they agreed on a plan. ‘“Right, well, next thing is, before this is over, they’re going to go right through your computer, your emails and your phones. So, stop sending each other emails about what Dodgy Don’s done today, delete all that stuff, they’ll find it eventually but it will slow them down. Delete everything and delete all your text messages from your phones, stop sending each other text messages – in fact, stop talking on your work phones at all.” And so we’d ring each other up and say, “Oh, got some ferret business to discuss this evening, usual place.”’

That usual place was the Great Northern Hotel, with its cosy courtyard. The ferrets did some digging and got together everything they needed to take down Dodgy Don. When they went to ASIC, they realised that a little ferret is a lot more dangerous than a big toothless tiger.

7

The toothless tiger

In 1992, the Australian Securities Commission released a pamphlet about how to pick a financial planner, called ‘Don’t Kiss Your Money Goodbye’. If you have ever had a sense that the onus was on the customer to not be ripped off, rather than on the regulator to be the tough cop on the beat, this brochure might reinforce that thought. The inside cover featured a blue and grey cartoon with the caption ‘Your first step to find a financial adviser’. The cartoon is, no joke, a pool full of sharks sitting either side of small, round stepping stones that lead to a target far off in the distance, presumably representing the customer’s financial goals. It’s hard to imagine too many planners handing that out to prospective clients, but nonetheless it contained sage advice about exercising caution over trust. It included questions for customers to ask planners, and reminds the reader a few times in insistent italics that ‘It is your right and responsibility to check the adviser’s background, credentials …’

For as long as financial planners and their previous incarnations have been ready to sell you something, the corporate regulators have been there watching on. As financial advisers struggled to form a well-defined profession, the regulators have equally struggled to form a coherent response. They’ve been accused of slapping more wrists than they’ve slammed prison cells shut. Lack of funding, high-risk prosecutions and lax legislation have all been blamed for ASIC’s poor record. As the watchdog has scrabbled to keep up with the rapid deregulation of the Australian economy and the proliferation of poor conduct, its senior personnel have become the high-profile faces that have borne the brunt of public anger and political posturing.

Before there was the Australian Securities and Investments Commission there was the Australian Securities Commission, and neither can claim to have been more effective than the other. Formed in 1991, the ASC pulled together the National Companies and Securities Commission and the Corporate Affairs offices of the states and territories. Up until that point, each state office had been operating independently and quite happily so, but the Hawke Government moved to streamline the set-up. They wanted to restructure each office as a specialist centre, with one city to focus on company licences, one to be a centre for enforcement specialists, and so on. In the days before widespread internet communication and cheap interstate travel, the offices were quite parochial and would have preferred to keep plodding along. The fear of job losses hung over the heads of workers in each state, which saw a widespread resistance to the push to remove duplicated services from the offices. However, the new ASC executives knew it was an issue, for instance, that companies were shopping around different offices to get their prospectuses approved, because some were known to get out the rubber stamp quicker than others. The hope was that a single regulator could be more effective and drive a unified approach to cracking down on corporate crooks.

It didn’t help that the Australian Securities Commission had had to weather a few controversies in its early days. Property trusts had been on the rise in the 1980s, when investors took advantage of investment opportunities in highly leveraged but also very risky property portfolios that escaped the scrutiny of regulators because they weren’t listed on the public market. Their popularity escalated into a full-blown crisis in the 1990s. In 1990, the Sydney-based Aust-Wide Group raised $130 million. In their book Savings: Australia in crisis?, Steve Lewis and Anthony Boyd described how, even as major mortgage trusts were ready to crash, ‘One of the slickest and most successful marketing campaigns for an unlisted property trust was in full swing.’¹ The Aust-Wide Group’s rapid growth was fuelled by investment advisers working for up-front commissions, which saw them pushing clients to borrow money just to buy unit shares. But with the entire business model built on overblown valuations and debt upon debt, it didn’t take much to bring it down. A single interview with the chairman of the Australian Securities Commission, Tony Hartnell, was enough to trigger widespread panic.

In an interview with Channel 9’s Business Sunday program on 8 July 1990, Hartnell sat back comfortably as he voiced concerns about the outlook for unlisted property trusts, in particular the valuation of their assets. Hartnell said, ‘I think in relation to some commercial property driven units, you’ve probably got to look at suspending buyback obligations with a number of them, to let the value of the security relate more closely to the market perception of the value of the underlying property.’ In the same interview, Hartnell referred to property prices having fallen by 20 to 30 per cent. These comments came just one week after the disastrous Pyramid Building Society had been frozen in trade, which only helped drive up concern around the unlisted property trusts.

Fast-forward to 1998 when ASIC was formed, and consumers were being promised a tough regulator with widespread powers as it took over responsibility for consumer protection in the financial sector. Among other things, the act that created ASIC established the current licensing regime for holders of Australian financial services licences. The idea of licensing each individual was seen as far too onerous to manage. The rationale behind licensees was that their audits would pick up bad behaviour in licences, and this way the regulators would know where to focus their attention. In the early days the commission was sidetracked by publicity-driven campaigns against corporate criminals like Alan Bond and Christopher Skase, and the nitty-gritty of small-time charlatans fell under the radar of the corporate watchdog.

By 2004, ASIC chairman Jeffrey Lucy was saying all the right things about upping the number of prosecutions, but it still didn’t happen. In a speech to the Australia–Israel Chamber of Commerce, he described the commission’s regulatory approach as being like a three-tiered pyramid. At the bottom of the pyramid was those who comply with the law. He said ASIC’s role for them was to ‘provide guidance to help them continue to comply’. The middle level was opportunists who are ‘prepared to bend the rules if they think they can get away with it’. ASIC’s strategy for them was to influence their views and conduct. At the top of the pyramid was the smallest layer – those who engage in improper and illegal behaviour. ‘ASIC uses its full enforcement strength to regulate this group.’²

At that time, however, ASIC’s love affair with enforceable undertakings was really just taking off. An ‘enforceable undertaking’ is a legally binding agreement to fix a breach of the law. In 2004 alone, ASIC accepted twenty-eight enforceable undertakings, from a peak of sixty-five in 1999. One argument that’s been put forward more than a few times is that ASIC has continued to chase enforceable undertakings because they’re lucrative. While you can argue that they’re cost-effective, it’s interesting to see that there isn’t necessarily a correlation between the number of enforceable undertakings and the amount of money ASIC recouped. In fact there’s almost an inverse relationship. The year 2000–01 was one of the most profitable for enforceable undertakings, accounting for $530 million, but that was made up of just forty-six enforceable undertakings. Compare that to the year after, when thirty-three enforceable undertakings brought in just $110 million.

That being said, numbers have never mattered much in the public perception of ASIC. It’s often a personality game, and one of the most controversial chairs by far would undoubtedly be Greg Medcraft. Medcraft became the subject of intense scrutiny over his position as board chair of the International Organization of Securities Commissions. He held that role for three years concurrent with his role as the chair of ASIC, and was accused of spending more time globetrotting than skull-cracking back home. His absenteeism even became a running joke with Kelly O’Dwyer, the Minister for Revenue and Financial Services, who reportedly made quite a show of asking whether he was in the country each time they spoke.

In 2013 alone, Medcraft spent almost a quarter of a million dollars on travel: $246,409 all up, including business-class flights, and accommodation for him and a staff member. In a pre-recorded video he posted to YouTube, responding to the relentless media coverage of his trips, he defended his need to travel ‘from time to time’, because, he said, ‘so many of the issues facing Australia are global issues and need a global response’. It didn’t do much to assuage the public dissatisfaction. It became such an issue for Medcraft and ASIC that he was forced to publish details of his travel plans and how much they cost. He also drew criticism from Alex Malley, the former chief executive of accounting body CPA Australia, who was quoted in the Sydney Morning Herald on 23 November 2013 saying that international travel ‘must be unambiguously focused on supporting your core business … Time and again we see that ASIC has taken its eye off the ball with a leadership distracted by role creep and an over-reliance on US and British policy thinking.’³ The irony of the millions of dollars CPA was spending on him for his personal publicity campaign was apparently lost on him.

In spite of the ire his travels caused, it was Greg Medcraft’s sensational comments that Australia was a ‘paradise for white-collar criminals’ that would become his lasting legacy. He argued, ‘The penalties, particularly civil penalties, in Australia for white-collar offences are basically not strong enough, not tough enough. All you’re doing is giving them a slap on the wrist. That is not deterring people.’⁴ He later tried to backtrack on his comments to a Senate Economics References Committee which had been tasked with investigating ‘Criminal, civil and administrative penalties for white collar crime’ in November 2015. He said, ‘The point I was making was not that we are a paradise, but we need to be careful that we are not seen as a haven and, therefore, regarding the issue we have raised previously about corporate penalties and which the Senate inquiry has actually recommended, we need to make sure that our penalties are consistent with the rest of the world. That is the point I have made on a number of occasions about making sure that we are consistent in terms of our penalty regime.’⁵

As Greg Medcraft jetted around the world to events in Russia and Malaysia, it was often left to deputy chairman Peter Kell to pick up the slack at home. While Medcraft’s frequent absences were the cause of consternation, it was some of Kell’s colder, more analytic performances at Senate inquiries that aggrieved observers, including one very driven Nationals senator.

As ASIC suffered from a lack of consistent direction, one senator took up the mantle of the man who’d help you take on the banks when no one else would, and he had ASIC squarely in his sights. New South Wales Senator John Williams prefers to go by his nickname, ‘Wacka’, and likes to joke that Western Australia calls their cricket stadium that after him. A short man with a strong presence, he knows how to let silence hang in the room if someone’s talking bullshit, but he’s not afraid to let them know if he thinks they’re full of rubbish either.

When I met with him in his office in Parliament House, he was enjoying his last few weeks as a senator. Almost from the moment he first walked into the building, he’d had the big banks in his sights. He’d personally lost a lot of money as a young man in currency trades. The swindle cost him nearly everything but the clothes on his back. While he’s now lauded as the man who almost single-handedly forced the royal commission through parliament, for a long time he was seen as the man pushing a fringe cause.

He tells me that when he started working at Parliament House in 2008, one of the first events he attended was a meeting for victims of Storm Financial at Redcliffe, in Queensland. It was the first exposure he had to the problems bubbling away in the financial planning sector, and the unfairness stuck in his mind. He thought that a lot of what he was seeing amounted to outright theft. ‘Years ago robbers would rob with a pistol or a knife. Now they rob with a pen or a computer. It’s a whole different scenario. And people come into my office and say how they’ve been treated by the banks and what they’ve done and so on.’

In 2011 he launched a Senate inquiry into the banking system. He recalls one inquiry hearing during which he grilled a bank representative about a branch manager who’d been investing customers in a Ponzi scheme that went belly-up. The branch manager was jailed for six months. Wacka leaned forward, both his elbows on his desk, looking me dead in the eyes as he told the story. ‘During that inquiry I said to one bank, “Why did you give a thirty-year loan to a ninety-three-year-old woman who’s in an aged care facility?” And Senator [Doug] Cameron said, “How old did you say she was, Senator?” And I said, “She was ninety-seven, Senator Cameron.” He said, “Must be a bloody good aged care facility.”’

It’s an awfully similar situation to what I heard about from Commonwealth Bank whistleblower Jeff Morris, which he would eventually describe to Senator Wacka Williams himself. In the middle of 2008, Jeff Morris handed over the dossier of evidence he had been collecting about the rampant misconduct at Commonwealth Financial Planning to ASIC, ironically at the time his career was taking off in the bank. ‘Six months before they promoted me, I’d written a report to ASIC, and I was flogging this dead horse trying to get them to do something. But because ASIC hadn’t done anything, the bank didn’t realise somebody had dobbed them in at that stage.’

By May 2009, ASIC still wasn’t moving, so Jeff Morris and his fellow ferrets got onto a journalist at a trade journal called Investor Daily. He told the journalist that Don Nguyen was under ASIC investigation. ‘We thought, oh well, surely to Christ this will get ASIC moving if we put that in the bloody paper. We couldn’t have been more wrong. Still nothing happened. The CBA reacted by letting Don resign, but then they had a look and they found things – they had to put in a breach report after he resigned. And they say to ASIC, “Oh, it’s all right, we’ll compensate the victims.”’

It wasn’t until 2013, when Jeff Morris finally reached out to ‘Wacka’ Williams, that he found someone who was willing to listen. By this point Wacka had spent years gathering his own evidence against the banks and had his eye on the regulators too. He introduced Jeff to investigative journalist Adele Ferguson, and together the three of them led a tireless campaign to get the stories out and gather momentum for a royal commission into the banks and the finance sector. In the end, it was one particular act of hubris from ASIC deputy chair Peter Kell that saw the balance tip in their favour.

There is still a hint of mirth as Wacka recalls going toe to toe with Peter Kell in Senate Estimates in June 2013. ‘I said to Peter Kell, “Why did it take you sixteen months to act when whistleblower Jeff Morris was feeding you information?”’

Peter Kell replied, ‘We got a great result and an enforceable undertaking.’

‘I didn’t ask what sort of result you got, I want to know why it took you so long to act,’ Wacka hit back.

Peter Kell stayed firm. ‘The result’s been good, the enforceable undertaking has been working well.’

Wacka turned to the chair of the committee, Senator Mark Bishop, and said, ‘How do you get these people to answer a question?’

At that time a staffer of Senator Doug Cameron was watching the tense scene unfold on a parliament television. He went over to his boss and said, ‘Hey, Dougie, ASIC’s belting Wacka up.’

Senator Doug Cameron, a formidable figure with a thick Scottish accent and the bolshiness of a politician forged in the trade union movement, marched into the hearing and said, ‘I got some questions for you, Mr Kell, and don’t you give the run around the mulberry bush like you gave Senator Williams, I can assure you. Take this on notice.’

As Peter Kell continued to obfuscate it only fuelled Doug Cameron. ‘I watched your responses to Senator Williams. Please do not do that to me. This is a very serious issue for ASIC. It is a serious issue for the government. All of the senators are concerned about it. Do not take me on a waltz around the merry-go-round.’ The lashing went on. ‘Mr Kell, you do not seem to take a breath when you are answering a question and it really is quite annoying.’⁶

Not much was resolved that day, but the spark was lit. Wacka says as they walked out, Dougie leaned over and said, ‘Hey, Wacka, we should have an inquiry into ASIC.’

That Estimates hearing produced a lot more evidence, and a recommendation of a royal commission into the banks. The rest, as they say, is history.

8

I’m with you

Somewhere in between the planners roaming the wild, wild countryside of our recently deregulated markets, and the regulator feebly attempting to rein them in, has been the associations that attempt to do both. This would come out in excruciating detail at the banking royal commission, with the industry’s hodgepodge of associations exposed for chasing their tails, trying to keep their membership fees up while also keeping their planners in line.

Even as early as 1992, the Financial Planning Association of Australia (FPA) knew that it needed to be seen disciplining its members if it was going to be taken seriously. That year the FPA was spruiking its code of ethics as the thing that would give consumers confidence in the industry. FPA Executive Officer Ken Breakspear said in an interview, ‘Public confidence and respect will be greatly enhanced when government and the media also appreciate there is accountability for operating at these minimum standards and that accountability is reinforced by penalties and sanctions for non-compliance. The board has approved a set of fair administrative procedures for complaints handling, investigation and conduct of disciplinary proceedings which focus on handling complaints in an informal, inexpensive and speedy manner.’ Which might have sounded awfully convincing if it wasn’t sharing column space with the same executive bemoaning over-regulation of the industry: ‘I think there are opportunities to push for the repeal of unnecessary regulations which burden the industry. The maintenance of the register of relevant interests is a good example, which is really a useless and defunct requirement given the disclosure obligations under section 849 of the Corporations Act, and the keeping of such registers belongs to the era of the 1970s when only stock brokers dealt in securities.’¹

By the time the banking royal commission started, there were around 25,000 advisers operating in Australia. Some advisers are members of multiple associations, but the cost alone means that most just belong to the one. The difference between the associations is mainly born out of the various professions that morphed into financial planning. The Association of Financial Advisers (AFA) has traditionally represented more of the life insurance crowd. It has only around 4300 members, the majority of whom are practising financial advisers. While much smaller than other organisations, the AFA’s reported membership has increased significantly in the past ten years and it has its own recognised professional designation, its own code of conduct, a formal complaints process and disciplinary procedures.

The Financial Planning Association (FPA) is the modern iteration of the International Association for Financial Planning that was started by Gwen Fletcher, and is most closely aligned to the degree-educated, professional planners. They have more than 14,000 members or affiliates. The Stockbrokers and Financial Advisers Association (SAFAA) and the Self-Managed Super Fund Association are fairly self-explanatory. The SAFAA only took on the Financial Advisers Association role in 2016, having previously been just the Stockbrokers Association of Australia. They boast a membership of 10,000, although that includes what they call ‘investment professionals’, many of whom wouldn’t be involved in financial advice.

While the two main associations, the FPA and the AFA, bicker in the middle, the major outlier would be an association run by Peter Johnston, the man we briefly met earlier who got his start in the investment and insurance business through his association with VFL clubs in Melbourne. Today he’s the executive director of the Association of Independently Owned Financial Professionals (AIOFP) in Australia. It sounds like the kind of association you might approach to find an independent financial adviser. There is some truth in that, but it has also become something of a unionised lobby group, seeking to align itself with the Labor Party. Peter Johnston has been described to me more than once as typical of the ‘old school’ of the financial planning world that is resistant to change.

In the past Peter Johnston has had to be talked out of organising protests, wanting financial planners to picket parliament against new education standards that were coming in. It’s hard to imagine white-collar financial planners pushing back their office chairs from their desks, walking outside and picking up a placard. Nathan Rees, former New South Wales premier and current national assistant secretary of the Financial Services Union (FSU), bluntly told Johnston he’d get nothing but a sunburnt neck doing it. That’s not to say the FSU turns up their noses at the idea of new members, but they have largely been focusing on bank tellers as their membership.

One document Peter Johnston sent to his members at the end of 2018, called ‘Advice – A New Direction’, with the FSU logo sitting alongside the AIOFP logo at the top of the page, read like a manifesto for financial planners to rise up and unionise. In it Johnston encouraged all his members to join the FSU, describing it as a ‘powerful white-collar union’. He argued that ‘they understand our plight. Politically they sit in the left, have a significant influence in financial services policy and will look to us for guidance and input.’ He went on, ‘Considering an ALP Government will more than likely be in within six months for six years, we think it’s [sic] makes sense to be there.’

The idea of a politically aligned professional group horrified a number of AIOFP members. Peter Johnston’s gruff attitude has put him directly at odds with the white-collar, university trained stock of the other professional associations. Dante De Gori, head of the FPA, did not mince his words when he told me, ‘That group I will never, ever, ever work with. So that’s all I’ll say about that.’

This edict from De Gori can be seen as having some clout, when the FPA is the largest and probably the most influential association representing financial planners in the country. The question De Gori, like many others in the industry, can’t answer is why all these organisations still exist. We’re often told it’s because each one is so specialised that stockbrokers and self-managed super fund experts all want their own associations. It seems ludicrous that there need to be so many bodies representing what’s comparatively a small profession, but the organisations themselves universally disagree.

De Gori told me, ‘Your point is not a new one, it comes up quite a lot and is something we get asked about quite a bit. I think it’s inevitable that eventually these things will start to merge and consolidate. It may not be a complete neat picture – I don’t think you’re going to all of a sudden get everyone saying let’s have just one super body. There will always be sort of niche areas, because even in financial planning, specialisations are one of the things that comes up when you talk about what the future is going to be like. As the population ages, as the superannuation market grows, as the need for special advice grows, advisers are going to be finding their niche and actually being very unique specialists in certain areas.’

Phil Anderson, general manager of policy for the AFA, has a similar take. ‘It’s a contentious question because it does get asked from time to time. It all depends upon the value proposition we have for our members and the extent to which different groups of members have different objectives for joining associations. Then I think there is still a valid argument to remain separate. And we have a lot of members who choose to be a member of the FPA as well as the AFA, because they look for different things from the different associations.

‘We’re probably perceived to be much more focused on the life insurance side of things than the FPA are, and therefore for life insurance advisers, the AFA seems to be a more natural fit. But I think our membership base is much broader than that and we certainly don’t just cater to that space. But it’s an important part of what we represent.’

The FPA has an internal disciplinary board called the Conduct Review Commission, which investigates complaints and manages disciplinary proceedings to ensure that members are held accountable to the FPA code of professional practice and code of ethics. The majority of complaints relate to inappropriate advice given by financial advisers, including failing to adequately explain risks to clients and failing to take their personal circumstances into account. The question, though, is how effectively can a membership body that relies on fees to survive regulate its members? It’s an issue that came to the fore during the royal commission hearings.

One observer of the industry who was heavily quoted in the background papers prepared by the banking royal commission is Robert M.C. Brown. A specialist reservist with the Australian Air Force, and now an Air Commodore, he chairs the Australian Defence Force Financial Services Consumer Centre. The centre was established by the Department of Defence to offer impartial financial advice as well as advise defence force chiefs on internal considerations for things like insurance and superannuation. He spent many years practising as a chartered accountant in Sydney, specialising in taxation, superannuation and financial planning, and he’s quite sceptical of the role membership associations can play in discipline and regulation. ‘Over the years, membership of the financial planning industry associations has been populated by people with a sales background. Over time, to be fair, the associations have tried to change. The industry talks about being on a journey. Oftentimes we don’t know or want to know the destination, and we actually don’t really want to get there because we want to keep the current conflicted structure in place.’

He does argue, however, that there have been moments of conviction from the FPA. ‘They banned commissions for their members, before FoFA did – on investment products, not on life insurance – but they did ban commissions being received by their members and that was a good thing.’

That was a bold move in an industry built on commissions, as we will see.

9

Back to the future of financial advice

In 1990, a company called Scottish Australia ran an advertising campaign targeting financial planners, with two birds’ nests sitting side by side. Both nests had feathers in them, but the one on the left had a lot more. In bold type across the double page spread it asked, ‘If we were to suggest you look after number one, who would you take it to mean?’ Below in smaller print the advertisement explained, ‘All too often feathering your client’s nest can literally be at the expense of your own’. It went on to argue that its superannuation products benefit the consumer because they’re simple, flexible and capital-guaranteed, while advisers are assured they will benefit from them because their commissions will be paid promptly.

In the most cynical way possible, this ad campaign sought to exploit the exact issue that the industry was grappling with and would continue to come up against in the decades that followed. It was hard to convince any adviser to do anything that wasn’t in their own best interest, even though customers thought they were getting advice about the best options for them. Fast forward to the global financial crisis and the slew of investment failures that followed, including Storm Financial. With victims of Storm’s collapse seizing momentum and launching class actions, they were also becoming increasingly vocal in a push for regulatory change. One of the men receiving many angry phone calls from constituents was Bernie Ripoll, a federal MP for the Queensland seat of Oxley. He says it was the Storm Financial crisis that tipped things over the edge. ‘It just became the spotlight for everything that was wrong with the sector.’

Bernie Ripoll doesn’t quite fit the same mould as many of the people who find their way into parliament. Born in France but educated in Queensland, he’s skirted the line between being white-collar and a unionist his whole career. He worked as an electrician, but a highly specialised kind for the Australian Air Force, then as an organiser for the former iteration of the Queensland Public Sector Union. He ended up chairing what became known as the Ripoll Inquiry into Financial Products and Services, which produced the Future of Financial Advice reforms. Most often referred to by its acronym, FoFA, it’s not quite the reforms themselves but what the industry players did with them afterwards that makes them so interesting. The industry fought against them tooth and nail, and eventually did see some of the stricter requirements rolled back.

The Ripoll Inquiry involved public hearings around the country, which often ran like town halls. Much of the evidence involved heartbreaking stories of personal loss. Bernie Ripoll recalls, ‘Mums and dads, Australians, everyone, had a chance to air their grievances. If they couldn’t get compensated, they might find some resolution in the fact someone would listen to them. It was an incredible process. Lots of emotion. We did a meeting in Townsville where people were just crying and really devastated that they’d lost their life savings.’

Bernie Ripoll also convened what was called the Peak Consultation Group to discuss the reforms with industry stakeholders. During the year leading up to FoFA being enacted in 2012, with mandatory compliance due to begin in July 2013, this group met up once every month to discuss the proposed changes. It included representatives from groups like the Association of Financial Advisers, the Australian Banking Association, consumer advocacy group CHOICE, Industry Super Australia and the Property Council of Australia. Each meeting there’d be about twenty people representing different interest groups sitting around the room, going through the legislation line by line. Robert M.C. Brown was in the room for some of those meetings, being something of an authority on financial planning as well as one of the leading figures espousing the need for reform. He recalls, ‘People were pretty civil, but there was some emotion. People had strong views about things, but it remained pretty professional most of the time.’

Of course, many of the more frank discussions happened outside of the room. One of the arguments Brown recalls most vividly was the dispute surrounding the industry’s push for ‘asset-based fees’. ‘They’re really commissions paid by customers. Such commissions are not banned in the financial services industry legislation, except on gearing. The industry associations insist that an asset-based fee is a professional fee for service. That’s outrageous. It’s a commission paid by a customer.’ This was where the real issue with the associations came to a head. Where do they draw the line between being a lobby group and a professional body? ‘I remember taking to task a number of industry players about the role of their associations. Basically it was about protecting their members’ commercial interests, because most of their members believe the associations principally exist to do that.’

Commissioner Kenneth Hayne made this comment about the FoFA reforms in his Interim Report: ‘It is, therefore, not surprising that the resulting provisions show signs of compromise and accommodation of widely divergent interests.’¹ Part of that approach was meant to head off the extreme lobbying that was set to follow. It would be much harder for industry players to cry foul and say they couldn’t comply with regulations if they had, even reluctantly, helped to draft them. ‘Regardless of what you read now and how people sort of rewrite history, the reality is that the sector more broadly didn’t want any change, let alone big change. So while now everyone says, “Oh, we were supportive” and, you know, “It’s a good thing”, that was never the case. There was enormous pushback. People said this would be the end of the world, the end of financial advice, end of advisers, et cetera, et cetera,’ Ripoll says, waving his hand for emphasis.

What came out of the extended consultations was eleven recommendations. Most related to beefing up ASIC’s powers, including that the regulator be better resourced and have the power to ban advisers. The first recommendation was a fiduciary duty, requiring financial advisers to place their clients’ interests ahead of their own. The fourth recommendation was that the government consult with and support the industry to develop a way to stop payments from product manufacturers to the advisers who sold them. In short, to ban commissions.

Bernie Ripoll says it was a deliberately concise set of reforms to eliminate chances of finding wiggle room. ‘Most reports have dozens or even a hundred-plus recommendations. We had eleven. But they were big, significant, and went right to the heart of some of these issues. As a committee and as an inquiry, we understood very early on that the work we did wouldn’t be about fixing everything, if you put it in those crude terms, but it would be about setting the stage for others to come along and then take that information and our findings and say, “Right, now we can use that as a basis for doing something.”’

As Ripoll suggests, at the time the reforms were decried as doomsday changes, the death knell of the financial advice industry. The interim report from the banking royal commission, on the other hand, would call the eleven recommendations ‘compromises’, with Kenneth Hayne writing, ‘For the moment it is useful to focus on two of those compromises. The first was that conflicts of interest between adviser and client should be permitted to remain but be “managed”. The second was that some forms of conflicted remuneration were, and still are, allowed to continue.’

‘Conflicted remuneration’ was the big one. In the simplest terms, conflicted remuneration is any money the adviser receives that would influence their decision over what advice they give to their client. That’s mainly commissions but was supposed to include bonuses as well, which became a very grey area too. The conflicted remunerations recommendation was such a hard-fought battle with the sector that in the end they reached a compromise that the industry could ‘grandfather’ existing remuneration agreements that were horribly conflicted. This meant that while they couldn’t sell any more of the products after 2013 (with a generous implementation period to allow advisers to actually start implementing the new fees after 2014), if you already had an agreement like that with clients you could keep it, and the cash it brought in each year. That made any grandfathered policies very valuable.

Following the introduction of FoFA, many in the industry moved to eliminate grandfathered commissions, but many more didn’t. ASIC deputy chair Peter Kell told the royal commission, ‘our starting point is that any conflicted remuneration has the capacity to create the wrong incentives, which can lead to inappropriate advice. So it certainly has to be carefully managed. We have, I think, made our views clear that the conflicted remuneration that was available on the life insurance sector until recently was contributing to poor advice, hence the recent reforms and the government has asked ASIC to review the impact of these reforms in a few years’ time to see whether they show improvements in the quality of advice. So that’s, in some sense, it’s still an open question. We also are of the view that commissions in relation to time share products, where there have been longstanding concerns about high pressure selling and misleading conduct are inappropriate.’²

However, Kell admitted that the full extent of the issue was still relatively unknown. ‘We do have concerns that the grandfathering provisions can incentivise the wrong sort of behaviour. They can encourage advisers to retain clients in products which enjoy grandfathered remuneration even in circumstances where they may more appropriately be moved to other products as their needs change over time. It’s not an area where we’ve undertaken any recent sort of extensive work to establish how heavily different licensees are relying on grandfathered remuneration. So I’m not sure I could give you an answer that goes to exactly what sort of problems it’s creating, but it is an area that we intend to review.’³

ASIC’s argument is that it’s hard to tell if conflicted remuneration reforms have been successful because they came in at the same time as changes around opt-in requirements and fee disclosure statements. From 2013 onwards, FoFA forced advisers to renew their agreements with clients about ongoing fees every two years. That generally required a signature on a form. But advisers still had to send a fee disclosure statement each year breaking down what they were charging, the logic being that if clients are more informed, they might be the ones taking themselves off policies with commissions and not the other way around.

Although, Peter Kell noted at the banking royal commission, ‘Nonetheless, we would observe that we have seen a decline in the sale of certain widespread higher-risk problematic products, such as agricultural investment schemes.’

The second big change to come out of FoFA was a legal obligation for your adviser to act in your best interest, not their own. The way they proposed to make sure this actually happened in practice was through full disclosure, which ended up creating a lot of paperwork and not much else. As Robert M.C. Brown explains, ‘It was intended in good faith, in the belief that it would solve many of the problems which we are still facing. But it doesn’t work. In fact, it was interesting when, as a result of the Wallace Inquiry, compulsory disclosure of commissions was legislated and the financial services industry said that the end of the world was nigh. If we had to tell people about our conflicts – my goodness, we can’t do that. And so, they thought the world was ending, but of course it didn’t. Disclosure hasn’t worked, but neither did it impact the profitability of the industry. It went on from strength to strength, until the revelations of the Royal Commission.’

There are essentially three, maybe four, documents a financial adviser will give you when you engage their services, and they’re strictly defined by ASIC. A ‘Financial Services Guide’ contains information about who is providing you financial advice, and should explain the financial service offered, the fees charged, and how the person or company providing the service will deal with complaints. After FoFA, the rules were that an adviser who signed up a customer for a plan with ongoing fees had to make sure they sent the customer an annual fee disclosure statement, and give them the option to opt out every two years. A ‘Statement of Advice’ is tailored to the client, where the adviser gives personal advice about what to do with their money. And a ‘Product Disclosure Statement’ is written by whoever is selling you the financial product, and must have enough information so you know what product you’re signing up for, which can be a very subjective thing.

Take, as one example, BT Financial. Today BT Financial is the wealth management arm of Westpac, but it started out as one of the original Australian fund managers in 1969. By the time of the banking royal commission, Westpac’s head of BT Financial, Michael Wright, explained that in each year since 2013, Westpac had paid around $200 million in grandfathered conflicted remuneration. Of course, the transition had been messy across the board. Wright also admitted that since 1 July 2013 they’d still been accepting some $222,000 of conflicted remuneration that they shouldn’t have, including $24,844 in payments received under a brokerage referral arrangement between 1 July 2013 and 5 May 2015, approximately $64,745 in percentage-based adviser fees paid to dealer groups before December 2014, $61,000 in volume-based payments made to AMP after 1 July 2014, $23,000 in adviser commissions deducted from customer accounts between 1 July 2013 and 29 August 2013, $27,895 in commissions that were paid in relation to superannuation accounts between 1 July 2013 and 14 July 2016, and $20,800 in commissions paid in relation to the ASGARD platform (one of the tools that advisers use to manage multiple investments) in August and September 2014. Westpac had disclosed some but not all of these events in its submissions to the royal commission earlier that year.

It’s clear from these examples that a number of financial products were affected by the ban on conflicted remuneration. Those affected include general insurance products, such as car insurance or home insurance, as well as basic banking products and time-share products. And advisers can still accept some non-cash benefits, such as training and education, or IT software and support, and ‘benefits arising from related non-financial products of which direct property is a notable example’.⁴

Many of these changes were walked back by the Abbott Government. On 20 December 2013, Shadow Treasurer Arthur Sinodinos announced changes to FoFA, including walking back the ‘opt-in’ requirement for advisers to get rolling permission to keep charging fees. Mr Sinodinos argued that it saves clients ‘unnecessary paperwork’ and that ‘[t]his requirement adds a burdensome layer of red tape to industry and does not provide any significant consumer protection’.⁵

The big carve-out that remains, thanks to extensive lobbying across the board, is in life insurance. There’s no obligation for an adviser to forgo a commission on life insurance, and it’s always been a huge cash cow for the industry. As Mick Lee, a financial adviser operating out of Perth, with more than thirty years’ experience, told me, ‘The remuneration models that were the life insurance remuneration models, if they were running those out today, they would be sent to jail. Because they were horrendously high-commission-paying services.’

Some policies gave life insurance agents commissions as high as 130 per cent of a premium for selling the policy, with the percentage decreasing over the years the policy is held. More often than not that number was closer to a tidy 90 per cent commission. The incentives were extremely high for life insurance agents to switch customers out of policies for no real reason, to take advantage of the sign-on commission rates. Successive governments have pushed to have that number dragged down, while the professional associations have lobbied to keep it high. From 1 January 2018, advisers could still take commissions on life insurance, but they were dialled down to a maximum of 60 per cent up-front commission, with volume payments removed from the sector altogether.

So why does this matter? Because a licensee will take a cut of commissions too. The amount of commission an adviser receives depends on what the agreement is with their licensee. For instance, a licensee might split the commission, passing 85 per cent on to the adviser and retaining 15 per cent, or sometimes they might charge an annual fee in lieu of skimming the commissions, and pass on the entire commission to the agent.

The licensee model is a slightly dry concept, but an important one to understand. You can’t just set up shop as a financial adviser in Australia – you need an Australian Financial Services Licence, issued by ASIC, and this is where it gets complicated. There are very few actual licensees in Australia, and if you’ve ever seen a financial adviser, the chances are the person sitting across from you wasn’t the licensee. More often than not they’re an employee of the licensee, an authorised representative of the licensee or even an employee of the authorised representative. This is where the Big Four banks and AMP have absolutely dominated. At the end of 2017, together they held a market share of 48 per cent by industry revenue. Around 30 per cent of the advisers registered with ASIC worked for one of the major banks, and 44 per cent of advisers both aligned and non-aligned operated under a licence controlled by the largest ten financial institutions.

Aligned means working under a financial institution like a bank or wealth manager, while non-aligned means independent. The definition of ‘non-aligned’, or ‘independent’, continues to be under intense scrutiny. At least up until the royal commission, the only way you could use those terms was if you weren’t receiving a commission, volume-based payment or other gift or benefit from the issuer of the financial product. It also meant the advisers had to operate without any conflicts of interest arising from an association or relationship with a product issuer. As you can imagine, there are very few truly independent operators indeed.

10

Back to school

You might wonder why I haven’t yet touched on the education and training of financial planners. A lack of education has emerged as a major contributing factor to the amount of bad advice given in the industry. For years advisers needed nothing more than a TAFE certificate under their belt to delve into the complicated world of self-managed super funds and investment schemes. There are two reasons I’ve avoided the topic of education standards until now. First, because changes in this area were well underway before the royal commission opened, so it seems like a good idea to hit the topic before we dive in to that event proper. Second, while the coming changes to education and training standards will have a seismic impact on the sector, perhaps just as much as the royal commission did, the two events are quite separate. Finally, and independent to both those issues, education standards in the early days of the industry were so shockingly bad that you wouldn’t have believed me if I’d started with it.

In the 1980s, as we’ve seen, being a financial planner required no training whatsoever. You had a product to sell and you sold it. No one was pulling up the Avon lady for calling herself a beautician so, what the heck – you’re selling an insurance policy, why not be a financial adviser too.

There was a concerted push by the International Association for Financial Planning to introduce basic training standards across the 1980s and 1990s, so that those entering the industry from the likes of accounting or taxation law could separate themselves more from the salespeople. By 1990, three cohorts of students had been through the Diploma of Financial Planning before they decided to actually grade the exam results with a distinction, credit, pass or fail. By 1993, the organisation, now known as the Financial Planning Association, had developed a Diploma of Financial Planning, which you could do by distance education through Deakin University. Without being too unkind, the tagline for the course was ‘The public gets what it deserves’, which, when you consider the decades of disastrous advisers that followed, makes you wonder if they were underestimating the public or themselves. The eight-unit course took two years on average to complete. At that point, 700 people across the country had gone through it.

Education standards in the industry were bolstered again in 2012, with the introduction of a Regulatory Guide from ASIC called ‘RG146’. ASIC said its purpose was to ‘Protect consumers of financial advice by ensuring that those who provide the advice are competent to do so’, and to help financial services licensees ensure their advisers were adequately trained. RG146 split the qualifications into two tiers to allow for more specialised training, but could still be completed online for a few thousand dollars of tuition fees.

Dante De Gori from the FPA conceded, ‘It really bastardised the system, so you were getting people who, in a matter of weeks, came out with a certificate saying they were qualified and then they just had to find an employer (licensee) to take them on and say, “Yeah, you can start giving advice.” That’s where some of the industry’s problems have come from really. And there were education providers basically competing for enrolments, because obviously aspiring financial planners were saying, “Well, if it’s only going to take this long to get qualified, I’ll do it.” People were also competing on price and so the cheapest and easiest providers were getting people to sign up for their courses.’

When you consider the easy access into the industry in its formative years, allowing people to operate with no concept of what the actual profession was and reckless abandon regarding how it’s done, is it any wonder that there was some truly poor behaviour? A key concept to understand is that a lot of these people didn’t know what they didn’t know. Take this completely unrelated tale as an example. McArthur Wheeler was an American man who, in 1995, walked into two Pittsburgh banks in broad daylight with no disguise, even stopping to smile at the surveillance cameras, and robbed the tellers. When that vision was played on the 11 o’clock news it took less than an hour for police to find and arrest him. When detectives showed Wheeler the video tapes he mumbled, ‘But I wore the juice.’ Mr Wheeler was under the assumption that rubbing lemon juice on his face would make it invisible, because it can be used for invisible ink on a sheet of paper.

Sometimes it’s hard to understand how someone can be so plainly stupid. McArthur Wheeler’s story is referenced at the beginning of the first published paper about the now-seminal research conducted at Cornell University by David Dunning and Justin Kruger to explain what’s become known as the Dunning–Kruger effect. The Dunning–Kruger effect seeks to explain why the incompetent are often the most confident, and the expert are often riddled with self-doubt. The theory has seen a resurgence in popularity of late, with a number of news outlets applying it unfavourably to United States President Donald Trump.

Almost everyone can think of an instance where they’ve suppressed the urge to roll their eyes while someone prattles on about something they clearly know nothing about. Many of us would be able to think of a time, especially in our younger years, when we might ourselves have overestimated our own expertise and done the same thing. Far from being a disorder, it’s more a symptom of the human condition. Comedian John Cleese summed up the Dunning–Kruger effect quite bluntly during an interview played on the Official Monty Python YouTube channel: ‘the problem with people like this is that they are so stupid that they have no idea how stupid they are. You see, if you are very, very stupid, how can you possibly realise that you’re very, very stupid? You’d have to be relatively intelligent to realise how stupid you are.’¹

In an industry such as financial advice, many of the conditions are perfect for those operating under the delusion of the Dunning–Kruger effect to blossom. If you never had to go through an education system where you might be graded and told you’re a poor performer, and if you weren’t being monitored by a regulator closely, it would be easy to float through life blissfully unaware of how poor your advice truly was.

The biggest overhaul of this state of affairs is already underway, and it is set to see about a third of all planners exit the industry because they simply can’t keep up with the new training requirements. Anyone brand-new joining the industry will now need to have an approved degree, undertake a professional supervised year, complete an exam and annual professional training, and adhere to a code of ethics. Someone already in the industry who doesn’t have an approved degree or an unrelated degree will need to complete a graduate diploma, consisting of eight subjects, by 2024. Even those who do have relevant degrees will still need to do a bridging course.

This will all be overseen by a new authority called the Financial Adviser Standards and Ethics Authority. Called FASEA for short, the authority was established under the Corporations Act to enforce a code of ethics for advisers as well as ensure compliance with the new education requirements. While it was established in 2017, the authority’s power grew on 1 January 2019 when the stricter requirements came in, which included the need for an approved degree or the equivalent level of training and experience.

According to ASIC, as at April 2018 there were 25,000 registered financial planners in Australia, and 8704 had a bachelor’s degree or higher qualification. That’s around 35 per cent of all advisers. There’s been a huge amount of pushback within the industry against the authority bringing in any changes, while at the same time a universal acknowledgement that changes need to be made. Sound familiar? Most people outside of financial planning I’ve spoken to about this have said, ‘Huh? Wait – you don’t need a degree to be a financial planner?’

One story from the ABC News program The Business became a flashpoint for the debate. Reporter Andrew Robertson interviewed Elizabeth Hughes, a Sydney-based planner who had nearly twenty years’ experience, a university degree and a diploma in financial planning, and had achieved the industry’s highest designation, becoming a Certified Financial Planner. But because her undergraduate degree was in Psychology, it doesn’t count. In the interview, Hughes argued, ‘I feel quite aggrieved that they have put me in the same basket as, for example, an ex-hairdresser who did one of these one-month RG146 courses and then was able to call themselves a financial planner.’ She went on, ‘And I would actually argue [a psychology degree is] quite relevant to what I do, because there are a lot of behavioural aspects, certainly in investing and how people make decisions around their money.’ She’s not wrong, and she’s undoubtedly one of the best examples of a planner being caught in the crosshairs of change. But the underlying assumption, which I’m not suggesting applies in this case at all, is that decades of experience shouldn’t count for anything if you’ve been poorly trained and dispensing below-average advice for a long period of time.

It’s particularly true for the bad apples operating in the industry, and there are some notorious examples of planners doing everything they can to work around the education requirements. In 2014, the Fairfax media organisation uncovered what’s become known as the ‘Penske File’, named after the folder of documents on which the Seinfeld character George Costanza pretended to work. The folder contained the answers to an exam that advisers were required to take each year to keep their accreditations up to date. Macquarie Group denied the existence of the file for years as journalists Adele Ferguson and Ben Butler repeatedly questioned them over it, before a copy was handed to ASIC in 2014.

The Association of Independently Owned Financial Professionals (AIOFP) was lobbying mainly Labor MPs over the changes, thinking Labor would be more sympathetic. The association argued the changes would disproportionately affect women because female financial planners are more often than not caregivers for their children as well, and they wouldn’t be able to handle the extra training on top of their work and their home duties. That lobbying didn’t seem to find its way into any press releases. The more widely held view is that the new standards will force many older advisers out of the industry, because they’re the least likely to have a degree qualification and won’t be interested in doing extra study for an industry they’re set to retire out of soon.

The new FASEA requirements also separated out those planners who are registered as financial planners from the beginning of 2019, which saw a huge spike of people registering even if they didn’t have the right qualifications. This segregation for those who registered before and after the cut-off is known as ‘ring fencing’.

When I sat down with the FPA’s Dante De Gori at the end of January 2019, he said, ‘I’m getting reports now that there have been 30,000 by the end of 2018 because a lot of people were being put on the register, so that they would be deemed as an existing individual, so therefore they wouldn’t have to go through the whole new process, they would just have to upskill and they also have until 2024 to do it.’ Ironically, the changes mean De Gori will no longer be able to call himself a financial planner, despite heading up the Financial Planning Association. ‘I would have to go in as a brand-new person and effectively go and do postgrad study in financial planning.’

A survey done by Money Management magazine, published on 31 January 2019, found that as many as a quarter of degree-qualified financial planners are facing the cost of further education because their qualifications are not recognised under FASEA. The survey revealed that around 6 per cent of respondents held ‘non-relevant’ degrees while a further 18 per cent held ‘non-relevant’ degrees as well as diplomas of financial planning or other similar qualifications.² Although it is estimated that one-third of all planners will exit the industry, the Money Management survey also said that some advisers believed this figure could grow depending on which party won the 2019 federal election, and when parliament bans grandfathered commissions.

The possibility that many older planners are set to leave the industry at the same time has left many concerned there will be a vacuum of experience and will in turn make it inversely harder to become an independent adviser. That’s because those wanting to become independent advisers need to do supervised experience under an independent adviser, so if there are fewer out there fewer will be trained too. One organisation watching closely has been CPA Australia. Public practice manager Keddie Waller says, ‘You not only meet the education standards now, but separately to that you would have to become authorised and the only way you can do that at the first point is to work under someone else’s licence. And because something like 80 per cent of the market is controlled by the Big Four and AMP, through all of their sub-brands, a lot of our members feel they don’t want to be associated with the big end of town, and that perceived product push – they want to be independent.’

Phil Anderson from the Association of Financial Advisers argues, ‘There are still people practising as accountants who don’t have university degrees. So when you go through the transitions, that grandfathering phase, there is always a legacy. And we’re risking the view that it’s all about education when, when you look at financial advice, experience is equally important. People who have experienced the ups and downs in the markets or they’ve worked with clients who, from an insurance perspective, have suffered loss of family members or they’ve had someone who’s been injured, and they’ve needed to work through a Total Permanent Disability claim with them, that experience cannot be underrated. It’s also not to say that these people haven’t done education in the past: many of them have diplomas, even large percentages have also got advanced diplomas, so it’s not as if they have nothing.’

Of course, the big question is: will all these big changes actually help to change the industry? As Robert M.C. Brown says, ‘I have some sympathy for older financial planners without a university degree, because fundamentally degrees don’t make you honest, they just make you well educated.’ Bernie Ripoll, the architect of the FoFA reforms that aimed to professionalise the industry, shares his sympathies. ‘Study in itself doesn’t make professionalism. So simply doing more study doesn’t make you a professional or be recognised as a profession. It takes all of the elements, takes the sort of protections and consumer outcomes that you would expect, so when we see an improvement in that it takes the right regulatory frameworks that people adhere to: codes of ethics, for example, and standards, and it takes an education level. Education is really important, no question about that. But there are really well-educated people who are completely unethical and rob people every day.’

Money Management journalist Hannah Wootton raised the point that the idea of seeing a planner who was still studying might make you doubt their abilities, ‘that saying you were studying a financial planning degree could make you seem as though you’re on your L plates, when you’re really an experienced planner’. But Wootton also acknowledged that this change was part of a long process to regain the trust of the public. ‘It would be worth remembering as well that it took the industry a long time to hit the point of poor reputation that it now has.’ She also wrote about wanting to see more women in financial planning, arguing that women’s natural empathy with their clients made them ideally suited to the industry.³

There’s also an industry-wide push to have financial planners complete a degree in financial planning. The FPA established the Financial Planning Education Council (FPEC) in 2011 with the sole purpose of creating a degree-level curriculum, in order to encourage universities to develop undergraduate and postgraduate courses in financial planning. Twelve universities now offer degree programs based on the curriculum, including Griffith, Deakin, Charles Sturt, New England, Western Sydney and Curtin. South Australia remains the only state that doesn’t have a university offering a FPEC degree, but there are reportedly another nine universities looking at getting on board. Before the compulsory requirement for financial planners to get a degree, the incentive for universities to deliver these courses just wasn’t there.

While advisers need to hit the books, there’s another education problem worth touching on, and that’s the problem with financial literacy across the board. It’s an issue often trundled out by the financial advice profession to shirk responsibility for a lot of the poor advice taken up by customers. But it’s a problem that feeds on itself: it’s hard to be sceptical of a planner when you don’t understand some of the basic concepts they’re referring to. It’s estimated around half of all Australians do not understand basic concepts considered to be essential for financial literacy. In a major survey called the Australian Financial Attitudes and Behaviour Tracker, carried out by ASIC and Ernst & Young in 2017 and 2018 and published in March 2018, roughly one-third of respondents said they understood the concept of risk/return trade-off (that is, that high-risk investments generally had a higher possibility of failing as well as a possibility of high returns). Around one-quarter of respondents had heard of the concept but didn’t understand it, and roughly two-fifths said they’d never heard of it and didn’t understand it.⁴

Another survey of 1500 Australians, completed by ME Bank in June 2017, found 42 per cent didn’t understand compound interest. Alarmingly, only 13 per cent of those surveyed rated their knowledge as below average, while the same survey showed that 60 per cent of the respondents didn’t have basic financial knowledge.⁵ You don’t know what you don’t know.

One adviser, Will Hamilton, has become an outspoken member of the financial advice community, publishing a number of op-eds in The Australian. He says a lot of the risk that customers will be duped into signing up for poor financial products comes down to their own level of financial literacy. He recalls one couple he met recently. ‘You could just tell that these people were basically completely financially illiterate, so therefore going to a retail outlet and someone who would give them retail advice wasn’t the right solution. They just needed the comfort of knowing that they’ll get their monthly cheque, so for some people industry super is the right outcome.’ He says he refused to take any money for that advice session, so they offered him a jar of homemade raspberry jam.

11

Some things change, some stay the same

If we take the beginning of the financial advice industry in Australia to be around 1980, and we know it was in 2018 that the royal commission threw a stick of dynamite into the whole thing, we can certainly say that in those almost thirty years we’ve seen rapid amounts of change. What started out as just a few hundred advisers had morphed into a $4.5 billion industry. The internet revolutionised the entire value proposition, giving consumers better ability to compare and check advice than ever before. In that time there have been dozens of reviews, inquiries and campaigns by the regulator. The Future of Financial Advice reforms were the line in the sand that would finally professionalise the industry. But the same issues keep coming up again and again, which is made very obvious by the shadow shopping exercises done by ASIC.

The idea behind shadow shopping is to get the most authentic experience from seeing a financial adviser, and to catch them out at their least guarded. It’s similar to supermarkets or clothing stores sending in undercover shoppers to assess how the staff treat customers when they’re not being supervised. Except in this case the customer is real, and they report their experience to ASIC after the fact. It’s a particularly important ‘quality control’ method for the financial advice sector, which is notoriously sloppy at note-taking and record-keeping. In 2011, ASIC partnered with a research agency to connect with elderly Australians seeking financial advice. They wanted people who were genuinely looking for advice to proceed as they normally would, and report back to ASIC about how they found the experience. They would also agree to let ASIC review the advice they received. In the end, sixty-four people participated in the study.

The study revealed that while the majority of advice examples reviewed were adequate, 39 per cent of the examples were poor, and just two examples were assessed to be good quality advice. What was really interesting from this study, though, was the reported satisfaction by the customers: 86 per cent of participants felt they had received good quality advice, and 81 per cent said they trusted the advice they received from their adviser ‘a lot’.

The twenty-five cases of poor advice all involved poor strategic advice. Poor strategies generally occurred where the client’s expressed needs and objectives were not addressed. This commonly included the failure of advisers to address areas that did not directly involve investment products. For example, several clients had borrowings and debts that were not addressed, in circumstances where a reasonable adviser would have considered these debts.¹

At the same time the research was conducted the issues just kept coming up. With doubts growing over the effectiveness of the regulator, the lack of good quality advice and the frequency of poor advice were both causes for concern. While in this book we’re focusing on a few examples, there’s evidence that bad advice was regularly being dispensed. During the royal commission, Commissioner Kenneth Hayne observed that much of this could be attributed to the fact that advisers prioritised making sure the systems tracking the money coming in the door were working, even if the systems ensuring that customers received a return weren’t.

NAB blamed issues with its Navigator Wrap platform for $25 million of compensation it was forced to pay to 62,000 customers. The issues included tax estimation and income estimation errors. PricewaterhouseCoopers was brought in to independently manage the payout process and overhaul the system’s integrity, and the reporting processes.

Macquarie Investment Management Limited was forced to refund $5.5 million to around 2300 clients because of system errors. The errors occurred between 2001 and 2014 on the Macquarie Wrap platform. What makes the Macquarie case interesting is the flow-on effect it had down the line because of ‘white-labelled’ products. It wasn’t just Macquarie advisers affected, it trickled down through eight financial advice groups, including Commonwealth Securities Limited (CommSec) and smaller licensees like Optimus Financial Group, FuturePlus Financial Services and Symes Warne & Associates. Between 2001 and 2014 there were two administration fee errors on a number of products using the Macquarie Wrap platform, including failure to apply sufficient tax credits to the GST portion of client fees, and the charging of administration fees which exceeded the maximum stated in the product offering documents. Deloitte was brought in to mop up the mess, and in the process discovered another problem with the administration fee in an offering document.

And the calls for a banking royal commission kept coming.

12

Let’s break it down

There’s three radically different kinds of case, I think: selling what you can’t deliver, selling what you won’t deliver and selling what you don’t deliver.

Commissioner Kenneth Hayne, 16 April 2018¹

In 2016, Dr Evan Jones, a retired political economist from the University of Sydney, wrote a scathing op-ed for the Sydney Morning Herald about the ongoing scandals in the financial services industry. ‘The system is seriously broken. Yet, in retrospect, this situation is entirely predictable, foreordained.’ The circuit-breaker many were calling for was a royal commission.

That same year, at the Press Freedom Australia dinner in Sydney, investigative journalist Adele Ferguson was also repeating her calls for a royal commission, off the back of the numerous stories she’d written on misconduct in the financial services industry. ‘Sadly,’ she said, ‘such things will continue to happen without a serious change in the culture of these companies, better laws and penalties and a stronger backbone from our corporate regulator to use the powers that it has.’ She went on, ‘Without a royal commission into the financial services sector, one thing is for sure: there will be more scandals and more whistleblowers wanting to do the right thing. But will they come forward under the current system that doesn’t protect them, leaves them open to smear and innuendo and doesn’t compensate them for the damage to their careers? Who could blame them if they fail to act in future if we fail now on the royal commission? Not me.’

For every person calling for the royal commission, there were plenty more who thought it was a politically motivated stunt, or at least a complete waste of time. One outspoken critic of the idea of a banking royal commission was ethicist Dr Simon Longstaff. He may well be the only person to have vocally criticised calls for a royal commission and also found himself being quoted by Kenneth Hayne as an authority on the ethical issues facing the financial advice sector. He does operate as something of a contradiction. Now the head of The Ethics Centre in Sydney, he’s a professional philosopher who’s become a trusted adviser to the banks, among other clients. He describes his upbringing as fairly modest, one which saw him working as a cleaner straight out of high school before his studies took him to Cambridge, where he obtained his doctorate in Philosophy. When he returned to Australia, one of his first acts to stoke the public consciousness was when he pulled together some lawn chairs at Martin Place in the Sydney CBD and placed cardboard signs that said, ‘If you want to talk to a philosopher about an idea, take a seat’. This became a regular event for him, eventually drawing attendees from around the world.

On 15 April 2016, he penned an article eviscerating those calling for a banking royal commission, saying that ‘The flavour of the current debate is laced with a discernible dose of revenge in anticipation of “evening of the score”.’ He defended the work of the regulators ASIC, APRA and the Australian Competition and Consumer Commission (ACCC), saying, ‘Unlike a royal commission, most of what is done takes place behind closed doors – meaning that the community doesn’t see the extraordinary diligence with which the regulators go about their work. This is as it should be. Except in cases of criminality, it is often better to work quietly to identify and fix problems rather than splash them across the news. There’s little virtue in grabbing a headline if you leave the world no better for it.’²

The banks never wanted a royal commission into themselves, for obvious reasons, and there were plenty of members of the government who didn’t want to call it either. Then-Minister for Revenue and Financial Services Kelly O’Dwyer called arguments in favour of a royal commission ‘reckless and ill-conceived’ in an opinion piece on the Treasury website where she argued that the government was already cracking down on the banks, so what was the point? In the weeks before the commission was called, former prime minister and Liberal Party elder John Howard told Sky News that proposing the royal commission was ‘rank socialism’. He urged the Nationals not to take out their anger on the government at the result of the same-sex marriage vote in the weeks before by threatening to cross the floor over it. But the Nationals were ready to vote against the Coalition, with Nationals MP Llew O’Brien saying he’d join his colleague George Christensen in voting in favour of a royal commission in the lower house, with rumblings the Nationals could allow a free vote or even switch the party stance entirely.

With the possibility of a Coalition split, and Labor adamant that a royal commission would be called if they won the election, the banks saw the writing on the wall and decided it would be better to get on the front foot. Maybe they expected more sympathetic terms of reference if it was Malcolm Turnbull calling the commission, before any chance of a change of government at the 2016 federal election. In the letter that was sent to the Treasurer Scott Morrison, signed by each of the Big Four bank executives and CEOs, there’s one statement that rings true: that the speculation about a commission being called was hurting their bottom lines. One paragraph said, ‘It is hurting confidence in our financial services system, including in offshore markets, and has diminished trust and respect for our sector and people. It also risks undermining the critical perception that our banks are unquestionably strong.’ If there’s one thing we know the markets loathe, it is uncertainty.

There was still plenty of scepticism about the idea of a royal commission, and the banks writing to the government to ever-so-politely request one didn’t show that there was any great reckoning coming upon them. When Malcolm Turnbull finally fronted a press conference to announce that a royal commission would be called, the prime minister admitted defeat, saying, ‘Government policy remains the same until it is changed’, and went on, ‘While we regret the necessity of the decision, we have taken it is in the national economic interest.’³

On the day after the letters patent for the royal commission were issued by the governor-general to officially appoint Kenneth Hayne as the head of the royal commission, Commissioner Hayne wrote to sixty-one financial services entities and demanded they detail any misconduct or behaviour they had identified that had fallen below ‘community standards’ since 2008, and gave them six weeks to report back. All bets were off when the commissioner confirmed that any previous confidentiality clauses in settlement agreements and non-disparagement clauses in employment, settlement or severance agreements weren’t going to preclude anyone from giving evidence at the commission hearings. In the end, 10,323 submissions were received from the public, 9 per cent of which were concerned with financial advice. According to the commission, 61 per cent of public submissions were dedicated to banking, which dominated the submissions, and superannuation just edged out financial advice in the public consciousness, attracting 12 per cent of submissions.

In that letter sent to the treasurer to ask for the royal commission, the banks raised an important point. Since the global financial crisis, they’d taken part in fifty-one substantial reviews, investigations and inquiries. If you counted the decades before the GFC, that number would easily double. Once the public hearings began, however, many were reminded of words spoken by a young John F. Kennedy: ‘When we got into office, the thing that surprised me most was to find that things were just as bad as we’d been saying they were.’ Our professional ethicist, Simon Longstaff, would soon after admit, ‘I was absolutely wrong. I thought that between the Reserve Bank, APRA and ASIC, they would uncover and prosecute all the things that needed to be known, and it was really inconceivable to me that there would be so much more to be discovered. It won’t be the first and last time I was wrong. It was completely wrong not to have seen the royal commission as an incredibly powerful tool, and I think the genius in the way in which Hayne and his team have proceeded is that they have brought to attention a set of concerns that have gone well beyond what I think most people would have thought happened.’

Before the banking royal commission was called, it would be fair to say Kenneth Hayne had a limited public profile, as did the lead barristers Michael Hodge and Rowena Orr. Once the commission started, Kenneth Hayne’s withering stare would be recognised across the country, while his barristers’ dogged questioning and meticulous preparation would see them appear in high rotation on news bulletins, giving them more exposure than most barristers would ever dream of or, possibly, want. Those of us in the press pack watching them day in, day out became familiar, if not slightly obsessed, with their style and quirks. For instance, we knew that Rowena Orr had elicited the response she was after when she’d say, ‘I see,’ and then the onslaught would begin. Michael Hodge’s favourite phrase was ‘break it down’. It came up often enough when explaining a concept or trying to trap someone in their own logic that there were suggestions of a drinking game among the press. But ‘break it down’ he did: their logic, the system, the whole damn thing.

Many weren’t prepared for the difference a lawyer’s analysis would make. Previous inquiries had either been run by industry participants or politicians, save for one Royal Commission on Monetary and Banking Systems held in 1936 and 1937. That commission remarkably examined two hundred witnesses in seven different cities, but sought more to examine the economy as a whole rather than uncover misconduct, and is more of a footnote of history. Much of the misconduct that would be uncovered in this royal commission was found because of the forensic, analytic approach that Commissioner Kenneth Hayne took, with a simple question in mind: is this behaviour the community expects?

The extraordinary thing the royal commission was set to achieve was forcing big banks and businesses to justify their behaviour not to industry watchers, but to the general public.

However, as the commission progressed, even the old guard were going to be stunned at what was uncovered, in particular the deliberate fraud. Sky News host and business journalist Janine Perrett sensationally tweeted, ‘I thought nothing could shock me anymore, but in my forty years as a journo, most of it covering business, I have never seen anything as appalling as what we are witnessing at the banking RC. And I covered the 80s crooks including Bond and Skase.’⁴

Those who followed the banking industry closely had indeed known about much of the misconduct for some time, including fees for no service. Former High Court judge Kenneth Hayne was going to be the man to rip these stories out of the business world and thrust them directly into the public spotlight. The key strength of the commission was not measuring the misconduct against the law, but against what an ordinary Australian would expect. The two absolutely did not match up.

13

Money for nothing

Charging for what you do not do is dishonest.

Commissioner Kenneth Hayne, Final Report¹

There was no shortage of scandalous behaviour uncovered by the royal commission. Banks and financial services firms had been caught lying to regulators, passing cash-stuffed envelopes around bank branches to bribe lenders to skip necessary checks, and even deliberately targeting problem gamblers with credit products they couldn’t afford. However, it was the most widespread and simple act of dishonesty the commission brought to light that’s left a lasting impact on the average Australian. Ask any punter on the street what they remember of the banking royal commission, and it’ll be that those people will charge you money for nothing.

Although this had in part been reported on within industry circles, the true extent of the scandal and the sheer number of people complicit in it were revealed by the royal commission. For many doubters who said the royal commission wasn’t necessary, the revelation that some of those customers being charged were dead changed their mind. Before we get to dead people being charged for advice, however, customers who were very much alive were also being charged for advice they never received, and that’s really where the story begins.

When Peter Kell, the deputy chair of ASIC, fronted the banking royal commission, he said the regulator knew of eight financial services licensees that had been charging fees for advice that was never given. That included the big dogs ANZ, CBA, NAB, Westpac and AMP as well as smaller providers Yellow Brick Road, Colonial First State and Bendigo Bank.

The first hard evidence ASIC had about fees being charged for no service was a breach report from ANZ in August of 2013. With the FoFA requirements becoming compulsory in 2013, the banks were looking at their compliance much more closely. Peter Kell told the commission, ‘As a result of that, it was apparent to ASIC that this may exist in other entities, and we received other breach reports subsequently. We made a public announcement that we were looking at this in more detail in 2015, and that generated some subsequent breach reports.’²

The ASIC Wealth Management Project was launched in October 2014 to investigate the big players. The corporate regulator would estimate that, by 2019, the Big Four banks and AMP had charged an estimated $1.15 billion in fees for advice that was never given. Behind the jaw-dropping realisation that people presenting themselves as professionals were pocketing cash for advice they clearly never gave is the much more fascinating question, how did it all happen?

AMP was first up at the commission and would fall the fastest and the hardest. It was a whole lot worse for the wealth manager, because not only did they know about the issue, they had built their business model around it. Founded in 1849 as the Australian Mutual Provident Society, AMP started out in the life insurance business. Over 170 years of operation in Australia, the company evolved into a publicly listed, global wealth manager. Its iconic headquarters building looks out over Sydney’s Circular Quay and was personally opened by Prime Minister Robert Menzies in 1962. Like any mutual, AMP was established to benefit its members. In 1998, AMP demutualised and was listed on the Australian Stock Exchange, when AMP Bank opened for business. While they were driving strong profit for their members, there’s no doubt that AMP’s conduct was now anything but in their interest.

As Kenneth Hayne would go on to describe in the Interim Report, ‘It is not at all easy to understand why so many employees and executives at AMP were unable to recognise that to charge fees for services that will not, and cannot, be provided is not just unlawful, but also ethically and morally wrong … It is plain to anyone who pauses to think about the proposition.’³

It’s not as if there aren’t protections against this already in place. You’ll remember that when selling a financial product, there are a few obligations that an adviser needs to keep track of. One is providing their clients with a fee disclosure statement. The other is providing a fee renewal notice to clients every two years, allowing the client to opt in to the service and agree to keep paying the fees. The key factor here is that the fees are normally automatically paid to the adviser out of the platform. Once the customer’s cash is in a platform, it’s from there that the adviser divvies it up into things like managed funds or investment products.

Here’s where it gets tricky, though. The fees the adviser gets are normally taken out of the client’s cash in the platform, but the fee would go to the licensee first, which in this case is AMP, who would then transfer it on to the adviser. Why does that matter? Because it’s up to the adviser to be checking that the client has been given the advice they’re paying for, as well as that they have received the fee disclosure statement and opted in every two years as well. The systems AMP had in place didn’t check each charge against whether there was a current fee disclosure statement. AMP’s process for picking up problems of this nature was audits of advisers every three to 24 months on a rolling cycle, depending on how high risk they were.

This issue came to a head when advisers decided to leave a company. The big value of financial advisers to employers is the people they have on the books that will keep bringing in those fees each year. That value will depend, among other things, on what kinds of products the clients are invested in and how loyal they’ve been to the adviser, but generally it’s the kind of thing advisers are usually very keen on buying off each other. The problem was, there wasn’t always another adviser to pass on that book to. AMP saw the value in retaining these books too, so if the adviser couldn’t find another adviser to sell to, AMP offered itself up as the ‘buyer of last resort’, or a BOLR (pronounced ‘bolar’). The AMP policy was to buy those books back at roughly four times the value of the ongoing revenue of the products, which was judged on the fees they’d been able to charge in the previous year.⁴

This is where the alarm bells should start ringing. You’ve got a very valuable book of clients’ policies that has no adviser attached to it. Therefore, no adviser is providing the service they’re charging for and no adviser is checking that they’re receiving the proper disclosures from the clients. The way AMP explained it away, in particular to junior staff, who’d started questioning the legality of the process, was that they felt they could legally hold the clients for up to 90 days without an adviser attached. Somehow AMP had come to this magic number as their safe limit and called it ‘the 90-day exception’.

There’s a common fable about a frog and a pot of hot water. If you throw them straight into the boiling water, they’ll jump right out, but if you put the same frog in a pot of cool water and gradually turn up the heat, they’ll die before they realise the water is boiling. At AMP, the water kept getting hotter but nobody noticed. They too had become good at monitoring the money coming into the business, but not so good at checking why.

Michael Hodge grilled AMP executive Jack Regan about this in one of the more excruciating exchanges of the banking royal commission.

‘Is it fair to say a significant problem with that until very recently was that AMP had no capacity to be able to provide any service to those clients that it bought?’ Hodge asked.

Mr Regan responded, ‘Where they’re fee-paying clients.’

Mr Hodge replied, ‘Sorry, is that suggesting you did have capacity to service clients who weren’t fee-paying clients?’

Mr Regan’s argument was that they could charge clients who were paying by way of commission, because the requirements were less stringent. But it was also equally impossible. Mr Hodge summed it up when he said, ‘I see, they don’t really require any servicing, therefore it’s possible to service them?’

Regan: ‘So the servicing is more reactive.’

Hodge: ‘And is what that means [is] that AMP had a telephone call centre that you could call into?’

Regan: ‘That’s correct.’

Hodge: ‘And that telephone call centre wasn’t staffed by financial planners?’

Regan: ‘Generally, no.’

Hodge: ‘So they couldn’t actually provide financial advice?’

Regan: ‘That’s correct.’

Hodge: ‘It was a purely administrative call centre?’

Regan: ‘Service-based.’

Hodge: ‘I’m sorry, I’m not sure what that means.’

Regan: ‘Well, providing services to those clients. So, for example, checking balances or undertaking transactions, notifications of changes of address, things of that nature.’

Hodge: ‘Yes. Administrative services, rather than providing any advice at all?’

Regan: ‘That’s correct.’

Hodge: ‘And so when you say it was possible to service commission clients, that just means so long as they didn’t require any advice, then AMP didn’t have a problem?’

Regan: ‘That’s correct.’

Hodge: ‘The problem was all of the clients that were paying fees for advice?’

Regan: ‘That’s correct.’

Hodge: ‘Did that come as a surprise to you, that there was no lawful basis for doing that?’

Regan: ‘No, not a … no. It’s not a surprise that it’s not lawful.’⁵

Drawn out in excruciating detail was the piece of information the commission knew it needed to find all along: that AMP had been deliberately charging customers fees for advice they knew their customers couldn’t possibly access. Plenty of other banks were also surreptitiously charging fees for no service, but at least they had advisers attached to customers.

Like any crime, which this may still turn out to be, it’s the cover-up that will get you. So Michael Hodge persisted: ‘All right. And so then whatever the particular matter is was something you then felt you needed to bring to the attention of the CEO? … That is, they had been specifically advised it’s not lawful to implement this ninety-day exception and they just went ahead and implemented the ninety-day exception?’

Verbose as ever, Jack Regan replied, ‘That’s correct.’

Hodge: ‘And that was the point of particular concern?’

Jack Regan was about to take another hit. ‘That’s correct. It had previously been described as an administrative oversight. What was different is that we became aware that it was a conscious business practice.’

For one, they’d internally identified it as a conscious business practice in 2016, when they discussed the risk that telling clients might prompt them to rethink their investment with AMP. ‘The rationale is that these clients are currently paying for a non-existent service and issuing an FDS [fee disclosure statement] may trigger the client to cancel both the ongoing fee agreement and the policy, lodge a complaint with AMP and/or ASIC and possibly request compensation on the advice fees or dialled up commission for the previous 12 months. This would be a very negative customer experience,’ one document read.⁶

For another point, they also notified ASIC, in a notice which read, ‘On behalf of AMP I apologise unreservedly for the regulatory breaches which are discussed below.’ This prompted Michael Hodge to ask what would appear to be a fairly simple question. ‘What are you apologising for?’

Jack Regan replied, ‘I will have to take that on notice.’

Michael Hodge quipped back, ‘That’s not really how it works. Is the answer you just don’t know?’

Jack Regan, ‘Yes, I’m uncertain.’

Even attempts to remediate customers gave nothing away about the seriousness of the issue. The script that was given to call centre workers in 2017 also helped reveal that AMP certainly wasn’t fessing up to anything either:

We want to let you know about a refund you are receiving from us. Some fees were charged in error. This happened due to an administrative error which has now been fixed. We want to apologise for the mistake.

The revelations at this point in the commission’s inquiries were damning. It was hard to fathom that it could get worse. It wasn’t only that AMP knew about the problem and chose to do nothing about it. It was that AMP knew that ASIC suspected there was a problem and they had repeatedly lied to the regulator about it. Michael Hodge was keeping count of this during the commission hearings, because Jack Regan couldn’t keep track.

‘[B]y my count, then, that brings us up to the fifteenth false or misleading statement by AMP to ASIC? I take it you’ve lost count now.’

It was so absurd, those in the hearing room started to laugh.

‘I’m in your hands in that regard, Mr Hodge,’ Mr Regan replied.

The misleading letters to ASIC continued up to seventeen.

‘I think that takes us to seventeen false or misleading statements by my count, Mr Regan.’ Mr Hodge paused.

‘Were you counting that as one or two?’ Mr Regan replied.

‘I only counted that as one, do you think I should count it as two?’

‘I think, in fairness, Mr Hodge, you should.’

‘Okay. The eighteenth false or misleading statement by AMP to ASIC.’

By the end of the morning the tally stood at twenty. AMP had lied to the regulator on at least twenty occasions between 2015 to 2017.

Fraud is not a problem peculiar to financial advice. It exists in almost any endeavour that involves humans, and there’s a particular theory about how it develops in a workplace that explains a lot about what has happened in the financial advice industry. American criminologist Donald Cressey developed what’s known as the ‘fraud triangle’. Essentially there are three elements required for occupational fraud: pressure, opportunity and rationalisation. There are a lot of different ways a person can feel pressured: pressure to succeed or win; pressure to hit targets; sometimes, pressure to hide something like debt or addiction, or even greed. Then, an opportunity needs to present itself: a chance to take something that’s not yours. And finally, rationalisation: the justification to quiet that voice in your head or that ache in your heart telling you that it’s not the right thing to do. In financial advice, this is where the incidence of fraud splits between cogs in the system and the truly greedy.

One huge factor in helping people rationalise their behaviour is when everyone else is doing the same thing, and if there’s a single story that’s used to demonstrate the effectiveness of the banking royal commission, it’s that no one else could have forced AMP to admit it had been lying to ASIC. Frequently.

The BOLR pool was spoken of in industry circles. Many advisers now insist they told their clients not to buy into AMP because they suspected their business model would come crashing down. But no one had any idea one of Australia’s oldest financial institutions was about to be caught out lying to the regulator over and over again. For a long time, even AMP’s own management thought they wouldn’t be caught out, as they succumbed to an extraordinary level of groupthink. Kenneth Hayne described it thus: ‘On its face it reflects a persistent and prevalent attitude of senior persons within AMP that it is acceptable to deal with ASIC other than frankly and candidly.’⁷

Key to revealing this was a single report from 2017 that seemingly made the worst case scenario a whole lot worse.

As the evidence mounted that AMP had been charging customers fees for no service for years, there was a growing sense within the company that the practice might pose a bigger risk than many were willing to admit. So the board commissioned law firm Clayton Utz to prepare a report into the issue. Twenty-five drafts and some 741 documents were exchanged between AMP and Clayton Utz in the five months it took to prepare that single report. Heavily involved in the drafting and redrafting was a man named Brian Salter, who’d worked at Clayton Utz for nineteen years before becoming general counsel at AMP. The commission was concerned not with the fact that so many changes were made during the preparation of the report, but with what one of those changes involved. That is, the removal of the name of AMP chief executive officer Craig Meller from the list of people identified as having been aware of the buyer of last resort policy. Meller was named in an early draft of the report on a list of ‘personnel involved in either the BOLR decision-making and/or the internal process to report to ASIC following the 2015 breach report’.⁸

AMP head of financial advice Jack Regan told the royal commission that he believed Craig Meller’s involvement would have been notified to the board separately, but the commission’s lawyers argued that documents showed that the Clayton Utz lawyer removed his name ‘on the basis that it would attract unnecessary attention to him by ASIC’. Damningly, a further change to the same draft read, ‘For completeness, Mr Craig Meller, CEO, confirmed to us that he was not aware of the 90-day exception and ring fencing and that he did not receive nor was he aware of any of the legal advices referred to above, either before or after the 2015 breach report. This is supported by our investigation and we come to the same conclusion.’⁹

Off the back of the evidence uncovered by the royal commission, ASIC launched an investigation into AMP, which in a matter of months had forced eighteen AMP staff to front up to interviews with the watchdog and hand over thousands of documents. The documents they had trouble getting their hands on, it seems, were in relation to the Clayton Utz report.

The fallout was swift, with AMP putting out a statement soon after the evidence that said, ‘The Board, including the former Chairman, were unaware of and disappointed about the number of drafts and the extent of the Group Counsel’s interaction with Clayton Utz during the preparation of the report. The Board commissioned and received the report. It was not a matter for the Board’s approval.’¹⁰

Clayton Utz quickly hit back, saying ‘Clayton Utz rejects any suggestion that the independence of its investigation and report findings to the AMP Board into AMP’s Advice business was in any way compromised. The terms of engagement stipulated that the investigation was to be undertaken independent of management of the Advice business being reviewed and under the instruction of the AMP Board and its General Counsel.’¹¹

In the weeks after Jack Regan took to the stand, the blood-letting began at AMP. Craig Meller was the first to go. He was followed quickly by Catherine Brenner, the chairperson of AMP who, before the royal commission, was a leading figure in the business community. Her name had also surfaced in the correspondence between AMP and Clayton Utz and she couldn’t resist the calls for her to stand down either. Legal counsel Brian Salter left without accepting that he’d had any role to play in the apparent failings of the board. Board members Vanessa Wallace and Holly Kramer resigned just ahead of the Annual General Meeting of stockholders which might have seen them lose their re-election bids, while another board member, Patty Akopiantz, was not up for re-election but announced she’d be retiring early.

Even as AMP executives fell, the Clayton Utz report wasn’t going away. ASIC took action against AMP and Clayton Utz over the alleged deception in December 2018, trying to use the court to force the law firm to produce the notes from the interviews Clayton Utz had done with current and former employees and executives of AMP. AMP fought against it, saying they were protected under legal professional privilege, which ASIC disputed. AMP ended up completely backing down in March, on the day they were due to file their evidence in the proceedings. Instead they handed over all the documents and agreed to pay ASIC’s costs.

That was enough for ASIC to claim a win, with ASIC deputy chair Daniel Crennan QC declaring, ‘ASIC is determined to take enforcement action against the major banks and financial service providers and to use all legal powers necessary to investigate the significant issue of fees for no service.’ He went on, ‘Entities should take seriously their obligations under statutory notices issued by ASIC, including producing documents in accordance with the specified timeframe and not preventing the disclosure of documents to ASIC by making inappropriate LPP [legal professional privilege] claims. These interruptions delay and frustrate ASIC’s proper investigation. ASIC is pleased that the documents have now been produced but is disappointed that the matter was not resolved sooner.’¹² The stoush was not just a chance for the newly emboldened regulator to throw its weight around but also a chance to show that finding out ‘how’ the misconduct happened was going to be just as important as finding out ‘why’ it happened.

The AMP stock price was plunging each minute Jack Regan was on the stand. The reaction was instant. It was at this point that former deputy prime minister Barnaby Joyce posted to Twitter, ‘In the past I argued against a Royal Commission into banking. I was wrong. What I have heard is so far is [sic] beyond disturbing.’¹³ By this stage he was a backbencher, but it was as leader of the National Party that he’d previously argued against a royal commission, resisting the lobbying of his colleagues John ‘Wacka’ Williams, Barry O’Sullivan and George Christensen. Little did Barnaby Joyce, or any of us, know that the very next day, things were about to get a whole lot worse. The dead customers were coming.

14

I fee dead people

Why did it happen? Too often, the answer seems to be greed – the pursuit of short term profit at the expense of basic standards of honesty. How else is charging continuing advice fees to the dead to be explained?

Commissioner Kenneth Hayne, Interim Report¹

The outright absurdity of the concept catapulted financial misconduct into the mainstream and horrified even the sagest observers of the banks. As hours of evidence about fees being charged for advice that was never given rolled on, it was almost easy to miss the most shocking headline of the entire royal commission. Michael Hodge was ploughing through audits of adviser files at the Commonwealth Bank’s Count Financial subsidiary from 2015, where problems with advisers charging fees for no service had been picked up and progressively ignored. It almost sounded innocuous when he read out one review: ‘Ongoing services have not been provided to clients. One file client dies in 2007. Contact made with deceased[’s] wife in 2013, but no action taken.’²

Michael Hodge continued, ‘And then if we go to 7287 is a report in relation to a different adviser. You will see: Adviser provided advice to a client in 2003 who passed away in January 2004. Adviser is aware that the client is dead but the ASF [adviser services fee] continues to be charged. When asked, he said he didn’t know what to do and he had tried to contact The Public Trustee and had not heard back.’³

With an air of fatigue, Michael Hodge had read out some of the most damning evidence ever to be presented to a banker in this country. Where once death and taxes used to be the only things you could rely on, the banks had found their way around one of them. Dead customers were being charged fees for financial advice. The absurdity of the concept takes a while to sink in. Each year, money was landing in the accounts of these advisers, when they knew they’d done absolutely nothing to earn it.

Compounding the issue was the confoundingly bad evidence given by CBA executive Marianne Perkovic. Perkovic is the executive general manager of Commonwealth Private and, by all accounts, is highly regarded in the bank. She has twenty-two years’ experience in financial services and was the youngest person to be appointed CEO of an ASX-listed company – Count Financial Limited. She was, unfortunately, a terrible witness. She was chastised by the commission’s lawyers, as well as the commissioner himself, for giving evidence that bordered on the deliberately obtuse. But she may have unwittingly become one of the best witnesses to demonstrate the clash between being a good corporate performer and someone who can speak normally to ordinary people.

She was prone to what came across as waffle. She started off slow and, as the time wore on, the questions to her were getting more abrupt and her answers even longer in response. When Michael Hodge asked when Commonwealth Financial Planning discovered the ‘fees for no service’ problem, she began, ‘So there’s obviously three components of issues that CFPL [Commonwealth Financial Planning Limited] was working through …’

At this point Commissioner Kenneth Hayne had had enough. ‘Ms Perkovic, I have hesitated to interrupt you. I will interrupt once … We will get on better if you listen to counsel’s question … If you have to stop and think about the question, do it, but listen to counsel’s question and answer what you are asked.’⁴

They did not get along better after that.

Dead customers being charged fees for advice dumbfounded even the staunchest defenders of the industry, but in many ways it was the least surprising development to those in the industry as well. ASIC had publicly reported on fees being charged for no service as early as 2013, and they suspected the issue as early as 2008. If you’re continually skimming money from clients for no reason, surely a few of them are bound to die in that time. If you’re not checking whether advisers are actually dispensing the advice, how would anyone realise the clients are dead?

Before any attempt can be made to understand why it happened, first we have to appreciate how it happened, which, in each of the cases brought out at the royal commission, was as banal as you’d imagine. While it’s inexcusable, like many things in life there were some extenuating circumstances.

One client’s estate was being managed by the Public Trustee, a low-cost provider of wills that is backed by the state government. It’s mostly used by people who are not leaving much behind. After the case was revealed during the hearings, many who were following the commission rightly asked why these estates were taking years to wind up in order for fees to even be charged in the first place. But it is common for estates, including Public Trustee estates, to take up to a year to be wound up. There are also the cases where relatives are fighting over the estate, which often drags things out and would easily leave small fees going unnoticed. Things can get really complicated where there are testamentary trusts, which distribute assets over a long period of time. The other thing to note about the particular case that Michael Hodge mentioned is that the fee concerned was a comparatively small amount of $65 a month.

By October 2018, six months on from the Financial Advice round of the banking royal commission, CBA said it had reviewed 142,000 accounts and found twelve deceased estates being charged ‘unauthorised advice fees’ between April and June of that year. Yes, we’re talking about a small number of clients, and yes, we’re often talking about small amounts of money, too. But it is quite literally money for nothing. Even if the bank couldn’t get in touch with the right person after the account holder died, most people would assume that they would be capable of simply not charging the fee in the first place. This is, after all, a fee for advice. It’s a fee that’s supposed to represent time taken to understand the client’s circumstances, whether anything has changed in the last year or if there are new opportunities for the client to take advantage of. It’s hard to see how, if the adviser is completely aware that they’re doing it and simply doesn’t care, it’s not stealing.

15

Bad apples

Experience (too often, hard and bitter experience) shows that conflicts cannot be ‘managed’ by saying, ‘Be good. Do the right thing’. People rapidly persuade themselves that what suits them is what is right. And people can and will do that even when doing so harms the person for whom they are acting.

Commissioner Kenneth Hayne, Interim Report¹

‘Unfortunately there are still going to be bad apples. It’s a fact of life. Bad apples are in society everywhere. I wish there weren’t, but you just want to reduce the number of bad apples.’ I’ve lost count of the number of times I’ve heard financial advisers trot out a line like this one. Every problem facing the industry seems to come down to the mythical ‘bad apple’. Even Commissioner Kenneth Hayne felt the need to reference it when he wrote, ‘Consistent with the regulatory focus on compensation, entities’ response to financial advice scandals such as Storm and CFPL [Commonwealth Financial Planning Limited] has frequently been that the misconduct was caused by “a few bad apples” and that the issue did not raise broader or systemic concerns.’²

Almost every single person in the financial planning industry I’ve spoken to in the course of writing this book has been at pains to point out that it was a royal commission into misconduct. The hearings were never supposed to highlight the good in the industry, only the bad. ‘You could have a royal commission into doctors and some horrible things would come out too,’ I have heard. In fairness, I’m sure I’d find it uncomfortable viewing to watch a royal commission into misconduct in the media. The real problem with this ‘bad apple’ argument is that it’s an easy way to shrug off the fact that the apples might be rotten because the tree is diseased. Before the public shaming of the royal commission, there were plenty of bad financial planners taking advantage of their positions for personal gain, and it’s undeniable many were doing so because they were in a system that allowed it.

The easiest examples are the cowboys: the small-time financial advisers who set up shop in a retail centre off the back of a bigger licence and are allowed to roam free. These include people like one Adelaide financial adviser who, on the day the Final Report of the banking royal commission was handed down, pleaded guilty to stealing $4.88 million from his clients. A tall, burly man, James Gibbs had worked in Adelaide’s CBD for many years. He used the access he had to clients’ superannuation accounts to steal their money. In later years the theft became sophisticated enough that he was creating and using false documents, including banking documents and member statements.

Aleks Vickovich, journalist and former editor of industry publication IFA Magazine (short for Independent Financial Adviser), argues there are plenty of people who fall in the space between the deliberately exploitative advisers and the poor performers. ‘I do buy the argument that it is only a few bad apples among the cohort of financial advisers who are truly in the wrong. I don’t buy the argument that the industry’s problems end there. I think there are deep, structural conflicts in the AFSL [Australian Financial Services Licence] in the way that the Corporations Act is structured and the ability to authorise third parties and then have them do your bidding as a result of being an authorised representative, and that goes all the way to the very top – and, more importantly, that’s the reason why the banks bought these organisations.’

Some examples of industry leaders using the ‘bad apples’ excuse include Commonwealth Bank CEO Ian Narev addressing the Commonwealth Financial Planning scandal in the bank’s 2014 Annual Report, where he said that the bank’s achievements were ‘overshadowed by the ongoing impact of the poor actions of some of our financial planners in past years’. Then, in the Commonwealth Bank’s initial submission to the banking royal commission on 29 January 2018, CBA argued that the incidents of misconduct were either to be blamed on individuals or ‘pockets of poor culture’. The same submission also referred to ‘isolated and unauthorised incidents of conduct issues’ about misconduct in Aussie Home Loans.³

In Westpac’s submission to the royal commission, made on the same day, the bank blamed its cultural and governance woes on five different issues, three of which put the focus squarely back on the ‘bad apples’. Those issues were that individuals were failing to follow proper procedures, were making mistakes or were simply dishonest. Even AMP’s interim executive chairman, Mike Wilkins, when opening the AMP Annual General Meeting after their shocking turn at the royal commission, started with an emphatic apology but went on to say, ‘A small number of individuals in our advice business made the decision not to follow policy, and inappropriately charged fees to customers where no service was provided.’

While Commissioner Kenneth Hayne acknowledged that in each of these instances there was a general show of remorse and a desire to do better, he also argued that it showed they were very much missing the point. ‘It ignores the root causes of conduct, which often lie with the systems, processes and culture cultivated by an entity. It does not contribute to rebuilding public trust in the financial advice industry.’⁴

The phrase has become so frequently cited that it’s worth briefly looking at what it actually means, because the way it’s been used and misused reveals a lot about the problem with the financial advice industry.

Geoffrey Nunberg, linguist and author of The Way We Talk Now, explains that its origins are actually quite different from its contemporary usage. He writes that in the nineteenth century it was a staple of Sunday morning sermons and used to be phrased, ‘As one bad apple spoils the others, so you must show no quarter to sin or sinners.’ He continues, ‘Back then, nobody ever talked about “just a few bad apples” or “only a few rotten apples” – the whole point was that even one was enough to taint the group.’⁵ Far from being something you’d shrug your shoulders about, a ‘bad apple’ was something to be feared and guarded against. Now it’s evolved into something of a moral equivalence, where a logical person must resign themselves to the fact that any group will inevitably have a few bad apples.

As investigative journalist Adele Ferguson wrote in a 2017 column, ‘It’s more than a few bad apples, it’s the whole orchard of dodgy advice.’⁶ In that column she discusses a key ASIC report that revealed in the lead-up to the banking royal commission just how dangerous this ‘bad apple’ myth can be. That report showed that between 2015 and 2017, ASIC uncovered 185 advisers who’d been pinged for giving dodgy advice, twenty-six banned advisers and seventy-five who were being actively monitored or investigated.

So who are these mythical ‘bad apples’? The commission revealed quite a few of them. Some of them escaped the worst glare of the commission spotlight, a number of them didn’t. Some were out to help themselves, others were just operating in a system that didn’t give them much incentive to behave in any other way. One of the worst offenders wasn’t required to front the commission at all, but his client’s quivering testimony about the advice that left her family in financial ruin gave a sense of the gravity of a ‘bad apple’.

Jacqueline McDowall was a registered nurse, and you could easily imagine her taking charge in a crisis, barking orders as patients stream in the door. She had her hair tightly pulled back and wore a neat cardigan and high-necked dress. She seemed like the epitome of someone who dots their i’s and crosses their t’s. In a thick Scottish accent, she told the commission how she’d sought the advice of a financial planner at Westpac. She and her husband wanted to retire to a bed and breakfast that they could live and work in through their retirement. On the advice of a BT Financial planner, a subsidiary of Westpac, they sold their family home, which still had a $400,000 mortgage, thinking they could buy a B & B through their self-managed super fund with the equity left over. They had around $200,000 in superannuation in two industry super funds, as well as two car loans and a small personal debt. Not only did the Westpac adviser tell them the plan was feasible, they were also put onto a business banker, who said they could take out a large loan to fund the purchase. Jacqueline says she was told, ‘You’re in the right place, I’m the money man, I can lend you up to $2 million.’

Their adviser was the money man indeed, but mainly for himself. The premiums from the insurance policies he signed the couple up for were $27,000 a year. The ongoing advice fees were $3000 a year and other fees added up to more than $8000. The adviser received commissions of more than $30,000 for that advice. Of course, it’s a relatively well-known fact that you can’t hold your residential property in a self-managed super fund. Jacqueline had no idea of this and trusted the advice of her BT planner. ‘I thought what I was being told was the truth and I just felt that I didn’t see it, and I just felt embarrassed and that I couldn’t tell my family and friends. I just told them that we had changed our mind.’ However, when they went back to Westpac with the property they wanted to buy, they were told it would be impossible to give them their loan because of the rules about SMSFs and residential properties. The adviser suggested the McDowalls buy an investment property instead. Jacqueline McDowall was in tears as she continued, ‘Why would we then buy an investment property to rent to someone else when we haven’t even got a property to live in ourselves?’

Jacqueline McDowall’s story of her dealings with a bad apple was a straightforward one. The advice she received didn’t comply with community expectations, the law or common decency. But her case, like many other ones involving financial planners, seemed to lack the key issue of ill intent. Most planners aren’t out to make their customers’ lives worse; some of the worst planners just seem indifferent to it.

Take, for instance, a company that wound up in January of 2019. CFS Private Wealth was an investment services group run by a man called Graeme Walter Miller. Over the previous decade, Mr Miller had advised clients, many of them retirees with self-managed super funds, to transfer more than $4.7 million to another one of his companies, ostensibly to invest. The Federal Court of Australia found that that money was going straight into his pocket instead, if not being used to cover the interest payments of new clients to cover his tracks in a ‘blatant misuse of investor funds’, as Justice John Reeves described it in his judgment. Graeme Miller also admitted that he received commissions as a result of those applications; that he had written insurance policies for family members and for close friends without their knowledge or consent; and that he had received commissions from those applications as well. He was banned from working as a financial adviser for twenty-five years when the judge found there was ‘no evidence that Mr Miller has demonstrated any remorse for, or shown any appreciation of, the disastrous effects of his wrongdoing on his erstwhile clients … [and] no evidence that Mr Miller has any prospects of reforming his behaviour’.⁷ While transferring money you know isn’t yours is simply taking what isn’t yours, applying for insurance policies that customers didn’t know about so you receive a commission doesn’t necessarily pose the same dilemma. In some ways it’s easy to see how the lines could quickly blur.

Other examples of ‘bad apples’ presented to the commission certainly weren’t as clear cut. While it’s easy to write off the nefarious operator as being heartless and greedy, it’s a lot harder to understand the honest but mistaken. The two highest-profile case studies of this variety were Sam Henderson, the ‘celebrity financial planner’, and Terry McMaster, who collapsed on the stand. Speaking to Terry, you get the sense that he was blindsided by the whole royal commission and he’s still in the thick of the fight. Sam Henderson, on the other hand, seems to have retreated into a different existence and taken a philosophical approach to processing what he went through. Terry is still fighting for his life. In a sense, there’s no coming back from his experience: he will forever be the man that collapsed under the pressure of cross-examination on the witness stand. Even the Interim Report has a caveat in the summation of his evidence that says quite clinically, ‘Mr McMaster collapsed during cross-examination. His evidence must be understood in that light.’⁸

As Robert M.C. Brown says of many of the advisers skirting the edge of the bad apple barrel, ‘It doesn’t mean they’re bad people, they’re not necessarily even unethical people, they’re just conflicted people. And when you conflict somebody, well, naturally you’re going to get a big structural problem in that industry. That’s what humans do, and these rules and incentives were created to achieve sales.’

16

A sharp intake of breath

We have already encountered Simon Longstaff, the professional ethicist who’s dissected the culture surrounding financial services. A former critic of the idea of a banking royal commission, he told me one of the reasons he changed his mind was because of the approach taken by Commissioner Kenneth Hayne. ‘That was incredibly powerful and probably totally unexpected from a former High Court judge, that he would look at the deepest foundations of the law and not just the legislation or the judgment of law itself. In doing so, he was able to get those moments where I think the intake of breath was not just from the community, but even the people that were sitting in the witness box or in the industry, having that terrible moment of recognition that they had become the kind of people who did what was done.’

Terry McMaster certainly experienced a sharp intake of breath, but perhaps not in the way Simon Longstaff described. He will now forever be known as that guy. Since the royal commission, his business has been taken from him and his reputation left in tatters, and a battle with ASIC has ensued. As he rages against the regulator, it doesn’t seem that he has had that moment of realisation Simon Longstaff referred to. McMaster continues to fight against what he says was an unfair campaign against his business, at the expense of going after the Big Four banks, because he’s an easier target. He continues to deny that he’s done anything wrong, and that while mistakes he made have seen him vilified and his business destroyed, the big banks and AMP were able to glide through much larger scandals with their PR machines at work. In his eyes the banks have emerged seemingly unscathed. However you see it, the story of how a comparatively small but influential player in the financial advice market came to dominate the two most controversial weeks of the banking royal commission is an extraordinary one.

Before the royal commission, Dover Financial Advisers had more than four hundred authorised representatives, making it one of the largest licensees in Australia. With its head office in Cheltenham, they had licensees all around the country and an office in Vietnam to assist with administration. Ironically, while Terry McMaster was a witness for the topic of ‘Bad Advice’, he wasn’t actually being grilled about any bad advice given to his own clients. He found himself in the crosshairs of the commission because of two issues: how he went about recruiting planners, and how his company dealt with client complaints when they did arise.

I haven’t been able to find any reliable data on the diversity of the financial planning profession. Let’s just say, if I asked you to close your eyes and picture a ‘typical’ financial planner, and you thought of a white, middle-aged male, you wouldn’t be the only one. It was quite a point of pride for Terry that he had a diverse workforce, that he made a point of hiring women and people of backgrounds and ethnicities he felt weren’t being given a go elsewhere. When the commission’s lawyer Mark Costello asked Terry McMaster on the stand if he was a soft touch, he denied it. It certainly could be said that some of his hiring practices may have been a little too altruistic, but that seems to have stemmed from his unfailing belief in his business’s own systems, as well as his burning desire to be the good guy.

On the stand, McMaster didn’t have the polish of some of the other corporate witnesses. The nerves that were later to boil over initially seemed restrained, but you could sense his wide-eyed disbelief and the cogs frantically whirring in his mind as the questioning began. While being cross-examined, he was asked about three different planners his company had recruited.

One of those planners was Julie Hamilton, who operated a tiny financial planning service in Gippsland, country Victoria. She was in a jam with her licensee, the CBA-backed Financial Wisdom, when she found out they were going to report her for significant breaches to ASIC. Some of the allegations against her included that she failed to ask about her clients’ financial circumstances when she recommended switching their superannuation and insurance, that she didn’t prioritise her clients’ interests and that she failed to disclose fees and charges that would occur because of her advice. By December 2017, she’d find herself banned by the regulator from providing financial services for up to three years. But her email to Terry McMaster in 2014 describes the initial strife she found herself in:

Hi, Terry. On Monday my world imploded. I wanted to come and speak with you face to face, but here goes. I had a teleconference with head of compliance and the state manager for Fin[ancial] Wis[dom]. CBA Financial Planning has been under immense scrutiny over the past few months. And, as you know, Financial Wisdom is owned by the CBA. In my last audit there were issues noted in that particular audit that I had had in my process all through my files in the time with Financial Wisdom. I asked myself at the time, ‘Why are they doing this?’ A few weeks ago, compliance wanted to look at some more files, so I sent them through. Then I got a month’s suspension while this was happening. I really didn’t think it would come to anything. I wanted to resign a month ago, but our BDM said I should wait and, ‘Oh, Julie, we will assist you with your transition to Dover and I will support you. It only takes about six weeks.’ Everything seemed to be falling into place until Monday, and I was told that Financial Wisdom had [reported] or will report me to ASIC with a significant breach. I was stunned and upset and eventually I asked how long it would take for my files to be released before I can move to a new licensee. I am not sure where this leaves me, Terry, or even if I can get a licence again …¹

There’s lots of different ways to respond to an email like this, some better than others. Terry McMaster’s response was, to say the least, surprising:

Hi, Julie. I am not unduly troubled by this. Could not have happened at Dover, because we read every SOA [Statement of Advice] twice, and we would have picked up any compliance concerns early in the piece. Dover will take you on. We are happy to do so with immediate effect, i.e. today or tomorrow, if that helps, and allows you to achieve a continuum of service with your clients.²

Just like that, within two hours of contacting Terry McMaster, she had a new job with a new licensee. This was not the only recruit McMaster was going to be questioned about, with two others who had been flagged as poor performers and linked to serious breaches at past licensees. Ironically, Terry’s willingness to take on people with bad track records is the opposite of one of the major industry issues his case study was used to address. A lack of background checking in financial services is an ongoing problem. In 2017, ASIC warned that they would start naming and shaming the Big Four banks and AMP for failing to do basic background checks on the advisers they hired, by publishing a report card comparing their shortcomings with their competitors. In their audit, the regulator found that of the 149 advisers who had been identified for serious compliance concerns, their bosses hadn’t told ASIC about seventy-three of them. Even of the seventy-six who were dobbed in to ASIC, forty-two were found to have been reported a substantial period of time after the issue arose, even though the law is that they have to be flagged within ten days. At a press conference, Peter Kell, deputy chair of ASIC, said, ‘There is a very deep frustration that both at the point of providing a reference, or checking a reference, when they are employing advisers, far too often firms have hidden the excuse that there are legal impediments. This is calling the issue out once and for all.’³

Except it was a little more like ‘twice and for all’, because in 2007 ASIC had led an awfully similar campaign, if one couched in much friendlier terms. The 2007 operation saw the launch of a reference-checking guide written with Standards Australia. Then–ASIC chairman Tony D’Aloisio said of the publication, ‘We have been careful to design the guide to encourage sharing of information between affected parties consistent, of course, with applicable laws including the National Privacy Principles.’ The ‘bad apples’ excuse also made an appearance in the announcement: ‘As the saying goes, “one bad apple can ruin the whole barrel”, which is why, together with industry, ASIC is encouraging all employers to share this type of information so that dubious or dishonest conduct does not go undetected and so that we maintain consumer confidence in the financial services industry.’⁴

Terry McMaster wasn’t worried about ‘bad apples’ because he had confidence in the ability of his systems to catch bad advice. However, that confidence in his internal checks may have been misplaced. As detailed in his submission to the banking royal commission, which was released following his appearance, Dover Financial Statements of Advice went through three checks. The first check happened at Dover’s Vietnam office. It was described as a ‘quantitative and qualitative review. It involves a detailed check of all supporting documents, together with administrative work. Where issues are identified in the advice, these issues are resolved by the Vietnam office directly with the AR [authorised representative].’

The second step was a review in Melbourne, ‘with the involvement of Dover’s Responsible Managers. This is a technical review, with substantial liaison between compliance staff and ARs. A SOA will not proceed to final review until the compliance team is satisfied that it is satisfactory.’ And the third, final, review was with ‘MLA Lawyers’. ‘MLA Lawyers generally reviews only the SOA itself (and not the supporting documents). This review is focused on ensuring that the SOA complies with the “best interests” test, and the fact that it does so is apparent on the face of the document.’

While Dover did have a relationship with MLA Lawyers, it also had a relationship with McMasters’ Legal, which was kept on a retainer of $3000 for legal advice.

During the questioning, Mark Costello asked, ‘Just pausing there, what’s McMasters’ Legal?’

Terry McMaster replied, ‘That’s basically me. And I think there was a corporate entity called McMasters’ Legal.’

Costello continued, ‘And that was you as a sole practitioner?’

‘In effect, yes. There were some employees.’

‘What type of employees?’

‘Solicitors.’

‘I see. And why was McMasters’ Legal engaged to review statements of advice?’

‘To add a third level of review to the review process, and to help the overall presentation of the statement of advice.’ He then added, ‘Well, if you like, the gravitas, the traction of this statement of advice, the fact it has actually been reviewed by legally qualified people and a third check by solicitors.’⁵

But the thing that brought Terry McMaster down, quite literally, was the way Dover dealt with complaints by clients. The banking royal commission honed in on two pieces of evidence in particular. The first was a letter provided by the now-superseded Financial Ombudsman Service (FOS) to ASIC about a client complaint. Dover had been a member of the FOS, but left after a complaint from a client in 2015. The client said that they’d received inappropriate advice, which wasn’t in their best interests and made a mistake regarding Capital Gains Tax. During the dispute, Dover sent a few letters. The first was to the client, which warned them that making false complaints about financial advisers would open her up to defamation action. It had the ring of a threat, which Terry McMaster strongly denied was the case at the royal commission.

The second document was Dover Financial’s client protection policy, which the barrister Mark Costello described as ‘an elaborate attempt to exclude Dover’s liability for the acts of its authorised representatives’.⁶ The policy spelled out in painful detail that the licensee would not be liable for anything a Dover adviser did that ‘is not within the authority’ provided by the dealer group, which included failing to adequately research a product, consider clients’ personal circumstances, failing to adhere to the law and more. It was something of a ‘get out of jail free’ card, and an extraordinary thing for a lawyer to write.

Mr Costello asked what ‘protection’ the policy gave the client.

Mr McMaster said, ‘I agree with that. It’s a misnomer,’ but then continued to argue there were parts of the document that were in the favour of the client.

Mr Costello said, ‘I’m going to put to you that the way you have just described the policy is simply untrue.’

Mr McMaster disagreed. ‘I’ve certainly understood and regretted the use of the word “protection”,’ he said. ‘That’s obviously been changed.’

It was at this point that Commissioner Kenneth Hayne stepped in to put it squarely to Terry McMaster that the document was misleading, adding, ‘I should perhaps say that if it were misleading or deceptive, that might draw attention to relevant provisions of the ASIC Act about making misleading or deceptive statements.’⁷ That definitely had the ring of a threat. It was enough to tip Terry McMaster over the edge. When he regained consciousness, Terry McMaster was lying on the floor of the courtroom. The room had emptied and the paramedics were arriving. ASIC’s executive responsible for financial planners, Louise Macaulay, was holding his hand as he stared up at the ceiling.

By April of that year, ASIC had cancelled Dover Financial Services’ licence.

17

I’m a celebrity, get me out of here!

Sam Henderson insists he’s never been a celebrity. While your average punter would probably agree with that assessment, he certainly was well loved by the media. He made a name for himself inside and outside the financial advice industry as an expert in self-managed super funds. He appeared as a guest host on Sky Business and wrote a column for the Australian Financial Review. He was also go-to talent on superannuation advice for Today and The Project. All of that, he told me, he did for love, not money. He was also a star of the Financial Planning Association, hosting one of their awards nights. At an FPA Money Masterclass he ran in 2015, he explained that he was inspired to start working in financial advice for the same reason I’ve heard other planners say they came upon the idea: as the result of receiving poor advice about his own money.

‘I went to get financial advice and I was actually horrified with the sort of advice that I got. It was really sell-down your property, buy a managed fund from me, and this is from about five different advisers, and I did become a little bit cynical about the industry. But by the same token I actually thought that was an opportunity to go and provide fee-for-service-style advice to people who are in need of good tax advice, good strategy advice and good product investment advice.’¹

In the glitzy conference room, surrounded by gilt-edged mirrors and plush upholstered walls, Sam Henderson was in his element. A warm speaker who easily cracked jokes at his own expense, you could hear titters from the crowd as they listened. This is no mean feat when you’re diving into the nitty-gritty details of superannuation rules. Somewhat tellingly, Henderson doubled his pace to power through the first few slides of his presentation. ‘We all have to put up this wretched adviser warning, generally what we talk about today is all general in nature, we need to understand your needs, goals and objectives before providing specific advice. So, I’ll skip through that quickly. I’ll skip through the books and everything I’ve done …’

Three years later he would find himself sitting in the witness stand of the banking royal commission, watching his career implode. The commission’s lawyers had decided he was going to be the face of the topic of Bad Advice. His complainant, Donna McKenna, hardly had celebrity status either, as a Fair Work commissioner, but she had a level of respectability and she was going to nail him. The advice she had been given was poor and the association’s response to her complaint slow, and his bungled handling of the complaint against him only exacerbated the issue. Unfortunately for Sam Henderson, it was a perfect case for the commission. In explaining how case studies were picked, Commissioner Kenneth Hayne wrote in the Interim Report that the main criterion was ‘whether the cases chosen were likely to permit identification and useful exploration of issues having a wider application than the particular case’.² Sam Henderson’s case neatly covered off a few topics: bad advice and bad regulation.

When Donna McKenna took to the stand, she didn’t seem at all fazed by the sweeping courtroom packed with lawyers and members of the public. McKenna wasn’t like the other victims we’d seen sit in the witness box. With her trendy, asymmetrical bob haircut and bold black glasses, she exuded confidence. She was capable, informed and clearly ready to take on what she saw as a real injustice. She told the commission she’d sought out Sam Henderson’s advice in 2016 because of changes to superannuation that were coming in in 2017, as well as some loans she was considering taking out, perhaps to help her adult children buy a house. Henderson ran a well-known financial advice firm that prided itself on its independence. Henderson Maxwell was a smaller firm, with just six staff but 200 clients on the books.

She told the commission that before she met with Sam Henderson, she spoke to him on the phone and was required to fill out a questionnaire. She said she really didn’t want to. It asked for basic information like her expenses, which at her age she wasn’t really keeping track of at such a detailed level, and didn’t really seem necessary. But this was the normal process, she was told. So she filled out information about her two super funds, both industry funds for public servants.

When she went in to Henderson’s office, she brought her son with her. McKenna noticed the Association of Financial Advisers plaque, recognising Henderson Maxwell as the 2016 Practice of the Year. That short pause in the waiting room may have been the last moment of confidence she had in the planner. Sam Henderson greeted her and took her into the boardroom. After some talk about possibly investing in shares, the conversation quickly turned to self-managed super funds, Sam’s speciality.

Donna McKenna told counsel assisting, Rowena Orr, ‘It was to be one of the largest slabs of conversation that we actually had at the meeting. After I had indicated that I was not interested in a self-managed superannuation fund, Mr Henderson continued to promote the establishment of a self-managed superannuation fund, relevantly, involving Henderson Maxwell. I said I had no interest in a self-managed superannuation fund.’³

Ms McKenna recalled saying, ‘Sam, I probably would go bankrupt if I had a self-managed superannuation fund. And then I wouldn’t only be bankrupt, but I wouldn’t have a job either,’ joking that, as a statutory officer, she’d be sacked if she went into bankruptcy. To cut the topic off she admits she acquiesced: ‘I said to him words to the effect, look, Sam, if there is some secret financial planner’s business about having a self-managed superannuation fund, you can put it in your advice and I will consider what you have to say about it as a potential option.’

Then, of course, was the matter of payment. For the advice to be prepared, Donna McKenna agreed to a cool $4950, plus GST – an amount I’ve since been told by other planners made their jaws drop. She handed over some documents about her superannuation and left, to return five weeks later. When she returned for her advice, she was handed a document, and waited while Sam fiddled with his laptop as he set up a PowerPoint presentation to go through the ‘Statement of Advice’ he’d prepared for her, which she’d go on to describe as ‘risible’.

The advice was basically to give everything she had to Henderson Maxwell. He was recommending $3000 a month plus any spare cash put into a Henderson Maxwell investment fund. Transfer all her shares to Henderson Maxwell. And, most critically, to roll the cash out of her State Authorities Superannuation Scheme, which was a deferred benefit superannuation fund, into a self-managed super fund.

Donna McKenna was becoming increasingly angry at the push to set up a self-managed super fund, telling the commission, ‘I said why would I do that when I’m in secure low-cost industry-type funds? And that’s when he said they only cost about four grand to set up, as best I recall. And then Mr Henderson said, look, I don’t have much time. I’ve got a Christmas cocktail reception that I’ve got to go to. I’m sorry about this, I have to go.’

Donna McKenna told the commission, ‘I said to my son I thought that if I went to an independently owned financial planning firm that I wouldn’t be subjected to product flogging of the type associated with the big banks and, yet, all I’m being flogged is Henderson Maxwell’s own products and services. My initial skim reading of the statement of advice suggested that the advice was so poor that I all but threw the advice in the bin at that stage.’

Short of actually throwing out the document, she put it aside until the evening before their second meeting in January, when she pulled it out and read it properly. It was only then she realised she was being recommended a plan of action that would cost her half a million dollars. Deferred benefit superannuation funds are the kind of gold-mine, too-good-to-be-true set-ups that were eventually phased out because they weren’t making the right people any money. I’m reliably informed that these super funds are such a good deal, there was a rush in Canberra to get into one before they were outlawed. Donna McKenna’s money had to sit in her super account until she was 58 or she would relinquish a deferred benefit of $500,000. That’s right, a cool half a million. Sam Henderson was recommending giving this up for no real reason at all.

Donna McKenna shot off an angry email to Sam Henderson and remained irate when she arrived for their meeting the next day. Sam Henderson apologised profusely but McKenna wasn’t having any of it. Remarkably, Donna McKenna says Sam Henderson persisted with the advice, arguing they could just hold off with the plan until she turned 58. At the end of her tether, she demanded an apology in writing and a refund, which Henderson hastily agreed to, sending the apology email minutes after she walked out the door, perhaps missing the first clue that Ms McKenna was preparing to take on this fight. Formal complaints followed to Henderson Maxwell, the Financial Ombudsman Service and the Financial Planning Association.

By the time Sam Henderson took to the stand it didn’t seem like it could get much worse. But it did.

The advice Donna McKenna had been given was indefensible. And Sam didn’t try to defend it, as he had much worse things coming. First, he was forced to admit that he didn’t actually have a Masters in Commerce degree, as claimed in a 2016 Financial Services Guide from the firm – rather, he had started one and never finished it. Then he was grilled by an incredulous Rowena Orr about something that he did deny responsibility for: namely, that an employee of Henderson Maxwell called Donna McKenna’s super fund, pretending to be her, to get information about the deferred benefit super fund. The tension was palpable as the recordings of the calls were played in the hearing room.

Rowena Orr asked, ‘Was that your customer service officer impersonating Ms McKenna?’

‘Yes,’ Mr Henderson replied. A couple of times the customer service rep put the super fund on hold, which led Rowena Orr to ask if Sam Henderson had been speaking with his employee while the call was on hold. ‘Potentially, but I can’t answer with any certainty,’ he said. ‘I can say, though, for the record, that I was not aware of the impersonation, I was quite disappointed … it was inexcusable.’

It was some months after his appearance at the banking royal commission when I tracked Sam Henderson down. He’d been hesitant to meet with me at first but in the end seemed to be won over by lingering fond memories of working for Sky (my employer). I went out to meet him at his new business headquarters in an industrial suburb north of Sydney. Unlike others who’d been caught out by the commission, Sam wasn’t fighting to salvage his career in financial advice. Seeing the absolute carnage that followed, he decided to retreat from the limelight.

So I found myself walking down the long driveway of a warehouse complex in a quiet cul-de-sac just off the highway, counting the roller doors to find his new business. It had already been leaked to The Australian’s ‘Margin Call’ column that he’d started a gift hamper business, which was printed with a rather unkind cartoon showing Henderson selling gifts for ‘the man that’s lost everything’. I was surprised to see a substantial set-up, with stacks and stacks of boxes on shelves and a handful of employees working away. I was even more surprised to see I’d walked right past Sam Henderson.

He’d ditched the suit and grown a beard. His once-tidy platinum-blond hair was hidden under a black trucker cap and he sported a much more casual look of shorts, T-shirt and sneakers. When I asked about the relaxed get-up, he joked that someone had recently asked him if he’d heard about ‘that’ financial planner from the banking royal commission who nearly lost their client half a million dollars. He was unrecognisable, and that’s exactly what he wanted. The whole process had obviously taken its toll.

‘I withdrew a lot, and there was a certain level of anxiety around going out in public,’ he said. ‘I certainly don’t want to be well known, I certainly don’t want to be on TV again. Nor do I want to write any more articles, so I’m quite happy to keep a very low profile from here on in. My priority is my family, my kids, and that’s where I want to be.’

Sam Henderson’s adamant that he’s not shirking responsibility for what happened. But he does seem unsettled by the intense scrutiny of what he maintains is one black mark on an otherwise very clean record.

‘I was surprised that they’d taken an interest in me in the first place, so I think that was a bit challenging, just trying to work out why I was so interesting. I wasn’t sure the mistake that I made was big enough to warrant the royal commission. But I suppose the complainant being a [Fair Work] commissioner and me being a “TV adviser”, not that I ever in any way considered myself to be well known, let alone the word “celebrity” as was described in the media, I just didn’t think that there’d be enough interest or that the issues were material enough. But I suppose what’s come to pass is you’ve got to take ownership of those issues and you need to address those on a highly personal level, at the highest level.’

The title of ‘celebrity’ adviser obviously sits uncomfortably for him now that he’s had everything ripped away from him. In fairness, his turn at the royal commission brought him a greater profile than he’d had before.

He was reluctant to speak about his new business, perhaps for fear of appearing opportunistic. As we spoke, though, he made it clear he wasn’t bitter. ‘It is a name-and-shame game. But that’s how you get change. You’ve got to go to the bottom, you’ve got to scrape the bottom and you’ve got to be fully challenged, and by being made an example of it would influence other advisers, and I’m pretty sure that’s exactly what’s occurred.’

18

Good cop, bad cop

If someone with my educational and occupational background hits a wall when you endeavour to engage proper disciplinary processes, what hope would someone who does not have those type of occupational background and skills – what hope are other people going to have? It seems that it is going to take a Royal Commission so that I can find out what happened to my complaint before the FPA.

Fair Work commissioner Donna McKenna, 24 April 2018¹

Sam Henderson’s fight with Donna McKenna was far from over. She was an experienced lawyer and this issue had clearly got under her skin. So she went to follow up with a complaint. She wrote to the Financial Planning Association in March 2017, and her complaint still hadn’t been finalised by the time of her appearance at the banking royal commission the following April.

Sam Henderson knew the Financial Planning Association heads well. He wrote a valiant defence of himself but drew the ire of the commission for some unfortunate language he used regarding Donna McKenna. He described her as ‘nitpicky’, played down the issue as a ‘storm in a teacup’ and characterised her behaviour as a ‘barrage of aggressive and presumptive accusations’. Henderson proposed a deal with the FPA that he’d agree to admit he messed up if the FPA didn’t publish his name in the issue.

The problem was, that approach seemed to work.

Even as the issue was heading to the royal commission, the FPA wrote to the commission’s lawyers asking that Sam Henderson not be named in the commission because investigation into the complaint was ‘ongoing’. Rowena Orr read an excerpt from a letter the commission received from the FPA’s head of professionalism, John Bacon, who’d written:

It is an ongoing matter. And, again, the FPA asks that the matter be treated confidentially, as any publication by the Royal Commission identifying Mr Henderson would render the CRC [Conduct Review Commission] process worthless to Mr Henderson and cause significant damage to the reputation of Mr Henderson, undermine the process of the CRC, and damage the FPA’s relationship with other members.²

One of the reasons that approach was working would expose the fundamental issue with associations regulating their members, which we’ve already seen: they need the membership fees. Rowena Orr asked FPA President Dante De Gori, ‘Is the FPA concerned that members might leave the FPA and go to another professional association if they find out that their name might be published in connection with a summary dismissal?’, which was the name of the disciplinary process that Henderson was going through with the association.

‘No,’ Dante De Gori replied.

Rowena Orr pressed on. ‘Why should members who have been the subject of adverse findings by your organisation have an entitlement to confidentiality?’

‘They shouldn’t. There isn’t an entitlement to confidentiality. But it is our biggest leverage in terms of actually impacting on change and conduct or change to conduct.’

‘It’s your only leverage, isn’t it, Mr De Gori?’

‘It is our main leverage, yes. Yes.’

It was in fact crucial enough that Sam Henderson’s non-payment of membership fees was a key part of the ‘summary dismissal’ negotiations. Rowena Orr asked, ‘Is it appropriate for Ms McKenna’s complaint to be dealt with by a sanction which requires him to pay you his outstanding membership fees?’

‘In terms of the member, that’s an obligation of the member according to the constitution. So I would imagine that’s a direct result of that obligation,’ De Gori replied.

‘It’s nothing to do with Ms McKenna’s complaint, is it, Mr De Gori?’

‘Not directly, no.’

We know the professional associations have been accused of not being enthusiastic about holding their members to account when they’re fighting for membership fees each year. As Peter Kell put it ever so diplomatically to the banking royal commission, ‘There are some associations which have taken a more forward-looking approach to standards, but we certainly don’t have a professional association of the sort that you get in other sectors such as medicine.’³

In the commission’s Final Report this would be singled out as a key issue holding back financial advice from being a proper profession: ‘[T]he evidence before the Commission did not show that either the FPA or the AFA currently plays any significant role in maintaining or enforcing proper standards of conduct by financial advisers.’⁴

Phil Anderson from the Association of Financial Advisers doesn’t quite agree with the commission’s conclusion. ‘In looking at that, I don’t think it’s necessarily a genuine issue, but it is a perception, so I think having an industry solution deals with that perception. And, when you think about running a professional association, yes, you want to attract members but you also want to attract clients for your members, you want consumers to have faith in the profession.’ As for where that perception comes from, he argues that just because it hasn’t always been well handled by professional associations in the past doesn’t mean it can’t be in the future. ‘So you can’t look the other way when some of your members do the wrong thing, and I think we are challenged from that from time to time when we do receive complaints but we absolutely have to investigate everything. We have to assess things, we have to get the right people to look at them but I think doing it from an industry perspective has a much stronger public perception outcome.’

19

Down at half-time: The Interim Report

Some conduct was already known to regulators and the public generally; some was not. Why did it happen? What can be done to avoid it happening again? These are now the key questions.

Commissioner Kenneth Hayne, Interim Report¹

In every newsroom around the country, hanging somewhere above the desks of producers and journalists, there will be a wall of TVs showing the broadcast of each major network. It’s so we can all keep an eye on what everyone else is covering and know when to panic that we’re missing something. Often each network follows a predictable formula, but it was a seemingly choreographed moment when, on the day the interim report was handed down, we watched each of the Channel 7, Channel 9, Sky News and ABC bulletins play the exact same quote from Kenneth Hayne when trying to explain the misconduct witnessed by the banking royal commission:

‘Too often, the answer seems to be greed – the pursuit of short-term profit at the expense of basic standards of honesty.’

Of course, it wasn’t choreographed at all. The commissioner has, more than once, been at pains to point out how little he or anyone at the commission interacted with the media. While the hearings were much more accessible to the public and the media than a court might be, once the hearings were over we got little more from the commission staff. We received no warnings about witnesses, topics or evidence before they were publicly made available. But boy, they knew how to play to us.

The government choosing to release the Interim Report just hours after it was handed over to the governor-general by the commissioner was probably the first sign that it wasn’t going to be as explosive as some had hoped. The Interim Report didn’t contain any recommendations, which had many observers scratching their heads as to why Commissioner Hayne compiled it in the first place, given that he wasn’t actually required to hand up an interim report at all. The letters patent calling for the commission ‘authorised’ the commissioner to submit an interim report, but ‘required’ the final one. A small difference, but lawyers love that sort of thing.

What the Interim Report did contain was questions – lots of them. Each chapter started with chunky explainers about the background of the topics under examination and the issues covered so far, as well as the questions that arose from what had been uncovered. It gave insight into the process the commissioner was following without giving away what his conclusions would be.

A few theories have been floated about why he did so, the most convincing being that it put everyone on notice to not wait for the final report to start making changes, because it could have become an easy excuse for the industry to say, ‘We’re awaiting the final report.’ Conversely, you could also argue that many changes were already underway, and by releasing an interim report he’d have at least some hand in directing the conversations that were happening instead of allowing speculation to continue.

Interestingly, while the industry was scrambling to make changes, it was debatable how much the commission was actually impacting consumer confidence. A Roy Morgan opinion poll of 50,000 Australians for their Customer Satisfaction Survey into consumer banking found confidence in banks fell from 81.2 per cent in January 2018 to 78.9 per cent by August 2018. That period spans arguably the most damning round of the banking royal commission, and while that is a decline of 2.8 per cent, you’d be forgiven for thinking it might have plummeted a bit further.

20

Show us those teeth

Plastered across the top of The Age newspaper in Melbourne was the unmissable headline ‘Crackdown on money advisers’, with the words ‘Money spinners’ in bold underneath. (See what I did there?) The first line read: ‘The federal and state governments have agreed to give a fast passage to new laws aimed at curbing unscrupulous practices in Australia’s booming personal investment industry.’¹ When was this published? 2019? Maybe 2018? Nope, try 21 March 1989. The article ran alongside the headline ‘Tearful Hawke admits infidelity’, about the prime-time confession made by the former prime minister to Channel 7 about his extramarital affairs, along with an awful little cartoon showing Hazel Hawke packing her bags and leaving. Maybe we can copy-paste some of our political scandals, too.

Tough new laws and promises of crackdowns are nothing new. While the Interim Report of the banking royal commission hardly came out swinging, there was renewed focus on the regulators doing their job, and renewed scepticism that it would ever happen. Kenneth Hayne’s criticism wasn’t hard to spot in the Interim Report when he opined, ‘When misconduct was revealed, it either went unpunished or the consequences did not meet the seriousness of what had been done. The conduct regulator, ASIC, rarely went to court to seek public denunciation of and punishment for misconduct. The prudential regulator, APRA, never went to court.’²

Relying on financial advice groups to fess up didn’t work either. AMP lied to ASIC around twenty times, by Michael Hodge’s count. A report released by ASIC in the second half of 2018 showed that delays in reporting were endemic. Across twelve financial services groups, including the Big Four banks and AMP, it was taking an average of 1726 days to identify significant breaches. That’s four and a half years. Once a breach had been identified, it would take on average another 150 days for the providers to report it to ASIC, keeping in mind that the law requires them to do it within ten days. When it came to repaying customers for errors the numbers were equally grim, with the review showing that by the time a financial adviser investigated a breach and decided they’d done the wrong thing, it took another 226 days to actually reimburse the customer. That’s on top of the delays in identifying and investigating a breach.

Across the board, there has been some improvement reported on this front. NAB’s group chief risk officer, David Gall, has said that ‘Since 2016, we have seen a reduction in late breach reporting to ASIC, with zero significant breaches being reported outside the 10 business day timeframe for 2018. While we are making progress, there have been instances where it has taken us longer than we would have liked to find and fix issues and remediate customers. There is clearly more to do. Recently we established a new centre for customer remediation which will ensure that impacted customers are compensated more quickly.’³

For those of us in journalism trying to keep our copy fresh, we often refer to ASIC as the ‘corporate watchdog’. More commonly it’s being called the ‘toothless tiger’. Or, as Bob Katter once called it, ‘the big corporate pussycat’. If there’s one accusation at the heart of the public’s concern over the actions, or inaction, of the regulators, it’s that they’re too chummy with their corporate friends and they pick on the little guys instead. The reason is, when you’re looking to get results, that’s exactly what you do. Going after the smaller suppliers is a proven tactic.

One senior ASIC figure told me it’s much better to get 20 cents on the dollar from a bank in an enforceable undertaking, and back in a customer’s pocket, than slogging it out in court and getting nothing but a big legal bill. One of the best illustrations of this in recent times happened in Melbourne’s Commonwealth Court just weeks before the banking royal commission would begin its hearings in the floors below. The case all came down to one big fuck-up. Literally. Let me explain.

ASIC had accused all of the Big Four banks of rigging the Bank Bill Swap Rate (BBSW). It’s a seriously important interest rate, even if I’m quite certain many of you would never have heard of it. It’s not the official one set by the Reserve Bank each month, as I had to explain to my bewildered news director, who was wondering why I wanted to cover the story at all. It’s the interest rate banks use when they loan money to each other. It’s a key benchmark used by the banks to set interest rates, and is used when pricing financial products on most variable-rate business loans. And, yes, the rate can have a flow-on effect on those all-important mortgage rates, credit card rates and personal loans.

In 2008, bankers in London were caught rigging their version of the BBSW, called the LIBOR (for London Interbank Offered Rate). It was one of the biggest corporate scandals in history, and resulted in $9 billion of fines being levied against banks from the United Kingdom and the United States. The fraud was brazen, with bankers openly calling and emailing each other to set their rates in a favourable way. The fallout for the banking sector there was apocalyptic. While comparisons to the LIBOR case helped make the BBSW case sound a lot sexier, the accusations here were far less scandalous. The key difference was that in Australia, bankers didn’t get the opportunity to actually set the rate. It was instead a ‘point in time’ measure of the trades that had gone through in the hours before. So, the only way a nefarious operator could manipulate the rate was by ramming a bunch of transactions through at a particular rate and hoping it went their way. Sort of like jamming the rudder of a boat and hoping the force against the current actually pushes you where you want to go.

All Big Four banks were accused of trying to manipulate the rate between 2010 and 2012. NAB and ANZ agreed to early settlements of $50 million each, striking eleventh-hour deals before the case was due to be heard in the Federal Court. CBA lingered, facing fewer allegations, but eventually agreed to pay $25 million and to say that it had engaged in unconscionable conduct.

Westpac was the only bank to fight on. Their lawyers argued they had better internal controls to stop any attempts to rig the rate. Much of the evidence relied upon by ASIC was tapes and transcripts of phone calls made by traders, and they blessed us with some of the more colourful language the well-heeled corporate lawyers would have come across in a courtroom. Trader Colin ‘The Rat’ Roden was the star witness. One of Westpac’s top traders, he’d gained a reputation for making bank and being rough as guts.

There were so many references to the word ‘fuck’ in this case that there was a brief discussion at the beginning of the trial about how the Honourable Justice Beach would like the word referred to in his court. Transcripts include one particularly revealing phone conversation where a female colleague said to Roden, ‘I had dinner with my friend and one of her other friends last night.’ To which Mr Roden replied, ‘Did the friend give you the kiss on both lips or just the big [one] on both cheeks or the big one on the lips?’

Yuck.

But it was one of his favourite phrases, to ‘fuck the rate’, that was at the heart of the whole case. ASIC was arguing that saying he wanted to ‘fuck’ the rate was evidence he was manipulating the rate. Or was it? Justice Beach didn’t buy it. Of the sixteen allegations of rate-rigging, he found only four could be shown on the balance of probabilities to be bona fide attempts. Even then, the court found that none of those attempts were actually successful. After a full six weeks of hearings in the Federal Court involving dozens of lawyers, Westpac was fined a paltry $3.3 million. Compare that to the $125 million in fines they collected from ANZ, NAB and CBA in pre-trial negotiations.

It’s not the only recent case in which ASIC failed. Another case against Westpac that started in February 2018, which would have seemed like a slam dunk in a post-Hayne world, ended up a flop. ASIC was arguing that Westpac breached its ‘best interest duty’ when two of its financial planning subsidiaries, Westpac Securities Administration Limited (WSAL) and BT Funds, conducted a telephone sales campaign urging customers to roll money out of their superannuation funds and into Westpac super funds, without taking a proper look at whether it was actually the best move for them. While the court found it was a breach of the Corporations Act, the judge didn’t find that the campaign actually provided personal advice.

Then there was the absolute slog ASIC had to go through to get the banks to pay back customers fees they’d charged for advice that was never given. As we know, ASIC was well on the case in the years prior to the royal commission, but despite having early evidence of the issue they still had a hard time getting the banks to hurry up and refund the ill-gotten gains, and they also seemed to struggle to figure out whether it was still happening. Peter Kell told the banking royal commission, ‘We’ve ended up having, at times, reasonably vigorous debates around the scope of the reviews and how many licensees should be included. We had discussions with some firms who wanted to suggest that a remediation program where consumers had to actively opt in to get remediation was appropriate, whereas in ASIC’s view, given the passive nature of many of these fees, that was not the right way to go.’⁴

Recently there has also been increasing pressure on ASIC to abandon its love affair with enforceable undertakings. An undertaking in the normal sense is essentially a promise to do something. An ‘enforceable undertaking’ is a promise where you can be taken to court if you break it. For a long time this was ASIC’s preferred method of policing the financial advice sector, at least for the large institutions. In the ten years prior to the banking royal commission, ASIC only launched one criminal case, while it has pursued six civil penalty cases against licensees since 2013, when the FoFA laws were introduced. The preferred method of policing individual financial advisers was banning licensees. Since 2008, ASIC banned 229 financial planners, with just under half of those bans permanent.

At the banking royal commission, Peter Kell was forced to admit that ASIC’s entire strategy for dealing with the fees for no service scandal had been to pursue enforceable undertakings. He argued, ‘We do not have at this point in time a straightforward ability to require a remediation program of the sort that we think is, in many cases, desirable. That’s a power that we have indicated in the current enforcement review of ASIC’s powers that would be of significant benefit under the area of having a directions power for ASIC. So at the moment, we don’t have a directions power that would allow us to more easily impose a remediation program of the sort that we think would have been appropriate in these instances.’

Rowena Orr pressed him on the point. ‘So is it the case, then, that a remediation program is an outcome that can only be achieved if the entity agrees to implement a remediation program such as a condition of an enforceable undertaking with ASIC?’

‘It’s that we do not have a straightforward ability to obtain a remediation program, especially one that’s very broad-based and one where we think there are issues around the focus on customer outcomes as being the driver for the remediation program.’⁵

Since the banking royal commission, and with the promise of increased funding from the government, ASIC has moved to drastically expand its team overseeing financial advisers, using government funding, with a core team of around sixty employees, and twenty other ASIC staff involved in policy and enforcement.

It seems that in the time since the start of the royal commission, ASIC has also discovered the ‘Tweet’ button on their Twitter account. Twitter being the favoured source of news for any journalist, my phone has never before lit up with so many notifications from ASIC, publishing news of the latest adviser being reprimanded or banned. One rather extraordinary tweet in February 2019 read, ‘ASIC dep chair Dan Crennan QC on new penalties law: Now ASIC can pursue extremely harsh sanctions against the banks & their executives.’⁶ In a chaotic week of parliament that saw medevac legislation for asylum seekers and refugees held under Australia’s offshore processing arrangements pass through both houses against the government’s wishes, and a senator smearing blood on another senator’s door, harsh new penalties for corporate criminals were quietly passed in the Senate. Penalties now include a maximum sentence of fifteen years for corporate criminals, civil penalties for companies now capped at $525 million, and individual penalties that can go as high as $1.05 million, not including the reclaiming of any profits made. Deputy chair Daniel Crennan, who took up the position in July 2018 and has been dubbed the watchdog’s special prosecutor, was keen to show that a tough new cop was on the beat. ‘Without this bill very significant aspects of the law lacked sufficient penalties to properly punish corporate wrongdoing in Australia. In part, the core obligations owed by banks and other financial services licensees to the citizens of Australia did not carry any penalties.’⁷

One move that would have had a few executives sweating was the government’s decision to change the jurisdiction of white-collar criminal cases from state-level courts to the Federal Court. Attorney-General Christian Porter quietly asked the Attorney-General’s Department to consult with the Federal Court about expanding to hold criminal cases. It was seen as a move to prepare for the glut of criminal charges that would come out of the banking royal commission. While this change had been considered for years, it was the biggest shake-up in the system in more than two decades. It represented a noticeable escalation of the seriousness with which the public expected corporate crimes to be treated, but also the rise in calls for greater consistency with corporate penalties.

As the political momentum was gathering, the regulators didn’t want to be seen sitting still. In August of 2018, ASIC announced plans to embed staff at the major banks and AMP, in order to appear more proactive in dealing with the big players. It was supposed to be modelled on a similar initiative by regulators in the United States. The announcement was met with some delight by the commentariat, and it’s an odd concept to process. You’d expect a frosty reception for the poor ASIC employee wandering about the bank floor on their first day. You certainly wouldn’t imagine too many offers for them to join the morning coffee run or after-work drinks. Although ASIC has kept the details of the arrangement quite closely guarded, it’s apparently more of an understanding that they can show up whenever they like and ask for specific documents from people directly than a plan to put staff in the bank full time. It’s hoped that even if the regulators aren’t literally standing over the shoulders of bankers each day, their presence will be felt much more than it has been in the past.

21

The culture crusades

That generally similar conduct occurred in all of the major entities suggests that the conduct cannot be explained as ‘a few bad apples’. That characterisation serves to contain allegations of misconduct and distance the entity from responsibility. It ignores the root causes of conduct, which often lie with the systems, process and culture cultivated by an entity.

Commissioner Kenneth Hayne, Interim Report¹

As a tidal wave of poor conduct spilled out of the banking royal commission and beyond, everyone wanted to know how such terrible behaviour could have been allowed to continue for so long. How were there so many oars turning the boat in the wrong direction? ‘Culture’ has become the buzzword in financial advice, because it’s simple to blame and difficult to attribute to any one person.

Take, for instance, when ASIC was pushing for company directors to be criminally liable for poor culture in their companies in 2016. One man who was very unhappy about that was former Commonwealth Bank CEO David Murray. Despite having chaired the Financial System Inquiry, which helped implement a number of reforms to improve the culture within banking and financial services, he clearly felt criminal liability was a step too far. In a now-infamous question-and-answer session at the Australian Financial Review Banking and Wealth Summit, Murray said, ‘ASIC is pursuing this notion that you can have liability for a culture breach. It is absolutely impossible to legislate for that. In fact, you could argue that it’s anti-competitive because you can’t have the same culture for everyone by definition. Great culture is a competitive advantage. It’s inefficient and to be perfectly candid, again, there have been people in the world who’ve tried to enforce culture. Adolf Hitler comes to mind.’

You could hear titters from the audience when columnist Jennifer Hewett interjected, ‘I’m not sure ASIC would appreciate the comparison,’ but David Murray barely missed a beat. ‘If you want people to be free you cannot do that. Well, let me explain. If we’re going to have a culture in the corporations’ law with criminal liability, then someone has to define culture. That’s going to be another guidance note, I don’t know how many pages. But which culture is going to define the guidance note? ASIC culture.’

Jennifer Hewett pushed him on it again. ‘So you think ASIC has absolutely overreached in that area. Because obviously we’ve had ASIC and APRA talking about the importance of culture –’ He quickly replied, ‘Well, you can pick up that I’m not happy about it!’² as the audience broke out in laughter. Soon after the speech he issued an apology for making the comparison, telling The Australian, among others, that ‘The reference was excessive, hurtful to many people who suffered from that regime and unnecessary to make the point.’ The point, nonetheless, was made.

In a speech by ASIC commissioner John Price to the Australian Institute of Company Directors forum, he spoke about culture as the mindset of an organisation, saying it’s often phrased as, ‘the way we do things around here’. ‘We think culture is vitally important for the organisations we regulate; however, we are not going to dictate the kind of culture a company has.’

He went on, ‘We are incorporating consideration of a firm’s culture into our risk-based surveillance reviews of the entities we regulate. Culture is relevant to who we want to look at as part of regulatory work and how hard we look. It can also be relevant when we consider questions around enforcement.’³

At an earlier summit, the chairman of the Australian Prudential Regulation Authority at the time, Wayne Byres, had hit back at the culture criticism in the strongest possible language you’d expect to hear from someone who has the word ‘prudent’ in their job title. ‘Regulators have variously been accused of being on a culture crusade and wanting to be the culture police. That’s not the case. Indeed, regulators are really keen to see the industry lead the running on this issue. We need the financial sector to take up the challenge to put in place better incentives for prudent behaviour, so as to prevent problems emerging in the first place. That is likely to be far more productive than spending our time removing so-called “bad apples” after the fact.’⁴

What we know now is that culture has been, and continues to be, a major issue for the banks and right across the financial advice sector. The question remains, can you ever really regulate for culture or is it just a symptom of deeper problems? One man who’s spent a fair amount of time thinking about this is Fahmi Hosain, who worked at APRA for seventeen years supervising the major banking groups. He spent a number of those years in policy roles before finally heading up a team overseeing governance, culture and remuneration. Now an independent consultant, he’s straightforward about what he thinks the regulators need to be doing. ‘You can’t regulate culture. That’s impossible to do. What you can do is supervise it, and assess it, and where you have concerns because it may have implications for the way the financial institution is run, you can then act. You do that on the basis of information that you’re collecting and assessing around cultural types of information. But you’re not setting rules to say your culture must be this or must be that. That’s not conducive to getting good behavioural outcomes. Anywhere around the world, you’ll find regulators aren’t looking to regulate culture but simply assess and supervise it.’

Ethicist Simon Longstaff agrees, saying the problems won’t go away until there’s a significant overhaul of the way advisers are paid. ‘It’s easy to believe when things are going well that it must be due to you, and the remuneration structures tend to have been put together in a rather perverse way that reinforces that impression. So, people feel that the success is all due to them and the failure is always due to someone else and that, I think, because of the sums of money involved and the kind of lustre that the industry has enjoyed for so long, has probably reinforced a kind of arrogance in some areas that probably wasn’t well deserved.’

Another key point Longstaff makes is the need to connect a certain level of skill with being the reason you’re paid for financial advice. ‘I think the industry has been seduced by its own success to a point where it’s come to think that perhaps it is made up of the smartest people in the world, who are rational and cool and that they’re in some sense impervious to the limitations that affect other people.’

Among some stiff competition, Ken Henry, former chairman of NAB, seemed to edge to the front of the pack of the worst performers on the stand at the banking royal commission. His academic musings and condescending manner when answering questions from Rowena Orr left him with few supporters, and no one was more critical than Kenneth Hayne. One answer that earned him more strife than any other was when he was asked about whether NAB focused too much on what the shareholders wanted, at the expense of customers. Henry replied with something of a soliloquy, saying, ‘It goes to the state of capitalism. The capitalist model is that businesses have no responsibility other than to maximise profits to shareholders.’

While he didn’t do himself any favours with this response, and he wasn’t really answering the question or taking responsibility, he did raise a valid issue. At the pointy end of capitalism, what’s the value in acting ethically? When the incentives are all aligned to prioritise profit, there’s a convincing school of thought that suggests a lot of advisers wouldn’t even realise the depths of their own incompetence.

Bernie Ripoll, who tried to overhaul the advice industry with the FoFA reforms, says the evidence we’ve seen from the royal commission is clear: the time for negotiating is over. ‘Culture is only changed by force. Something needs to make the change happen. So we’re trying to change culture, we’re trying to protect consumers and do it in a way that is meaningful, because, if you recall, back under FSR [financial services reform] laws and regulations about transparency, the idea of protecting people was that if you were compelled to disclose everything, that would be the protection mechanism.’

The phrase ‘sunlight is the best disinfectant’ has become one of the most overused phrases in Australian politics in recent times, as transparency has swung back into fashion.

In May of 2018, when James Shipton had been at the helm of ASIC for just three months after taking over from Greg Medcraft, he gave a speech at the Australian Council of Superannuation Investors annual conference in Sydney, which I promise wasn’t as boring as it sounds. It was in this speech that he coined the term ‘the trust deficit’. If you think he might be talking about the dwindling trust in the regulator, you’d be mistaken in this instance. Shipton was speaking about the (rightfully) plummeting trust in financial services. He told the conference, ‘Australia’s corporations, and the finance sector in particular, are suffering from a trust deficit. And this current predicament is of the sector’s own making. And because it is largely of its own making, the sector must be held to account and must take responsibility for its repair. As I have said before, ASIC and other regulators have a crucial role to play here too. But, ultimately, trust can only be restored if these companies work root and branch to change their ways to rebuild their culture from deep within.’⁵

We’ve also seen stirrings coming out of APRA. The prudential regulator has a lot less to do with financial advice than conduct regulators. In the most basic terms, a prudential regulator is concerned with whether the systems are in place to make sure financial entities can pay back everyone they owe money to. APRA watches over the largest financial institutions in the country like banks, credit unions and insurance companies to essentially make sure their books balance and that they aren’t signing up to promises they can’t keep. A conduct regulator like ASIC, on the other hand, makes sure everyone behaves well while they’re doing it, and that the systems are fair and transparent.

We know a lot of the problems with both regulators start right at the top. In a move that stunned many observers, APRA announced in December 2018 a number of actions against the financial services firm IOOF for failing to act in the best interests of their superannuation members. The big shock waves, however, came from the announcement of their move to disqualify a number of key personnel, including managing director Chris Kelaher, chairperson George Venardos, chief financial officer David Coulter, general manager of legal, risk and compliance, and company secretary Paul Vine, and general counsel Gary Riordan.

APRA deputy chair Helen Rowell threw down the gauntlet, saying ‘APRA’s efforts to resolve its concerns with IOOF have been frustrated by a disappointing level of acceptance and responsiveness to the issues raised by APRA, which is not the behaviour we expect from an APRA-regulated entity.’⁶

The problem is that the effectiveness of the regulators is measured by the punishments they’ve doled out to wrongdoers. What that assessment does not recognise is the misconduct that they’ve failed to uncover.

22

The trust deficit

Other professions do not have such faith in the notion that conflicts of interest and conflicts between duty and interest can be effectively managed. Until something is done to address these conflicts, the financial advice industry will not be a profession.

Commissioner Kenneth Hayne, Final Report¹

Just one week out from the release of the banking royal commission’s final report, ASIC was working hard to look like it was ahead of the recommendations, with a flurry of media releases about cracking down on financial advisers and updates on ongoing criminal proceedings against dodgy advisers. The last thing they needed was the headline splashed across the Fairfax/Nine newspapers, declaring ‘Watchdogs wined, dined and given corporate gifts without scrutiny’. In the edition published on 22 January, the paper listed in detail gifts received by ASIC representatives that they’d uncovered through Freedom of Information requests. They included things like champagne and vintage wines, expensive dinners, concert tickets, airline upgrades and customised ‘training seminars’ supplied by stockbrokers, banks, law firms and industry lobby groups.²

The allegations continued that Macquarie Group had wined and dined ASIC staff at Sydney’s Beta Bar at the same time the bank was the subject of multiple ASIC investigations and had been ordered to pay former clients tens of millions of dollars in compensation.

It’s exactly the kind of headline that doesn’t get industry insiders too worked up but translates horribly to the general public. For me, the benchmark of this is always if it makes the rounds of daytime television talk shows, whose primary focus is providing a soundtrack to unemployment. Studio 10’s Joe Hildebrand went straight for the jugular that day, saying, ‘Why you would not release that information, I think, is incredibly sinister. We know from the royal commission that ASIC has been incredibly soft on the banks and reaching dodgy little back-room deals and cutting deals where they’d fine them a tiny amount for these known breaches in return for not going to a full prosecution.’ His co-host Kerri-Anne Kennerley cut right to the chase when she said, ‘But I tell you what, they don’t mind going the little guy. The little guy who hasn’t got the big bucks and fancy law firm to look after themselves for seemingly small misdemeanours that small companies occasionally face. So I hope they’re going to have a look at themselves, but I doubt it.’

Many long-time observers of the industry have warned against letting the regulators become a punching bag for frustration at poorly behaved corporates. Bernie Ripoll says, ‘ASIC is really reforming now how it approaches. And what we’re finding as a consequence of Hayne is that ASIC has just suddenly found in the back office a really big stick, and they’re now whacking people with it. Most of us were saying they should have done that years ago. And they did, to some extent. And, look, I’m sure they can defend themselves quite ably, I don’t need to defend them. I think everyone would agree, and I would agree, that ASIC should have done a lot more … There’s no question that by any assessment even they would have to say they failed in their duties in a whole range of areas. We might all have differing views as to why and how that failure’s taken place, but certainly it’s not been the regulatory approach to protecting consumers that we might have all wanted or expected. So this has caused a big shake-up in ASIC.’

The day the APRA story broke, Bernie Ripoll, for one, was pleased. ‘It’s great. Honestly, I think they ought to be doing their job without fear or favour and they need to prosecute their charges fully. And everyone who gets prosecuted under that mechanism should be given their full rights under the law to defend themselves, and everyone has to have their day in court. But it’s really good because, I suppose, that’s what they ought to be doing – that’s their job.’

You might be wondering why APRA hasn’t received much mention in this book so far. In the ‘twin peaks model’, they don’t have an awful lot to do with financial advisers. The basic difference between the bodies is that ASIC regulates conduct, so their job is to make sure everyone follows the rules. APRA has loftier ambitions, to ensure large institutions are all doing the right thing, and will always be able to pay their bills and do what they say they’re going to do. The overlap is endless and sees a lot of back and forth between the two – enough that some have suggested a single super regulator, but that’s largely been ignored. Commissioner Kenneth Hayne called for greater cooperation between the pair, forcing six-monthly memorandums of understanding between the two to be signed. With both having been taken to task over lack of enforcement in the financial services industry, they are both facing the same issues that can’t be ignored.

Fahmi Hosain explains, ‘As the conduct regulator, ASIC has a clear operating motive to enforce conduct issues, and litigate and take people to court. For APRA, part of its whole ethos is to undertake work to prevent issues manifesting into bad outcomes, and in reality most of that is not getting to the point where things have gone totally wrong; they have actually helped to prevent issues. But, of course, what Royal Commissioner Hayne is saying is that in those cases where things have gone wrong from a prudential perspective, APRA must work harder and with greater enforcement powers.’

Now an independent consultant, Hosain says the regulators need to look beyond their normal hiring pool of lawyers, accountants, economists and actuaries. He argues that true cultural change will be driven by hiring more behavioural experts and people with psychology backgrounds who can tell what makes people tick, and know how to influence them into good behaviour. ‘[Traditional ASIC and APRA employees] are not well placed to diagnose root cause cultural issues. So I think rather than a cultural change, you’ll see some different skill sets being utilised to properly meet the new objectives that have been set by Commissioner Hayne.’

As we have seen, the industry associations aren’t yet up to the task of self-regulating either, while industry body FOS, or the Financial Ombudsman Service, was found wanting as well. FOS was one of those optional-but-not-really-optional membership associations that handled complaints from the public. It has now been subsumed into the new Australian Financial Complaints Authority (AFCA), which is most certainly not optional. It essentially operates in the same way but includes superannuation complaints and credit and investment complaints. When announcing the new complaints authority, the treasurer at the time, Scott Morrison, euphemistically called it a ‘SUPER FOS!’

In the year before the royal commission, around one-quarter of FOS’s 13,422 members were financial advisers, making up the vast majority. Between 2016 and 2017 the body received 626 complaints about financial advice. In March 2019, as part of its continued campaign to show it wasn’t messing around, ASIC cancelled the licences of two financial services providers in New South Wales because they hadn’t signed up to AFCA in time. ASIC commissioner Danielle Press was keen to flex her muscles when she released a statement saying, ‘These cancellations are significant because this is the first time ASIC has cancelled licences for non-compliance with AFCA membership requirements.’ She went on, ‘AFCA is crucial to the protection of Australia’s financial consumers. Licensees need to be aware that failure to meet AFCA membership requirements is a serious breach of the law and ASIC will take action where licensees fail to meet this important obligation.’³

The Credit and Investments Ombudsman authority, now also part of AFCA, told the royal commission that of the complaints it received about financial advisers, the largest proportion was about inappropriate advice, around 39 per cent, followed by excessive or incorrectly charged fees (28 per cent of complaints), conflict of interest (around 15 per cent of complaints) and failure to follow a customer’s instructions (around 11 per cent of complaints). The more serious misconduct reported was mainly around advising consumers to borrow against the equity in their homes in order to invest in managed investment funds, and advice that wasn’t appropriate for the customer’s personal financial circumstances, including advising consumers to establish a self-managed superannuation fund.

The associations representing financial planners have too realised that they need to step up their games to win back trust. In one of the most significant moves to self-regulate the industry to date, six associations – the Financial Planning Association of Australia (FPA), Association of Financial Advisers (AFA), Boutique Financial Planners (BFP), the Financial Services Institute of Australasia (FINSIA), the Self-Managed Super Fund Association (SMSF Association) and the Stockbrokers and Financial Advisers Association (SAFAA) – have developed an agreement to monitor and enforce the new Financial Adviser Standards and Ethics Authority (FASEA) code of ethics. It will be run by all the member organisations through a special purpose company called Code Monitoring Australia (CMA, a wholly owned subsidiary of the FPA). That company will operate the compliance scheme, which will be called the Financial Advisers Monitoring Scheme (FAMS). The final application for the system is being lodged with ASIC by 30 June 2019.

The move has been seen as the best step yet taken to ensure compliance across the associations. As we saw, they were found wanting during the royal commission’s evidence, and perhaps the best way to eliminate a conflict of interest is to step away altogether. It limits the risk of people switching associations, and makes it harder to hide. A consumer wouldn’t necessarily notice the difference between the AFA and the FPA, but you might notice if your adviser wasn’t a member of an association at all. It also eliminates the need for paid external dispute resolution, because FAMS will be independent and can fulfil this function.

23

A failed experiment

Much more often than not, the conduct now condemned was contrary to law. Passing some new law to say, again, ‘Do not do that’, would add an extra layer of legal complexity to an already complex regulatory regime. What would that gain?

Commissioner Kenneth Hayne, Interim Report¹

Hungry for publicity, in the second half of 2018 the Labor Party set off on a much-lauded series of roundtable discussions around the country, meeting with banking victims who ‘hadn’t had their voices heard’. The initiative was launched during a visit by Bill Shorten to the Consumer Action Law Centre in Melbourne. In the first hurried media call, the opposition leader ended up sitting across from two victims who’d actually given evidence at the banking royal commission. Labor spun it as Shorten meeting with people who did get to share their stories, to understand how powerful the experience was. However, they couldn’t escape the accusation that the opposition was undermining the work of the commissioner to score political points. They were, undeniably, tapping into the public mood that there hadn’t been enough time for hearings. With just twenty-seven consumer witnesses, it played into the narrative that the government was happy to rush things along to avoid more revelations out of the commission they plainly never wanted to have.

There was, however, one question that almost seemed to be resolving itself even before the hearings started. Vertical integration had fuelled the chaotic rise of financial advice in Australia but, by all accounts, the banks were calling time of their own accord. The ‘wealth management’ arms that housed all the financial planners hadn’t been the cash cows the banks had been hoping for, and had come with enormous regulatory and reputational risk. By the time the royal commission hearings started, the banks had seen the writing on the wall and were looking at dropping their wealth management arms.

ANZ was one of the first with its foot out the door. The bank agreed to spin off its OnePath Pensions and Investments business to IOOF in October 2017. The $975 million deal would see them enter into a twenty-year strategic alliance to make IOOF superannuation and investment products available to ANZ customers. They’d also agreed to keep working with the wealth manager to oversee the remediation programs that were already in place. A massive spanner was thrown in the works, however, when APRA announced it was seeking Federal Court approval to disqualify the three executives and two directors from IOOF for failing to act in the best interests of superannuation members. APRA also said it was seeking to apply additional licence restrictions on IOOF. ANZ deputy CEO Alexis George said at the time, ‘Given the significance of APRA’s action, we will assess the various options available to us while we seek urgent information from both IOOF and APRA.’² She did say, however, that ANZ were still working on separating their pensions and investments from their life insurance business. ‘There is a framework available to complete the Zurich transaction that does not involve IOOF,’ George said.

NAB was next, announcing at its mid-year results that it was hoping to dump its advice, platform, superannuation and asset management businesses, as well as selling off its MLC Wealth business, which by 2019 was predominantly financial planning. In the ASX announcement, the bank wrote that they wanted to become more focused on their core banking. However, the turmoil following the singling out of chairman Ken Henry and chief executive officer Andrew Thorburn at the banking royal commission had huge ramifications for the bank and saw the outlook for any sale pushed back to 2020.

There were internal changes coming for NAB too. On 3 September 2018, just a few weeks ahead of the royal commission’s interim report, NAB announced that NAB Financial Planning and NAB Direct Advice would no longer accept grandfathered commissions from NAB Wealth superannuation and investment product providers. They estimated it would cost them around $11 million when they cut themselves off, from 1 January 2019, and by their calculations around 32,000 superannuation and investment customers would be given fee rebates and reductions. Tellingly, however, while NAB supported the move away from grandfathered commissions, they said they’d continue to honour obligations to aligned advisers and independent financial advisers under the FoFA legislation, saying in a statement attributed to no one in particular that ‘This is a complex issue for the industry, and NAB believes the right framework needs to be in place to appropriately transition off grandfathered commissions. We look forward to working with the wider industry and regulators to ensure this is done in a considered way in line with community and customer expectations.’³ MLC Wealth also announced price changes across some of its key investment products in January 2019 that would deliver administration fee cuts of up to 50 per cent. ‘We want to lead the industry in winning back trust, and these pricing changes are an important step in showing our clients and their advisers that we have listened to them, and we are changing,’ said Geoff Lloyd, CEO of MLC Wealth.⁴

Macquarie has stayed very quiet on the royal commission findings, having escaped the glare of the public hearings, to the surprise of many industry observers. Reportedly, around twenty advisers left their wealth division ahead of a new structure introduced in April 2019. Before the restructure, it’s estimated they had between 170 and 200 advisers. Macquarie hasn’t been open about sharing the numbers, but it’s understood they’ve shed as much as half of that. The big change seems to have been forced when the group decided to move from a commission-based remuneration structure to a salary-plus-profit-share model. Macquarie Private Wealth and Macquarie Private Bank advisers were slated to shift to the new remuneration model starting from 1 April. At the same time, the group committed to discontinuing the practice of receiving grandfathered commissions, making the wealth division a much less profitable proposition.

For CommBank, the gig was up on 25 June 2018. The bank that had led the charge into vertically integrated wealth admitted defeat. CBA announced it was demerging its wealth management and mortgage brokering businesses. That meant the whole lot was going, including Colonial First State and its superannuation, investment and retirement solutions platform, which held $135 billion of funds under administration, as well as CFSGAM (Colonial First State Global Asset Management), their global investment management business, which was managing over $207 billion of assets for clients worldwide. It was a smart move by the bank to head off what was expected to be a brutal final report from the banking royal commission, and would hopefully signal to the commissioner that the bank was ready to make the necessary big changes before they were forced into doing so. If Ken Henry and Andrew Thorburn from NAB had been as conciliatory from the outset, there’s a good chance they might still have their jobs.

In a pre-recorded video interview, a favourite method of the Big Four banks to share soundbites with journalists and summaries with shareholders, PR man and former business journalist Geoff Elliott asks CBA CEO Matt Comyn about the changes. He starts with a straightforward question: ‘The context is clearly the royal commission and the political environment at the moment. We’re seeing a lot of banks demerging, or making asset sales like this. Is this what’s driving the decision?’

In an answer exactly as scripted as you’d expect in a pre-recorded PR video, Mr Comyn replies, ‘I think there is good reasons for why banks should own wealth management businesses. I think there are equally good reasons why banks shouldn’t own wealth management businesses. The context has changed quite markedly over the past ten years. Ultimately for us, we have formed the view that the best decision [for] the Commonwealth Bank’s shareholders is to demerge the wealth management businesses, enabling our core banking business to become a simpler and better bank.’

Geoff Elliott presses on. ‘Matt, some of these businesses have faced reputational damage. It seems, really, perhaps these are businesses you don’t really want to manage anymore. Why should shareholders think this is going to make a difference?’ Matt Comyn replies, ‘Well, these are some fantastic businesses. We are talking about a global asset management business that has performed very well, one of the leading platform businesses, financial advice and mortgage broking businesses. Each in their own right, [they’re] very successful businesses with very strong growth profiles. Ultimately, we believe that they will perform better outside the Commonwealth Bank Group, which will also enable CBA shareholders to participate in that improved performance. We believe that focus within the Commonwealth Bank Group will enable us to become a simpler and better bank for our customers, for our shareholders and for our people. And this transaction provides certainty and clarity over both the bank’s future strategy, as well as our participation in wealth management.’

In one of the most dramatic turns of the post–royal commission landscape, CBA suspended its $4 billion demerger in March 2019, ostensibly to prioritise the implementation of the banking royal commission findings. By this point CBA had already spent $1.46 billion to fix the issues, including $1.215 billion on compensating customers from the wealth business alone. That included a total of $610 million either already paid to customers or put aside to pay back customers, to remediate customers for issues like the quality of advice, fees for no service, dodgy credit card play and insurance products, as well as banking fees and interest. On top of that, they’ve spent $650 million in program costs and internal process improvements. Notably, the bank also put aside $200 million for an indemnity provision for wealth management related remediation issues, including ongoing service fees charged by aligned advisers.

Like the other banks, they continued to grapple with the remediation programs. On 9 October 2018, CBA announced ‘further actions to improve outcomes for wealth management customers’ and ‘a review and remediation program for any instances where unauthorised advice fees have been charged to deceased estates’. They also pointed out that any fees charged to deceased estates were being refunded with interest, breaking ground on the fact that not only can you be charged fees for advice when you’re dead, some dead people might actually now be making money too. On a more serious note, they also announced the phasing out of grandfathered commissions from January 2019, benefiting around 50,000 customers by about $20 million a year. By October 2018, CBA estimated that it had spent $580 million improving its advice business over the previous six years, and in the same time paid some $270 million in compensation for bad advice or fees for no service.⁵

And if that isn’t enough brand damage for you, ASIC also announced a sweeping review of the Dollarmites program. As part of CBA’s School Banking program, students receive a savings account into which they can deposit money. The bank says Dollarmites is designed to encourage regular savings behaviour and good money habits, arguing that it is an altruistic program because CommBank does not charge fees or market credit products to any customers under eighteen years old. The more cynical among us say it’s a good way to lock children into CommBank accounts knowing they’ll most likely stay in them in adulthood.

Adding to the uncomfortableness is the fact that the bank also makes a payment to schools based on the number of participating students, and the frequency of their deposits. The bank argues that the payments recognise schools’ administrative involvement in the program and the time of around 10,000 program volunteers. Schools on average receive $500, generally going towards school sporting equipment or books in the school library.

The hardest task fell on AMP. Financial advice has been core to AMP’s business model over the past two decades, so there was no letting go of wealth management. AMP had to attempt to rise from the ashes of the shelling it sustained in the royal commission. It was undoubtedly the worst hit, with the revelations of lying to ASIC taking its misdeeds well beyond its corporate equivalents. It will take a miracle for the new chairman David Murray to salvage the business but he says he’s up for the task. As Your Money network host and Australian contributor Ticky Fullerton wrote at the end of 2018, ‘When Murray took on the chair of AMP, it was then, and still remains, the hardest turnaround job in the country and he’s right in the middle of it. With sleeves rolled up he has called out corporate governance failings which have muddied the waters on accountability between boards and management which helps create many of the woes highlighted in the royal commission.’⁶

AMP also looked set to be hardest hit by the FASEA education requirements, with many of their planners who had come through their ‘Horizons’ in-house training program now being forced to get degree-level qualifications. Changes to grandfathered commissions will also impact upon many of their advisers. Some industry insiders estimate that it will cost AMP advisers 20 per cent of their aggregated revenue base.⁷

In October 2018, AMP announced it was selling off its life insurance arm in a $3.3 billion sale to a British investor. In the meantime, 54 per cent of its share price was wiped from its high in March of that year. AMP had a net profit of $28 million for the year ending 31 December 2018, a 97 per cent decline from $848 million the previous year. The AMP report specifies that one of the big problems for the cash flow was that advisers weren’t signing on new clients because their focus in the previous year had been ‘retention rather than new business’. The number of advisers in core licensees declined 4.6 per cent from December 2017, largely due to exits from the industry including retirements. According to the investor presentation, the number of advisers was down from 2692 advisers at December 2017 to 2567 advisers at December 2018. Licensees were also down from 175 to 137.

Westpac appeared to be the most wedded to its financial planning arm, until it suddenly wasn’t. There were persistent rumours that they’d been quietly weighing up their options, but with the vertical integration model left largely untouched by Commissioner Kenneth Hayne it didn’t seem like the pressure was there for them to jump ship. Financial planning was a significant business unit at Westpac with roughly 939 planners, inclusive of in-house advisers and those that sit within planning dealer groups.

‘If banks get totally out of financial planning and a customer walks in and says “I just inherited $100,000, what should I do with it?” – if the bank doesn’t have a financial planning capability they’re just going to say “just stick it in a term deposit”,’ Westpac chief executive Brian Hartzer said in April 2018 to reporters at the Global Summit of Women in Sydney. ‘Is that the right answer? Probably not. But what do you do then? Because customers do come to us.’⁸

Before the final report of the Banking Royal Commission was handed down, rumours were already circulating that Westpac was quietly testing the waters about whether there was any appetite in the market if they were to sell off their in-house financial planners. Westpac has said it will keep manufacturing its own products in things like superannuation and insurance. Head of wealth Brad Cooper told the Australian Financial Review, ‘I think if you’re going to stay in this space, you’ve got to continue to invest in it. If you’re not prepared to invest in it, then get out is the message.’⁹ And with about $12 billion in funds under management on the Panorama investment platform at the time, there were plenty of reasons to stay. Brian Hartzer struck a pessimistic tone about the industry when he appeared before the royal commission in November, saying that the economics of providing high-quality financial advice were ‘getting very difficult’.

Like the other banks, however, they were moving to engage in as much positive spin as possible. In what Westpac described as an industry-leading move, the bank announced it was overhauling incentives for its advisers. Where tellers had previously been incentivised by ‘customer satisfaction measures’, they’d instead be paid a $500 ‘fixed pay increase’. Around 2300 customer-facing staff members would be affected.

But by March, they became the last of the Big Four banks to decide to part ways with their financial advice arm, with the announcement that the whole division would be shifted externally or dropped entirely by September 2018. External advisers were to be ‘exited’ and the bank would instead rely on a ‘referral model’ for financial advice. Most of the advisers were being moved out to firm Viridian Advisory.

What was most telling was the reason Westpac gave for the sale. Essentially, the business never actually made them that much money. Excluding the cost of remediating customers, Westpac estimated that the changes would be ‘earnings per share’ positive by 2020, because the wealth division was a ‘high cost, loss making business’. The cash earnings for the Advice business in 2018 was $53 million, and that’s excluding the remediation costs. Westpac also estimates they’ll save $20 million in pre-tax productivity savings from operating one fewer business divisions.

This was the most extraordinary takeaway from the big wealth experiment for the banks. For the high reputational risks they took, the scandals they bogged themselves down in and all the customers they ripped off, they never actually made that much money out of it. It seems unfathomable that a business designed around the most basic principles of capitalism, the product offering of which was to make customers money, wasn’t doing the same for itself. It’s a form of madness that, without the banning of vertical integration, seems likely to repeat itself again in the future.

The largest of the smaller firms face an uncertain future indeed. Without the luxury of being able to cut their losses and retreat into their core businesses like the banks, wealth management businesses that do nothing but financial advice are bearing the full brunt of the royal commission. Yellow Brick Road is a prime example. While researching this book I attempted numerous times to interview someone from Yellow Brick Road, because it is such a significant and established player in financial advice. Perhaps I should have realised why they weren’t too interested. In March 2019 the business revealed massive losses, including a complete writedown of their ‘goodwill’, which for non-business types is essentially the market value of the trust you can place in a business that they’ll honour their commitments. In its half-year report for the second half of 2018, the company posted a ‘net loss after tax’ of $34.15 million. Mark Bouris, executive chairman of Yellow Brick Road, said of the results, ‘The first half of this financial year has been challenging for the sector and we have taken decisive action. In this context, we have made the necessary decisions for the Company to reset and provide a simplified balance sheet.’ He went on, ‘It has been an unusually tough six months. Sentiment surrounding the Royal Commission, changes in credit approval processes, more intense regulatory oversight and greater compliance requirements and costs have created significant uncertainty. It is now particularly hard for mortgage originators and brokers to assist borrowers to obtain an approved home loan. In all the years of being involved in the home loan business, I have never seen such difficult borrowing conditions. These factors have caused an adverse impact to our new lending, particularly in the December quarter.’¹⁰

Much has been made of the incentives dangled in front of advisers that have tempted them to engage in poor behaviour. But those incentives are just the symptom of a much larger problem. The nature of financial advice is that it’s personal and comes with certain risks. The biggest predictor of poor advice has not been the ill intent of advisers themselves, but the systems in place that have put profits ahead of all else. Vertical integration has obvious benefits, but in an industry where the product is someone’s livelihood, the risks become very real and the ethical lines quickly blurred.

24

Choices must now be made

Obey the law. Do not mislead or deceive. Be fair. Provide services that are fit for purpose. Deliver services with reasonable care and skill. When acting for another, act in the best interests of that other.

Commissioner Kenneth Hayne, Interim Report¹

The Parliament House Press Gallery stretches down one side of the building and loops around the Senate chamber, with small bureaus and boltholes off to each side. There’s a fairly consistent set of journalists who tread the bright-red carpet each day, some who have been ensconced in the politics round for decades. Despite the fact we’re all vying for the same stories, the cosy set-up means it often feels like a college dorm, with a certain collegiality with your competitors next door. For the day of the final report of the banking royal commission, dozens of business reporters were flown in from around the country to deliver specialised coverage. There was a frisson of anticipation in the corridor as the journalists who’d all covered the commission arrived for the final verdict. There was also the ongoing consternation of the banks and big businesses, who weren’t being allowed an early look at the report alongside the journalists.

Commissioner Hayne had ignored cries from the Labor Party and consumer lobbyists for more hearings. Attorney-General Christian Porter privately asked Commissioner Hayne why he wasn’t taking up the government’s repeated offer of more time, to which he apparently replied, ‘It’s best not to leave the patient on the operating table for too long.’ Indeed, it seemed the advice sector had slowed into a holding pattern. There were multiple reports of approvals for financial services licences being delayed indefinitely, as well as mergers and product launches held off as everyone braced for the final report. More than a few people caught out in the commission were spending their Christmases waiting to see if criminal charges would be recommended against them. One senior MP explained to me that the reason the wait was excruciating for all involved was because, unlike inquiries and reviews, there was no consultation with politicians or stakeholders before the final recommendations were made. Everyone just had to wait and see. Kenneth Hayne had everything he needed, and it felt like we were all waiting for the meteor to hit.

Then came the discussion about when the report would be released to the public. Shadow Treasurer Chris Bowen was putting the pressure on Treasurer Josh Frydenberg two weeks out, demanding the government release the report the same day it was handed from Commissioner Hayne to the governor-general. That’s what they’d done with the interim report. Bowen kept up the onslaught through to the day the report was handed to the commissioner but there were fears that releasing the report might spook the market. In the end the government announced it would be released on the Monday after it was received, after a three-day lock-up period.

When the day of the final report arrived, ASIC seized on the fevered anticipation, publishing a media release at exactly 9.08 am. The corporate watchdog announced it was cutting off Commonwealth Financial Planning at the knees for dragging its feet over the fees for no service issue, which at this point had cost the bank $119 million in fees it had to pay back to customers. The bank had already entered into an (you guessed it) enforceable undertaking. But an Ernst & Young report showed the remuneration plan and the promised fixes were still heavily reliant on manual checking, which wasn’t enough for ASIC. So, the regulator ordered CBA to immediately stop charging ongoing service fees and signing up any new clients for ongoing service fees, a move which the bank estimated was going to cost them $40 million in lost fees.

CBA wasn’t fighting back in a statement that day, saying, ‘CFP also identified that further improvements to its model were required to satisfy the standards set out in the Enforceable Undertaking (EU) and informed ASIC of this.’ Commonwealth Bank group executive of retail banking services, Angus Sullivan, said, ‘We recognise the importance of customers getting quality financial advice. Beyond the terms of what is required for the EU, we are evolving the future approach for the delivery of advice. CFP will be moving to a new financial advice fee model where customers will pay for advice services when they are delivered. The details of this model are currently being worked through and further information will be communicated to customers when they are finalised.’²

The release of the Final Report was being run like a federal budget, except with a huge paranoia about any leaks that could affect ‘market stability’. Labor attacked the prime minister and treasurer relentlessly after they announced they would receive the report on Friday, and only release it on Monday after a formal ‘lock-up’. While that manoeuvre didn’t cause much concern in the public eye, the public sure noticed Kenneth Hayne being strong-armed into a photo with the treasurer, Josh Frydenberg. At the formal handing over of the report, the commissioner looked visibly annoyed throughout the thirty-second photo opportunity and refused to shake hands with the treasurer with a firm ‘Nope’ when asked by a News Corp photographer. A photo-op with a politician was not the normal process, and a High Court judge isn’t the kind of person to appreciate doing anything out of order. The awkward exchange did nothing to make the government look any more adept at handling the final report, after being pilloried for years of fighting against a royal commission.

Every news outlet had to fight to get people into the lock-up, with frantic calls being made to Treasury officials to argue for more people in the room. Banks and other big businesses were fuming that they weren’t getting any representatives in. The first time they’d find out that criminal charges were being laid against them, they said, was when it was splashed across the media. Those of us who had been granted entry were divided into different committee rooms, some for journalists and others for stakeholders like the Law Council of Australia, consumer advocates like CHOICE and, yes, even the Australian Banking Association, with about fifty people in each. Once we all signed legal disclaimers warning us against leaking any parts of the report, we took seats at the long teak tables that had been meticulously laid out with chilled jugs of water and pads of paper. In the corner there was a large stack of plain brown boxes sealed with tape, which contained copies of the Final Report. Once we were locked in and subjected to another briefing, we had to watch the clock until it ticked over to 1 pm and we could finally grab a box. Tearing into the boxes had the chaos of Christmas morning, without any joy. It was time to see what the commissioner was unleashing on the world.

The room went silent as we all frantically flipped through, looking for the most explosive angle. One official walked past, leaned over and quietly suggested we turn to page 411, where we discovered the commissioner’s now infamous evisceration of NAB chair Ken Henry and CEO Andrew Thorburn. Scanning the pages, the first thing anyone was interested in was finding recommendations of criminal charges, and we were left sorely disappointed. We quickly racked up roughly twenty different referrals to the regulators for investigations, but no one was singled out.

While everyone was expecting scorched earth out of the banking royal commission, it turned out that the approach from the commissioner may have been intended to be more of a slow burn. None of the worst case scenarios were there. No individuals were recommended for criminal charges. No ban on vertical integration. No immediate ban on grandfathered commissions. No cap on executive pay. As chatter edged back into the room and everyone started comparing notes, we were all quickly coming to the same conclusion that there were to be no heads on stakes out of this report. The next morning confirmed the banks were having the same reaction, with shares leaping ahead across the board – CBA achieving the smallest gain of just 4.7 per cent, likely because of the CFS announcement the morning before.

25

The Final Report

Some may see what has emerged from the work of the Commission only through the lens of public accountability for what has happened. And public accountability is critically important. But it cannot be the only focus. It is necessary to look to the future as well as to the past.

Commissioner Kenneth Hayne, Final Report¹

Those fearing the worst heaved a huge sigh of relief. It hadn’t happened. The Final Report wasn’t going to blow up the whole industry. After months of excruciating examination, public shaming, ridicule and upheaval, the report was really what we should have expected all along: measured. Kenneth Hayne was, however, extremely critical of the conflicts of interest plaguing the industry, saying, ‘Other professions do not have such faith in the notion that conflicts of interest and conflicts between duty and interest can be effectively managed. Until something is done to address these conflicts, the financial advice industry will not be a profession.’²

While executives weren’t being frogmarched to jail, there were some significant changes being called for, with both major political parties immediately saying they’d back the financial advice recommendations, even if their enthusiasm would prove to wane in the weeks and months to follow. Kenneth Hayne said there were four big reforms that needed to happen to see meaningful change in financial advice: simplifying the law, removing conflicts for advisers, improving compliance and fixing the culture.

There were also other smaller changes that would hopefully address some of the bigger issues.

First, Commissioner Hayne recommended fees should be actively reviewed by clients once a year. This was a significant step up on the biennial-slash-never approach previously seen. Critically, Hayne recommended that the fee review must be recorded in writing, and that fees taken out of money held by the adviser had to be expressly agreed to.

In what’s sure to be a fun conversation for advisers, they’ll need to hand their customers a single sheet of paper that explains, in detail, all the ways in which they’re not independent. There will be very few advisers who will be able to claim that they’re truly independent, and forcing a customer to read through a disclaimer explaining how they’re not was recommended to make sure customers are fully aware of who they’re really dealing with.

Grandfathered commissions, the commissions still hung over from before the Future of Financial Advice reforms, were singled out to be dropped as soon as possible. This call was both important and inevitable. The banks had already dumped them for the most part; it is older and smaller firms reliant on them that will see the biggest impact upon their business model, although, as we’ve seen, AMP’s advisers are also anticipated to take a hit. AMP was careful in its response to the recommendation, saying, ‘There is more work to do as we are determined to earn back the trust of our clients, our shareholders, our regulators and the wider Australian community.’³

The Coalition agreed that they’d ban grandfathered commissions by 1 January 2021, giving those hangers-on a last chance to phase them out. This proved to be one of the only real points of difference between the Coalition and Labor responses, with Labor calling for them to be dropped immediately. Grandfathered commissions became a niche topic during the election campaign, as the parties focused on punter issues like tax cuts, house prices and climate change. With the Coalition riding to an emphatic victory, there’s little chance they’ll waste the political capital on making life more miserable for financial advisers. Labor, however, will undoubtedly relish the opportunity to blame any scandals that come to light before 2021 on the Coalition.

Big changes are also coming through to bolster the disciplinary regimes keeping financial advice in line.

Kenneth Hayne argued in the Final Report that it was important to ‘assist in impressing upon financial advisers that they occupy a position of trust’.⁴ Australian financial services licensees would be obliged to report to disciplinary bodies, and a ‘system of mandatory notifications is necessary to overcome the existing issue with licensees failing to share information with ASIC and with professional associations’.⁵ The commission also called for a stronger, more ‘coherent’ disciplinary scheme, saying, ‘the existing disciplinary arrangements for financial advisers are fragmented, and hampered by inadequate sharing of information’.⁶ The associations say they’re already sharing more information than they ever have. The government has agreed to establish a single disciplinary body for imposing sanctions, but the worst punishment it can dole out would essentially be deregistration.

Licence restrictions are also set to get tougher for licensees. The commissioner called for stronger reference checking and information-sharing protocols for financial advisers as a condition of their licence, suggesting that the Australian Banking Association’s ‘Financial advice – recruitment and termination reference checking and information sharing protocol’ guidelines is a good benchmark. Further, as a requirement of their licence, the commission recommended that licensees should be forced to report ‘serious compliance concerns’ about individual advisers to ASIC on a quarterly basis.

More than a month after the Final Report was released, the Association of Independently Owned Financial Professionals revealed to the Your Money website that it was planning on launching a legal campaign against the government. AIOFP executive director Peter Johnston wrote, ‘The [banks] have cleverly spun grandfathered revenue into a fictitious story that the monies are sourced directly from consumers and it be returned to them. [That’s] total trash … This is yet again another attempt by the institutional lobby to starve advisers out of the industry. This time they have gone too far.’⁷

While you might be with him so far, you can almost hear the quiver of a long bow being drawn when he goes on to mount his legal argument. ‘Since 2011, the constitutional restrictions on the acquisition of property (other than on just terms) have not changed.’ You might remember that constitutional principle from the iconic Australian film The Castle, where the Kerrigan family successfully fights off the government’s plans to repossess their home to make way for an expansion of Melbourne airport.

Calls to change the life insurance premiums could prove to be the most divisive issue for the industry. The commission recommended reducing the cap on life insurance commissions down to zero, unless there was a clear justification otherwise. When the industry has in the past fought tooth and nail to stop the cap being wound down from a possible high of 130 per cent, there’s a lot to lose. The industry argued that the dialling down of these commissions would see Australia drastically underinsured. There’s always a regular rotation of press releases bemoaning the level of underinsurance in Australia, but they are often attached to a company trying to sell you an expensive policy. This is another recommendation that’s been kicked down the road, with an ASIC review to be completed in 2022 to have the final say.

The decision to not call for the ban of vertically integrating finance products was slammed as the biggest missed opportunity of the Final Report. It was perhaps because the commissioner could already see that the requirements being introduced were making vertical integration such an untenable business proposition that calling to ban it would be an avoidable overreach. IOOF told its advisers, ‘Noticeably, the vertical integration model was considered in detail and not altered. In simple terms the model is not the primary issue, it is that existing laws need to be more rigorously applied.’

Jonathan Mott, a banking analyst from the global investment firm UBS, wrote a report in response titled ‘Tough Talk, Soft Recommendations’, where he said everyone had been bracing for much worse. ‘There was much discussion around misconduct within the banks and the need to change culture; however, the final recommendations fell well short of market expectations.’⁸

There was universal agreement that the recommendations didn’t go as far as expected or hoped. Sydney Morning Herald investigative journalist Adele Ferguson, whose work covering financial misconduct was a driving force in bringing about the banking royal commission, wrote on the day it was released, ‘For those looking for massive structural change, an overhaul of the regulators or a list of heads on sticks, commissioner Kenneth Hayne’s verdict would have disappointed. There was little blood and gore.’ She also rightly foreshadowed the industry pushback to come, saying, ‘But like anything, the devil in all the recommendations will be in the detail. The lobbyists will be in full-throttle trying to maintain the status quo.’⁹ Ferguson was a lot more critical by March 2019, watching bank executives face another parliamentary inquiry, when she lamented, ‘In many ways, the final report was a win for the banks. Key areas were squibbed, including tackling vertical integration.’¹⁰

Former ACCC tsar Professor Allan Fels praised Kenneth Hayne for his ‘radical exposure’ of misconduct in the industry, but also thought the Final Report’s recommendations fell flat. At a panel hosted by the Melbourne Press Club in March 2019, following the Final Report being released, he spoke alongside investigative journalist Adele Ferguson and Professor Ian Ramsay, who led the Review of the Financial System External Dispute Resolution and Complaints Framework in 2017. There, he said, ‘The royal commission was not good on the whole process of dealing with the difficult policy problems … A few more names would have sent a really clear message to boards, and I think that’s the way we get change, through scaring them, quite frankly.’¹¹

What we’ve witnessed in the immediate aftermath of the banking royal commission’s final report is a lot of PR spin. In a way, it’s not surprising to see that the recommendations didn’t go as far as we might have expected. A lot of changes were already happening in the culture of the industry and Kenneth Hayne’s approach appeared to be to put more pressure on the regulator. And we can’t underestimate the cultural shift occurring. Even the renowned rouser for reform Robert M.C. Brown has said he’s noticed that responses to his articles that are critical of the industry have pivoted away from persistent negative feedback. ‘I do get some positive responses now, whereas previously I didn’t receive any. I think people get it, and they’ve actually got it for a long time – I think Hayne identified these points about the importance of the people we see on the boards and senior management of these product manufacturers, they need to lead from the front, because they promote themselves as leaders and they’re handsomely paid to do so.’

If you’re thinking Kenneth Hayne might just be too much of an optimist, he did recommend there should be a joint review done by the government and ASIC down the track to see if the recommendations have been implemented properly by government and businesses, and whether the regulators and the financial services entities have done enough to improve the quality of financial advice. He’s recommended the review be done preferably by 30 June 2022, but no later than 31 December 2022. The terms he outlined for the review sound an awful lot like another inquiry, which had more than a few people wondering if there would be another royal commission before too long.

Since the Final Report, we’ve already witnessed Labor and the Coalition sparring over changes to mortgage broker commissions, before both backed down in their own ways: the government punting it to a future review while Labor backed away from its calls to implement every recommendation in full, no doubt prompted by the nationwide advertising campaign funded by lobbyists for the mortgage brokering industry. The TV ads showed a young family walking down a long corridor full of doors, each one with a different mortgage broker behind it slamming the door in their face until, eventually, the only door remaining open has a greedy banker behind it. The lobbying worked. The halls of parliament were full of lobbyists in the lead-up to the 2019 federal election, wearing their distinctive orange lanyards which identify them as such, issued by Parliament House security. The doors of MPs and senators were not shut in their faces.

26

Just the bill, please

Risk to reputation was ignored. Discovery of misconduct was ‘managed’ by words of apology and promises to do better. But little more was done than utter the apology and make the promise.

Commissioner Kenneth Hayne, Interim Report¹

The point of remediation is supposed to do more than just pay back the customer what they put in. It’s also supposed to put them in the same position they would have been in had they not been the victim of bad advice. The first is unlikely, and the latter is almost impossible. By the beginning of 2019, the Big Four banks and AMP had collectively paid or offered $350 million in compensation to customers who were charged fees for advice they never received. On top of that, the banks have all provisioned for more than $800 million towards potential compensation. While the reviews are incomplete and that number could go down, history also tells us there’s every chance it could go up, too, which means the total could come to a whopping $1.15 billion.²

Once the banking royal commission had dredged up the widespread rorting of customers, the focus then turned to making it right. The enormity of the task was not lost on anyone as the institutions began the painstaking task of going back and trying to figure out how many customers had been ripped off. On 11 March 2019, ASIC released a statement that seemed designed to deliberately shame the banks for moving slowly. It said that ASIC’s ongoing supervision of the review programs being undertaken by the Big Four banks, AMP and Macquarie showed that most of the institutions were yet to complete fresh reviews to identify systemic issues; ASIC was still relying on information about issues already identified and reported to ASIC from 2013 onwards. ASIC commissioner Danielle Press was quoted as saying the institutions had taken too long to conduct those reviews, and made reference to new enforcement powers promised by the government that would help ‘speed up remediation programs in the future’.

Press continued, ‘These reviews have been unreasonably delayed. ASIC acknowledges that they are large scale reviews – they relate to systemic failures over long periods with reviews going back six to 10 years and cover 36 licensees from the six institutions that currently authorise more than 7,000 advisers. However, we believe the institutions have failed to sufficiently prioritise and resource their reviews, particularly as ASIC advised them to commence the reviews in mid-2015 or early 2016.’³

It is an extraordinary thought that these reviews covered almost a third of the financial planners operating in the country, and that all those promises to do better might be falling on deaf ears. The reasons ASIC listed above for the slow response also gives an idea of the deeply rooted institutional changes that need to be made. For instance, poor record-keeping and systems within the institutions has meant that in many cases they’ve been unable to find or access customer files for review. ASIC says there are still disagreements within some of the big banks regarding how they’ll go about actually remediating customers. The regulator says some of the banks were pushing for the requirement for customers to ‘opt in’ to the review and remediation programs, while other banks have proposed to assess if there had been a ‘fair exchange of value’ with customers instead of figuring out whether customers had actually received the specific services they paid for. If that doesn’t have your confidence in concerted change wavering, ASIC says they’re still encountering entities that insist the offer of an annual review is legally sufficient to satisfy the requirement of an annual review.

Just remember, this is not a problem that hit the Big Four and AMP out of the blue. Since 2014, ASIC has supervised compensation programs surrounding the issue of fees for no service (FFNS) for thirty-two Australian financial services licensees, including some not affiliated to major institutions. As at 31 January 2019, the licensees have paid or offered approximately $316 million in FFNS compensation to more than 120,000 customers who were charged fees for personal advice they did not receive. Of this amount, approximately $235 million has come from licensees owned by the institutions. Separately, NAB’s superannuation trustee, NULIS Nominees, has paid or offered more than $116 million in relation to ‘plan service fees’ for general advice.

When it comes to the banks meeting the public halfway, two men who have ironically become intermediaries of a sort are Jeff Morris and John ‘Wacka’ Williams. While neither had a formal role with the banks, both have become well-known advocates for victims, with direct lines to senior bankers. Nor are either of them keen on any formal role, although Wacka Williams has been pushing for some time to get Jeff Morris into CBA, even speaking to the former CEO about it. ‘I said to Ian Narev, if I were you I’d employ Jeff Morris to do the oversight of the whole clean-up. Jeff’s been your enemy, he’s highlighted the wrongdoing, if you can satisfy him that your review of your 450,000 files is done properly that’s a good step in the right direction to clean the mess up. However, they didn’t employ him,’ Williams told me. When I asked Jeff Morris, he laughed off the suggestion.

Wacka is more open about his own future, saying he’s already agreed to work part time with one bank to help mediate disputes between farmers and their financers if the farmers are facing the prospect of having to leave their land. We saw in the royal commission rounds how desperately sad it was for farmers being forced off land that might have been in their family for generations, sometimes because of things out of anyone’s control, like drought, although in many of the case studies the contributing factor was the government banning live exports overnight. Wacka Williams tells me, ‘I met with fifteen bankers here in Parliament House around four years ago and they said “What do you want, Senator Williams?” I said I want that when people have to leave the land that they leave alive and not in a coffin. That’s all I want.’

Williams takes his commitment to fairness very seriously, saying that despite all he’s been through he’s not a bank-basher. He often works closely with the banks and has no problem weeding out the vexatious from the real victims. Which sometimes means telling people who claim they’ve been wronged that they haven’t got a case and leaving the banks to it. Wacka explained, ‘Sometimes you’ll say, “You haven’t got a complaint, on your bike.” Then we’ll tell the bank, “Go your hardest on them, we won’t interfere.” In other cases I’ve been the mediator. I’ve brought the banks and the customers together, and during that mediation I’ve said to the bank, “Don’t offer them any more money, you’ve been more than generous, you’ve done your bit. You’ve paid your compensation, I wouldn’t be offering them any more.” So I think I’m very fair.’

One observation Commissioner Kenneth Hayne made was the fact that remediation is often impossible ‘once the horse has bolted’. It’s not just the matter of a refund. Remediation is the process of trying to put the victim into the position that they would have been before they received the wrong advice. When you factor in the missed opportunities, the pain and the heartache, it’s often simply unquantifiable.

27

It’s a new dawn

Like any inquiry that is required to investigate whether there has been wrongdoing, and if there has, to identify its causes, there is always a risk that the resulting picture of the industry is distorted. There is always a risk of losing sight of the fact that, in any industry as large as the financial services industry (or any of the chief subsectors of the industry) there will always be cases where participants do the wrong thing.

Commissioner Kenneth Hayne, Interim Report¹

The year before the banking royal commission started, market research company Roy Morgan did a survey that, unsurprisingly, found nurses were the most trusted professionals in Australia, with 94 per cent of people rating them ‘high’ or ‘very high’ in criteria of ethics and honesty. Nurses had topped the same survey for the past twenty-three years. Skirting down the list, past lawyers and priests, financial planners find themselves with a paltry 25 per cent of people saying they trust them – although I should fess up that, even further down the list, TV reporters sit at just 17 per cent.

The challenge of working their way up the trust ranking will start with providing advice that actually makes people’s lives better. Arguably the most significant issue affecting that is the connection between bad conduct and how people are paid. Once, I was interviewing an obstetrician for a story about the drop in the number of parents consenting to vitamin K shots for their newborn babies. This routine shot, given after birth, helps blood to clot and prevents an extremely rare but devastating disorder that can see newborn babies bleeding out of their eyeballs. It is beyond most people’s comprehension to ever refuse such a simple but powerful intervention, but there has been a rise in refusals alongside the anti-vaccination movement. The obstetrician told me he says the same thing to every parent who questions the need for the shot: ‘If you do this or you don’t, I still get paid. There’s nothing in this for me. I’m just trying to do the right thing by your baby.’ There isn’t a financial adviser in Australia right now who could say the same thing about their own services.

That’s not to say that financial advisers will never prove their worth without being paid at the same time. But it won’t happen until there is a much smaller, more well-defined cohort of people who call themselves financial advisers, and who figure out a business model that sees them running a sustainable business that doesn’t involve taking a cut of the action.

The royal commission was tasked with triggering an overhaul of misconduct in an industry that, since its inception, has grappled with the same few issues. So far these problems have only been hacked away at the edges but remain deeply ingrained at its core. Industry watchers see advice splitting off in two very different directions: some will be very expensive, and the rest will be very cheap.

Let’s start with the expensive advice. There is a class of investor that has a lot of money. They’ll be interested in more sophisticated investments, like self-managed super funds. To get good financial advice they’ll need someone with experience and qualifications, possibly across several fields including tax law and superannuation, and someone who’s well across current research. Those people will spend time getting to know your situation, really listening to what you want to achieve, and they won’t want to push you into anything you’re not comfortable with. Those advisers are expensive and will likely get much more expensive as the demand for their services goes up and the number of advisers in Australia goes down. You’ll likely have to pay for their services up-front.

As Ben Smythe, partner and principal adviser at Minchin Moore Private Wealth puts it, ‘Consumers who value advice that is personalised, unconflicted and delivered by someone they trust and respect must face the reality that this type of financial advice is not cheap. While this might mean that personalised financial advice might not be affordable for all consumers, those who now actively choose to engage a financial adviser should expect that you will [be] treated individually, and your own unique needs, goals, preferences and aspirations taken in to consideration.’²

Those looking for more affordable options may find themselves talking to ‘wealth coaches’. Generally people with little to no training, they won’t be useful in terms of giving product advice but they should be able to look at your financial habits. Much like a personal trainer you might hire at the gym, the onus is entirely on the customer to get anything out of working with them, which, if you’re as disciplined as me, will be hit and miss. But if your number-one issue is wasting money, getting more of your money into a garden-variety savings account might be the best thing you can do.

Lea Schodel is one woman who’s entered the wealth coaching industry, starting a ‘mindful wealth’ practice. Schodel has had a career in personal finance, and in 2017 was named the winner of the AFA/TAL Female Excellence in Advice award, as well as being the 2016 Money Management Young Achiever of the Year. She’s also a qualified yoga teacher. She decided to take a very different path to traditional financial advice by teaching her clients that ‘Money is just another form of energy, and we can use this energy in a positive way to create more energy. We can find flow with money.’ While this might sound out there, she admits she’s not one to follow the crowd. And there’s certainly a growing appetite, especially among younger consumers, to focus less on the process of saving as a primary goal and to look more closely at what’s tempting them to waste money.

Right at the other end of the spectrum from our high-net-worth individuals, there will be advice that is cheap but effective for most people. ‘Robo-advice’ is a hot topic in the industry, with the words usually spat out by advisers in disgust, in a ‘look at our industry going down the tubes’ kind of way. Robo-advice is sometimes called ‘automated advice’ or ‘digital advice’. It’s any advice that uses algorithms or technology to auto-generate advice for you without the involvement of a human. Easier and more cost-effective than receiving traditional advice, there’s a lot of appealing factors related to robo-advice for people with not much to save. Some envision it being software programs into which you can punch your details to receive different modelling of your finances and scenarios of what you can achieve with different funds. The thing is, for your average twenty-year-old an app on your phone that tells you when you’ve already spent $100 eating out in a week will probably be a lot more useful than an adviser who wants to push your paltry savings into a managed fund. ASIC says it’s seen a number of existing licences as well as new ones edging into robo-advice, which is regulated in the same way as human advisers. If you’re sceptical that this is really where the field is headed, one interesting character who has found himself in the robo-advice field is the father of the Future of Financial Advice reforms himself, Bernie Ripoll, with a new company called Map My Plan. If you can’t see the writing on the wall with this one, maybe listen to the guy holding the marker.

Between these two extremes there are the consumers who lie somewhere in the middle, who’ve experienced a significant change in their life which has involved a sudden windfall, like an inheritance, or, at the grimmer end of the spectrum, a large loss like a death or a divorce. These types of customers often find themselves susceptible to dodgy financial advice because they’re already emotionally vulnerable and probably not in a position to be thinking about the long-term ramifications of their actions. It’s pretty easy to see how customers who are panicked by the degree of change in their lives can be easily parted from their money. Rather than looking at this line of advice as a depressing proposition, however, many see the opportunity here. In the United States there are financial planners that specialise in transitioning clients through a divorce.

The FPA has picked this as a growth area, because it also generally comes with a more transactional payment model that they believe will take off. CEO Dante De Gori says, ‘People want to pay for services they want and need, people don’t necessarily want to pay for a full holistic financial plan of their situation. People will actually say, “Look this is my issue today, this is what I need advice on” and move on. It’s going to become more – and this is a dirty word sometimes in the industry, but financial advice will become more transactional. It doesn’t mean you don’t take into account the client’s circumstances and their financial situation, but the reality is that you’re giving them advice on a specific need or want at a point in time. People will pay for what they need. People won’t pay for stuff they don’t need or don’t want.’ Of course, ‘transaction’ is a dirty word because it’s a lot harder to make money on many individual single transactions than by holding on to someone’s money and taking little bits of it on a regular basis.

While we wait to see if our political leaders have the wherewithal to actually see through the proposed reforms and force real change in the sector, we can be sure we are going to see much more sceptical consumers. Websites like Adviser Ratings, which allows reviews of financial advisers by members of the public to be posted online, will help keep rogue operators accountable, perhaps more than an ASIC register could – although, finance guru and Sunrise host David Koch did find himself the subject of an ABC TV Media Watch segment for spruiking the company on his shows and online without disclosing his financial interest. He told Media Watch, ‘My shareholding was so minor that I didn’t think it worthy of disclosure, but clearly you think it is, so will do so now moving forward.’ Naughty Kochie.

One of the hardest things in journalism is knowing the difference between when you just don’t understand something and when something doesn’t make sense. That instinct can be the difference between uncovering huge stories of corruption and fraud or setting yourself up for ridicule and shame. Each day you’ll be challenged by people on both sides of the argument who are confident in their truth and want you to be uncertain in yours. You have to do your research, be reasonable and strive for accuracy. It’s a risk not unlike the risk many of us take with our money. Everyone always has an opinion about the best way for you to handle your finances. The unfortunate truth of financial advisers is that, for a long time, there’s been an obvious advantage to making everything as complicated as possible. The solutions they offer will, by any logic, have some benefit for them. When you can’t be sure whether that cloak of confusion is because the subject matter is complicated or being made complicated, there’s not much you can trust but your own research and gut feeling.

Scott Pape, the Barefoot Investor, has some advice in a video he made for Money Smart that sums it up quite nicely. ‘Empower yourself to ask good questions. It’s just like being on a first date. You want to know what the motivation is of this person that I’m sitting down with.’ It’s good advice, because like a date, advisers might just take the clothes off your back.

The true test will be whether the regulator steps up. For those naysayers who say over-regulation will be the death of the industry, remember that according to ASIC, in 2009 there were approximately 18,000 financial advisers in Australia. As at April 2018, there were 25,386 financial advisers registered in Australia. That’s a 40 per cent growth in the industry. Right in the middle of that period the Future of Financial Advice reforms came in, which were supposedly going to cripple the industry.

As Bernie Ripoll says, ‘This is not a nanny state. We shouldn’t regulate everyone to death. But if the sector keeps forcing the parliament to regulate them to death then that’s their responsibility. I’m really clear about that, I don’t take a step backwards. Some people will still criticise them. Everyone’s now come to the realisation that it’s a different world, there has been a shift.’

Financial advisers will also have to realise that some of the industry’s staunchest critics are also the biggest believers in good financial advice. ‘Consumers of financial planning services deserve the existence of a source of advice that is, and is perceived to be, trustworthy and independent. Putting it another way, reinvention of the financial planning industry into a professional occupation is a worthwhile project because it is in the public interest. In that sense, reinvention is not an option. It is a necessity.’

But the last word here will go to former senator John ‘Wacka’ Williams, who leaves a legacy greater than most politicians can aspire to. His focus is squarely on the regulators. ‘I don’t think we need any more laws, I think we need more severe punishment as a deterrent.’ He continues, ‘If they don’t do their job properly: sack them. Simple as that. The buck stops with [chair of ASIC] James Shipton. If in three years we’re seeing an inquiry into ASIC in parliament and they’ve been hopeless again, then put the bloody spear through them, sack them.’

Only time will tell.

28

Where to from here?

Charging for doing what you do not do is dishonest. No-one needs legal advice to tell them that. The root cause for what happened was greed; the greed of both licensees and advisers.

Commissioner Kenneth Hayne, Interim Report¹

There’s an old joke about a tourist who has become lost on his way to Dublin and asks a local Irishman for directions. The Irishman replies, ‘Well, if I was going there, I wouldn’t be starting from here.’ While we might wonder if the financial planning industry has lost its way or been on the wrong track the whole time, it’s not a completely lost cause. People want and need good financial advice, but it’s going to take a radical rethink of the entire industry, which is already in a perpetual loop of self-examination and inaction.

Buried beneath the National Library of Australia are hundreds of thousands of different records, carefully preserved and neatly organised along long shelves that climb up to the ceiling. These shelves are full of documents waiting to be picked through by the amateur and expert historian alike. Tucked away in these archives was where I found the small grey plastic boxes containing the original journals of the International Association for Financial Planning, which later became the Financial Planning Association. I’ve referenced a lot of these articles in this book. Picking through the journals has given me a newfound appreciation for a good perm, and excellent insight into the fact that financial planners have been talking about exactly the same issues for about thirty years now. These issues can be roughly divided up into four categories. First, how is the industry going to survive the latest regulatory changes? Second, how is the industry going to survive with stricter education standards? Third, how are planners going to regain the trust of the public? And fourth, let me sell you this thing.

I’ll give you a sense of some of the headlines:

‘Pressure to give correct advice continues to grow’, published 1988.

‘Litigation set to increase’, published 1989.

‘Client confidence still down’, published 1990.

‘Aim is to define financial planning’, published 1990.

‘Degree course a possibility: Pressure on financial planners to perform has substantially increased the need for better educational qualifications’, published 1990.

‘Australian Securities Commission big guns to fire’, published 1990.

‘Yes, we do have an image problem’, published 1991.

‘Compliance is getting tougher’, published 1992.

‘Australian Securities Commission targets dealers’, published 1992.

And my personal favourite, ‘Cross your fingers and pray’, the title of an article published in 1991 warning planners to take out professional indemnity insurance because of the latest ‘trend’ of the courts to hold professionals liable for breaching a standard of care.

Throughout the royal commission there was a lot of discussion around whether financial planning can be considered a profession like a doctor or a lawyer. It’s not a great start when one of the best bits of evidence to back up the claim that financial advice is a legitimate profession is a legislative definition of ‘financial adviser’ that means they’re strictly liable for harsher penalties for misconduct. There have been a lot of positive steps in that direction, including better self-regulation of the industry, increased individual responsibility of advisers and better education. However, as an outside observer of the industry, I think these conversations have put the cart before the horse, because the industry has missed the first step. The question they should be asking themselves is, ‘What are you providing, and what is that worth?’

If I break a bone, I need to see a doctor. If I’m charged with a crime, I need a lawyer to represent me in court. I can, however, live my life perfectly well without ever seeing a financial adviser. There’s plenty of evidence to show that if I do see one, it’s likely I’ll either see no benefit, or my money will end up lining their pockets and not my own. There’s plenty more evidence to show that good planners will make incremental differences, which can be ultimately quite powerful but just as often quite pointless. There are plenty of jobs where someone with no education or work experience to speak of can walk in and do what’s required. A retail worker can learn how to put transactions through the till on their first shift. If you’re selling financial products with the same level of skill, you should expect to be remunerated like a retail worker, who do not receive much more than a basic wage. Education changes already taking place in the industry will, one hopes, eliminate this issue almost entirely.

For all the valid criticism of the industry, it is not to say that there aren’t financial advisers out there who can help you make a lot more money than you could on your own. Increasingly, they will do this by becoming highly specialised. For advisers, there will need to be a true realisation that unless you actually have skills in things like tax minimisation or self-managed super funds, you’re not bringing anything to the table worth charging for.

The first change of thinking will have to come from customers. As long as money and wealth exist there will be someone looking to take it off you. If the shocking stories from the royal commission have taught us anything, it’s that there needs to be a deep level of distrust when dealing with a financial adviser. This distrust is not insurmountable, but in the absence of established education standards and a strict regulatory system, anyone looking to a financial adviser for help will have to make them jump through a number of hoops before parting with their hard-earned cash. The good financial advisers out there will agree with me on this.

The most obvious point to make, though, is that you really don’t need someone to ‘manage’ your money unless you have a lot of it. Advisers can promise to make you money but they’ll very rarely make you rich. If you’ve been earning less than a six-figure salary most of your life and have accumulated a great superannuation balance, chances are that there are small changes you can make to improve your situation, but they will comfortably fall within the ‘general advice’ category.

Until then, arm yourself with as much knowledge as you can, don’t act rashly and question everything. But, that’s just my advice.

Acknowledgements

There are more people I’d like to thank than I can possibly fit on this page, but there are a few people who deserve a special mention for their role in the making of this book. Firstly, each person who took the time to meet with me and be interviewed about financial advice. The invaluable research assistance from the National Library of Australia and the National Film and Sound Archive of Australia. My Sky News colleagues who told me to keep going, especially Janine Perrett, Paddy Brown, Kaycie Bradford and Paul Murray. Louise Adler for seeing the potential in me. Meredith Curnow and Kathryn Knight for bringing my work to life. My wonderful family, especially my parents Tom and Vickie, who’ve weathered more than a few storms with me. My Patrick Westman, for your encouragement, patience and support. Nicole Quinn and Andrew Westman for helping with the nitty-gritty. And finally, Pepe, for never leaving my side.

Annelise Nielsen is a political reporter and host at Sky News Australia. As a journalist, she has a wide range of experience covering stories across Australia, Asia and the Middle East. With a bachelor’s degree in law and a year working in a professional services firm, her work is often driven and informed by a strong interest in justice, the Australian legal system and politics.

List of abbreviations and acronyms

ACCC

Australian Competition and Consumer Commission

AFA

Association of Financial Advisers

AFSL

Australian Financial Services Licence

AIOFP

Association of Independently Owned Financial Professionals

APRA

Australian Prudential Regulation Authority

ASC

Australian Securities Commission (precursor to ASIC)

ASIC

Australian Securities and Investments Commission

BOLR

buyer of last resort

CPA

Certified Practising Accountant

FASEA

Financial Adviser Standards and Ethics Authority

FoFA

Future of Financial Advice

FPA

Financial Planning Association of Australia

FPEC

Financial Planning Education Council

IAFP

International Association for Financial Planning

Notes

Introduction: The shame game

1 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Draft Transcript, P-1895, 45

2 Australian Transaction Reports and Analysis Centre (AUSTRAC), Australia’s Financial Planning Sector: Money laundering and terrorism financing risk assessment, December 2016, p. 2, www.austrac.gov.au/sites/default/files/financial-planning-sector-risk-assessment-WEB.pdf, accessed 6 May 2019

3 Australian Transaction Reports and Analysis Centre (AUSTRAC), Australia’s Financial Planning Sector: Money laundering and terrorism financing risk assessment, December 2016, p. 2, www.austrac.gov.au/sites/default/files/financial-planning-sector-risk-assessment-WEB.pdf, accessed 6 May 2019

4 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, ‘Some Features of the Australian Financial Planning Industry’, Background Paper 6 (Part A), p. 7, https://financialservices.royalcommission.gov.au/publications/Documents/features-of-the-australian-financial-planning-industry-paper-6.pdf, accessed 17 June 2019

1: A punter’s royal commission

1 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Interim Report, Volume 1, p. 7, © Commonwealth of Australia 2018

2 Prime Minister of Australia, The Hon Malcolm Turnbull MP, ‘Appointment of royal commissioner’, media release, 1 December 2017, https://webarchive.nla.gov.au/awa/20180822062103/https://www.pm.gov.au/media/appointment-royal-commissioner, accessed 17 June 2019

2: Opportunity comes knocking

1 Commonwealth of Australia 2001, Parliamentary debates: Senate, Hansard, No. 11, 22 August 2001, p. 26325

3: A short history of some long scandals

1 Supreme Court of Western Australia, Greenburg v Queen [1993] WASC 655, www.austlii.edu.au/au/cases/wa/WASC/1993/655.html, accessed 17 June 2019

2 Professor Kevin Davis, Study of Financial System Guarantees, Department of Treasury, pp. 242–3, © Commonwealth of Australia 2004

3 AMP, ‘Update on AMP Financial Planning Enforceable Undertaking with ASIC’, ASX announcement, 15 February 2007, http://media.corporate-ir.net/media_files/irol/21/219073/MediaReleases/asx/150207%20Update%20on%20AMP%20Financial%20Planning%20Enforceable%20Undertaking%20with%20ASIC.PDF, accessed 17 June 2019

4 Australian Securities and Investments Commission, Enforceable undertaking 017029200, accepted by ASIC 27 July 2006, pp. 11–12, https://download.asic.gov.au/media/1299577/017029200.pdf, accessed 16 June 2019

5 PM, ABC Radio National, 27 July 2006, ‘AMP caught out by regulators’, transcript, www.abc.net.au/pm/content/2006/s1698909.htm, accessed 14 June 2019

4: A Storm is coming

1 Andrew Fraser, ‘Jetsetters may crash while banks weather Storm’, The Australian, 6 November 2009, www.theaustralian.com.au/news/inquirer/jetsetters-may-crash-while-banks-weather-storm/news-story/9aeeb90a0c81d4402e5c34ac3ea0d07d, accessed 10 July 2019

2 Australian Securities and Investments Commission, ‘Margin loans: The highs and lows of margin loans’, updated 4 October 2017 www.moneysmart.gov.au/investing/borrowing-to-invest/margin-loans, accessed 17 June 2019

3 Radomir (Ron) Jelich, Submission to the Parliamentary Joint Committee on Corporations and Financial Services: Inquiry into issues associated with recent financial product and services provider collapses such as Storm Financial, Opes Prime and other similar collapses, May 2009, www.aph.gov.au/~/media/wopapub/senate/committee/corporations_ctte/completed_inquiries/2008_10/fps/submissions/sub54_pdf, accessed 17 June 2019

4 Ibid

5 Federal Court of Australia, Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023, www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2016/2016fca1023, accessed 17 June 2019

6 Australian Securities and Investments Commission, ‘14-244MR ASIC and Bank of Queensland reach Storm Financial settlement’, media release, 22 September 2014, https://asic.gov.au/about-asic/news-centre/find-a-media-release/2014-releases/14-244mr-asic-and-bank-of-queensland-reach-storm-financial-settlement, accessed 10 July 2019

5: Banks and the big wealth experiment

1 Australian Securities and Investments Commission, Report 562: Financial Advice: Vertically integrated institutions and conflicts of interest, January 2018, p. 7, https://download.asic.gov.au/media/4807789/rep-562-published-04-july-2018.pdf, accessed 7 May 2019

2 Karen Maley, ‘How CBA, ANZ and NAB were forced out of wealth’, Australian Financial Review, 29 June 2018,www.afr.com/business/banking-and-finance/how-cba-anz-and-nab-were-forced-out-of-wealth-20180628-h11yup, accessed 17 June 2019

3 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, ‘Some Features of the Australian Financial Planning Industry’, Background Paper 6 (Part A), p. 7, https://financialservices.royalcommission.gov.au/publications/Documents/features-of-the-australian-financial-planning-industry-paper-6.pdf, accessed 17 June 2019

4 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Final Report, Volume 1, p. xxvi, © Commonwealth of Australia 2018

5 Australian Securities and Investments Commission, Report 562: Financial Advice: Vertically integrated institutions and conflicts of interest, p. 8

6: Commonwealth Financial Planning

1 Australia, Senate Economic References Committee, ‘Performance of the Australian Securities and Investments Commission’, June 2014, p. 125, 8.54

2 Australia, Senate Economic References Committee, ‘Performance of the Australian Securities and Investments Commission’, June 2014, p. 119, 8.33

7: The toothless tiger

1 Steve Lewis and Anthony Boyd, 1993, Savings: Australia in crisis?, Financial Review Library, Sydney, p. 183

2 Australian Securities and Investments Commission, ‘Significant regulatory issues facing ASIC and Australian business’, presentation by Jeffrey Lucy, Chairman, to Australia–Israel Chamber of Commerce, 4 August 2004, p. 3, https://download.asic.gov.au/media/1310449/AICC_speech_040804.pdf, accessed 17 June 2019

3 Adele Ferguson, Ben Butler and Ruth Williams, ‘ASIC chief’s overseas trips draw criticism’, Sydney Morning Herald, 23 November 2013, www.smh.com.au/business/asic-chiefs-overseas-trips-draw-criticism-20131122-2y1p5.html, accessed 17 June 2019

4 Sue Mitchell and Joyce Moullakis, ‘Australia a “paradise” for white collar crime’, Australian Financial Review, 22 October 2014, www.afr.com/business/australia-a-paradise-for-white-collar-crime-20141021-11blos, accessed 17 June 2019

5 Australia, Senate Economics Legislation Committee, Estimates, Hansard, 22 October 2014, p. 69

6 Australia, Senate Economics Legislation Committee, Questions on Notice, Budget Estimates, June 4–6 2013

8: I’m with you

1 Russell Lea, ‘A busy time ahead’, interview with Ken Breakspear, Financial Planning, International Association for Financial Planning (Australia), March 1992, National Library of Australia call number Nq 332.024 IAF

9: Back to the future of financial advice

1 Interim Report, Volume 1, pp. 88–9

2 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Draft Transcript, P-1042, 10

3 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Draft Transcript, P-1042, 30

4 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Draft Transcript, P-1042, 5

5 Assistant Treasurer, The Hon Arthur Sinodinos MP, ‘Delivering affordable and accessible financial advice’, media release, 20 December 2013, http://axs.ministers.treasury.gov.au/media-release/011-2013/, accessed 10 July 2019

10: Back to school

1 Monty Python channel on YouTube, ‘John Cleese Considers Your Futile Comments – Monty Python’, www.youtube.com/watch?v=x8Afv3U_ysc&feature=youtu.be&t=214, accessed 17 June 2019

2 Mike Taylor, ‘25% of degree-qualified advisers are falling short’, Money Management, 31 January 2019, www.moneymanagement.com.au/news/financial-planning/25-degree-qualified-advisers-are-falling-short, accessed 17 June 2019

3 Hannah Wootton, ‘Advisers need to unite to enlighten consumers on trust’, Money Management, 31 January 2019, www.moneymanagement.com.au/news/financial-planning/advisers-need-unite-enlighten-consumers-trust, accessed 10 July 2019

4 Australian Securities and Investments Commission, Australian Financial Attitudes and Behaviour Tracker: Key findings report: Wave 6 – Sep 2017–Feb 2018, March 2018, p. 41, https://financialcapability.gov.au/files/afab-tracker_wave-6-key-findings.pdf, accessed 17 June 2019

5 ME Bank, ‘High confidence and low financial literacy a risky combo’, media release, 21 June 2017, www.mebank.com.au/news/high-confidence-and-low-financial-literacy-a-risky, accessed 17 June 2019

11: Some things change, some stay the same

1 Australian Securities and Investments Commission, Report 279: Shadow shopping study of retirement advice, March 2012, https://download.asic.gov.au/media/1343876/rep279-published-27-March-2012.pdf, accessed 17 June 2019

12: Let’s break it down

1 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Draft Transcript, P-1036, 20

2 Dr Andy Schmulow and Dr Simon Longstaff, ‘For and against a royal commission into banks’, Sydney Morning Herald, 15 April 2016, www.smh.com.au/business/banking-and-finance/for-and-against-a-royal-commission-into-banks-20160412-go4ed1.html, accessed 10 July 2019

3 Louise Yaxley, ‘Banking royal commission: Malcolm Turnbull hates this inquiry, but it had to happen’, ABC News, 30 November 2017, www.abc.net.au/news/2017-11-30/analysis-malcolm-turnbull-hates-the-inquiry-but-it-had-to-happen/9210246, accessed 3 July 2019

4 Janine Perrett on Twitter, 18 April 2018, https://twitter.com/perrettreport/status/986452663175856128, accessed 16 April 2019

13: Money for nothing

1 Final Report, Volume 1, p. 134

2 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Draft Transcript, P-1033, 5

3 Interim Report, Volume 2, p. 135

4 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Draft Transcript, P-1063, 1064

5 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Draft Transcript, P-1063, 1064

6 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Draft Transcript, P-1133, 45

7 Interim Report, Volume 2, p. 144

8 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Draft Transcript, P-1180, 10

9 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Draft Transcript, P-1190, 30

10 AMP, ‘AMP Chairman Catherine Brenner steps down from the Board – Mike Wilkins appointed interim Executive Chairman’, media release, 30 April 2018, https://corporate.amp.com.au/content/dam/corporate/shareholdercentre/files/asx-announcements/2018/30_april_2018_amp_chairman_catherine_brenner_steps_down_from_the_board.pdf, accessed 10 July 2019

11 Clayton Utz spokesperson, email to Annelise Nielsen, 30 April 2018

12 Australian Securities and Investments Commission, ‘19-052MR AMP and Clayton Utz surrender in ASIC court battle over failure to produce documents’, media release, 11 March 2019, https://asic.gov.au/about-asic/news-centre/find-a-media-release/2019-releases/19-052mr-amp-and-clayton-utz-surrender-in-asic-court-battle-over-failure-to-produce-documents, accessed 17 June 2019

13 Barnaby Joyce on Twitter, 18 April 2018, https://twitter.com/barnaby_joyce/status/986566461706547201, accessed 16 April 2019

14: I fee dead people

1 Interim Report, Volume 1, p. xix

2 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Draft Transcript, P-1340, 15

3 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Draft Transcript, P-1340, 25

4 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Draft Transcript, P-1294, 20

15: Bad apples

1 Interim Report, Volume 1, p. 91

2 Interim Report, Volume 1, p. 86

3 Commonwealth Bank of Australia, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry: Submission, 29 January 2018, pp. 31–2, https://financialservices.royalcommission.gov.au/Submissions/Documents/initial-response/RCD.0001.0003.0004.pdf, accessed 17 June 2019

4 Interim Report, Volume 1, p. 87

5 Geoff Nunberg, ‘Bad Apple Proverbs: There’s One In Every Bunch’, NPR, 5 May 2011, www.npr.org/2011/05/09/136017612/bad-apple-proverbs-theres-one-in-every-bunch, accessed 17 June 2019

6 Adele Ferguson, ‘A few bad apples? It’s a dodgy adviser orchard’, Sydney Morning Herald, 17 March 2017, www.smh.com.au/business/banking-and-finance/a-few-bad-apples-its-a-dodgy-adviser-orchard-20170317-gv0htc.html, accessed 14 June 2019

7 Federal Court of Australia, Australian Securities and Investments Commission v CFS Private Wealth Pty Ltd (No 2) [2019] FCA 24, 69, www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2019/2019fca0024, accessed 10 July 2019

8 Interim Report, Volume 2, p. 249

16: A sharp intake of breath

1 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Draft Transcript, P-1879, 20

2 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Draft Transcript, P-1880, 5

3 Mathew Dunckley and Mario Christodoulou, ‘ASIC vows to name and shame banks that don’t conduct background checks’, Sydney Morning Herald, 17 March 2017, www.smh.com.au/business/banking-and-finance/asic-says-financial-firms-still-not-dobbing-in-rogue-advisers-20170317-gv06pd.html, accessed 17 June 2019

4 Australian Securities and Investments Commission, ‘07-267 ASIC teams with industry on reference-checking initiative for financial advisers’, media release, 11 October 2007, https://asic.gov.au/about-asic/news-centre/find-a-media-release/2007-releases/07-267-asic-teams-with-industry-on-reference-checking-initiative-for-financial-advisers, accessed 9 May 2019

5 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Draft Transcript, P-1852, 5

6 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Draft Transcript, P-1896, 15

7 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Draft Transcript, P-1896, 45

17: I’m a celebrity, get me out of here!

1 Money magazine Australia channel on YouTube, ‘Sam Henderson speaking at the FPA Money Masterclass’, www.youtube.com/watch?v=HPylrpgeEVk, accessed 17 June 2019

2 Interim Report, Volume 1, p. 12

3 Quotes here and following from transcript of the public hearings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, 24 April 2018, pp. 1726–43, © Commonwealth of Australia 2018

18: Good cop, bad cop

1 Transcript, public hearings, 24 April 2018, p. 1732

2 Quotes here and following from transcript of the public hearings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, 26 April 2018, pp. 1812–14, © Commonwealth of Australia 2018

3 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Draft Transcript, P-1031, 40

4 Final Report, Volume 1, p. 208

19: Down at half-time: The Interim Report

1 Interim Report, Volume 1, p. xix

20: Show us those teeth

1 Tom Ormonde, ‘Crackdown on Money Advisers’, The Age, 21 March 1989, p. 1

2 Interim Report, Volume 1, p. xix

3 National Australia Bank, ‘NAB response to ASIC review into breach reporting and remediation’, media release, 25 September 2018, https://news.nab.com.au/nab-response-to-asic-review-into-breach-reporting-and-remediation, accessed 17 June 2019

4 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Draft Transcript, P-1034, 30

5 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Draft Transcript, P-1035, 20

6 ASIC Media on Twitter, 14 February 2019, https://twitter.com/asicmedia/status/1095988587546341376, accessed 29 April 2019

7 Australian Securities and Investments Commission, ‘19-032MR ASIC to pursue harsher penalties after laws passed by Senate’, media release, 15 February 2019, https://asic.gov.au/about-asic/news-centre/find-a-media-release/2019-releases/19-032mr-asic-to-pursue-harsher-penalties-after-laws-passed-by-senate, accessed 29 April 2019

21: The culture crusades

1 Interim Report, Volume 1, p. 87

2 Fairfax Media, embedded video, ‘The chair of the Financial System Inquiry and former Commonwealth Bank CEO David Murray has condemned ASIC’s focus on banking culture’, www.afr.com/business/banking-and-finance/david-murray-lashes-regulators-on-culture-crackdown-20160405-gnz2vr, accessed 17 June 2019

3 Australian Securities and Investments Commission, ‘Outline of ASIC’s approach to corporate culture’, speech by John Price, Commissioner, to AICD Directors’ Forum: Regulators’ insights on risk culture, Sydney, 19 July 2017, https://download.asic.gov.au/media/4393665/john-price-speech-aicd-regulator-insights-on-risk-culture-published-20-july-2017.pdf, accessed 10 July 2019

4 Australian Prudential Regulation Authority, ‘From strength to resilience’, speech by Wayne Byres, Chairman, to AFR Banking & Wealth Summit, Sydney, 5 April 2016, www.apra.gov.au/media-centre/speeches/strength-resilience, accessed 10 July 2019

5 Australian Securities and Investments Commission, ‘The Trust Deficit and Corporate Australia’, keynote address by James Shipton, Chair, to Australian Council of Superannuation Investors Annual Conference, Sydney, 17 May 2018, http://download.asic.gov.au/media/4737827/the-trust-deficit-and-corporate-australia-acsi-conference-2018-keynote-address-by-james-shipton-chair-asic.pdf, accessed 10 July 2019

6 Australian Prudential Regulation Authority, ‘APRA takes action against IOOF for failing to act in best interests of superannuation members’, media release, 7 December 2018, www.apra.gov.au/media-centre/media-releases/apra-takes-action-against-ioof-failing-act-best-interests-superannuation, accessed 9 May 2019

22: The trust deficit

1 Final Report, Volume 1, p. 135

2 Royce Millar and Chris Vedelago, ‘Watchdogs wined, dined and given corporate gifts without scrutiny’, 22 January 2019, www.smh.com.au/national/watchdogs-wined-dined-and-given-corporate-gifts-without-scrutiny-20190122-p50sy8.html, accessed 9 May 2019

3 Australian Securities and Investments Commission, ‘19-063MR ASIC cancels the licences of firms that failed to join AFCA’, media release, 22 March 2019, https://asic.gov.au/about-asic/news-centre/find-a-media-release/2019-releases/19-063mr-asic-cancels-the-licences-of-firms-that-failed-to-join-afca, accessed 9 May 2019

23: A failed experiment

1 Interim Report, Volume 1, p. xx

2 Australia and New Zealand Banking Group Limited (ANZ), ‘Update on sale of Wealth businesses’, media release, 7 December 2018, https://media.anz.com/posts/2018/12/update-on-sale-of-wealth-businesses, accessed 10 July 2019

3 National Australia Bank, ‘NAB moves on grandfathered commissions’, media release, 3 September 2018, https://news.nab.com.au/nab-moves-on-grandfathered-commissions, accessed 10 May 2019

4 National Australia Bank, ‘MLC Wealth announces major new pricing initiatives across Wrap and Masterkey products’, media release, 29 January 2019, https://news.nab.com.au/mlc-wealth-announces-major-new-pricing-initiatives-across-wrap-and-masterkey-products, accessed 10 May 2019

5 Commonwealth Bank of Australia, ‘CBA takes further action to improve its wealth businesses’, media release, 9 October 2018, www.commbank.com.au/guidance/newsroom/cba-takes-action-to-improve-wealth-businesses-201810.html, accessed 17 June 2019

6 Ticky Fullerton, ‘David Murray calls the shots as AMP’s fate hangs in balance’, The Australian, 1 November 2018, www.theaustralian.com.au/business/opinion/david-murray-calls-the-shots-as-amps-fate-hangs-in-balance/news-story/a456fa073c9d2039c1b9beeae24a3ff0, accessed 17 June 2019

7 Stephen Bartholomeusz, ‘AMP dodges break-up but hasn’t escaped unscathed’, Sydney Morning Herald, 7 February 2019, www.smh.com.au/business/banking-and-finance/amp-dodges-disintegration-but-hasn-t-escaped-unscathed-20190207-p50wa6.html, accessed 17 June 2019

8 Jonathan Shapiro, ‘Westpac chief Brian Hartzer not giving up on wealth management’, Australian Financial Review, 27 April 2018, www.afr.com/business/banking-and-finance/westpac-chief-brian-hartzer-not-giving-up-on-wealth-management-20180427-h0zcja, accessed 14 June 2019

9 Alice Uribe, ‘Westpac sticks by BT Financial Group, as other banks exit wealth’, Australian Financial Review, 6 November 2017, www.afr.com/business/banking-and-finance/westpac-sticks-by-bt-financial-group-as-other-banks-exit-wealth-20171106-gzfplv, accessed 30 April 2019

10 Yellow Brick Road Wealth Management, ‘FY2019 Half-Year Report’, ASX announcement, 7 March 2019, https://yourir.info/5643e58942dc4d10-ybr.asx-2A1137643/YBR_Half_Yearly_Report_and_Accounts.pdf, accessed 17 June 2019

24: Choices must now be made

1 Interim Report, Volume 1, p. 290

2 Commonwealth Bank of Australia, ‘Commonwealth Financial Planning stops charging ongoing service fees’, media release, 4 February 2019, www.commbank.com.au/guidance/newsroom/commonwealth-financial-planning-201902.html, accessed 10 May 2019

25: The Final Report

1 Final Report, Volume 1, p. 4

2 Final Report, Volume 1, p. 135

3 AMP, ‘Royal Commission final report – a catalyst for change’, media release, 5 February 2019, https://corporate.amp.com.au/newsroom/2019/february/royal-commission-final-report---a-catalyst-for-change, accessed 17 June 2019

4 Final Report, Volume 1, p. 214

5 Final Report, Volume 1, p. 217

6 Final Report, Volume 1, p. 135

7 James Mitchell, ‘Advisers to take government to court over commissions’, ifa, 1 March 2019, www.ifa.com.au/news/26534-advisers-to-take-government-to-court-over-commissions, accessed 10 July 2019

8 Michael Janda, ‘Banks win from “disappointing” royal commission report, shares surge’, ABC News, 5 February 2019, www.abc.net.au/news/2019-02-05/banks-win-from-disappointing-royal-commission-report/10781288, accessed 26 June 2019

9 Adele Ferguson, ‘Customers who hoped for blood and gore will be left disappointed’, Sydney Morning Herald, 4 February 2019, www.smh.com.au/business/banking-and-finance/adele-ferguson-customers-who-hoped-for-blood-and-gore-will-be-left-disappointed-20190203-p50vfx.html, accessed 1 May 2019

10 Adele Ferguson, ‘Banks need to show more than mea culpas and committees’, Sydney Morning Herald, 9 March 2019, www.smh.com.au/business/banking-and-finance/banks-need-to-show-more-than-mea-culpas-and-committees-20190308-p512u2.html, accessed 1 May 2019

11 Sybilla Gross, ‘Hayne Didn’t Go Far Enough: MPC Panel’, Melbourne Press Club, 2 March 2019, www.melbournepressclub.com/article/hayne-didn-t-go-far-enough--mpc-panel, accessed 17 June 2019

26: Just the bill, please

1 Interim Report, Volume 1, p. 269

2 Australian Securities and Investments Commission, ‘19-051MR ASIC provides update on further reviews into fees-for-no-service failures’, media release, 11 March 2019, https://asic.gov.au/about-asic/news-centre/find-a-media-release/2019-releases/19-051mr-asic-provides-update-on-further-reviews-into-fees-for-no-service-failures, accessed 2 May 2019

3 Australian Securities and Investments Commission, ‘19-051MR ASIC provides update on further reviews into fees-for-no-service failures’, media release, 11 March 2019, https://asic.gov.au/about-asic/news-centre/find-a-media-release/2019-releases/19-051mr-asic-provides-update-on-further-reviews-into-fees-for-no-service-failures, accessed 2 May 2019

27: It’s a new dawn

1 Interim Report, Volume 1, p. 13

2 Ben Smythe, ‘Banking Royal Commission: Now you will get what you pay for in financial advice’, Australian Financial Review, 7 February 2019, www.afr.com/personal-finance/banking-royal-commission-now-you-will-get-what-you-pay-for-in-financial-advice-20190205-h1aweo, accessed 14 June 2019

28: Where to from here?

1 Interim Report, Volume 1, pp. 121–2

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First published by Viking in 2019

Copyright © Annelise Nielsen 2019

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