Dear Mr Turner,
It has been two years since the Senate Inquiry into the Performance of ASIC demonstrated the misconduct by financial advisers and other staff at Commonwealth Financial Planning Limited (CFPL). According to the inquiry, multiple CFPL advisers failed to meet required compliance standards and provided advice that was irresponsible, self-serving and incidental to client interests.
Specifically, it was found that CFPL failed to have a reasonable basis for advice, failed to provide Statements of Advice, made statements that were false or misleading in a material particular, made forecasts that were misleading, false or deceptive, failed to make reasonable inquiries before implementing advice, provided asset allocation advice far above that recommended for the client's risk profile, and failed to complete 'financial needs analysis' documentation. The inquiry noted that an aggressive sales-based culture prevailed wherein advisers pushed clients into inappropriately high-risk products both to earn bonuses.
The inquiry found that most of the misconduct appears to have taken place between 2006 and 2010. This gets Mr Narev off the hook, whose tenure as CEO commenced in 2011. Although your own tenure as Chairman commenced in 2010, you should bear some of the responsibility for the misconduct by financial advisers CFPL as you presided over this behaviour as a board director since 2006.
More recently, the quality and independence of financial advice has come under renewed scrutiny. Mr John Edwards, former member of the RBA Board, has publicly called for an inquiry into the conflicted nature of financial advice offered by wealth management arms owned by banks. The Productivity Commission has recently announced that it would be assessing the costs and benefits of vertically integrated models of financial advice.
The regulatory risks associated with the CBA owning Colonial First State (CFS) therefore continue to grow. The CBA should consider de-merging CFS and listing it as a stand-alone entity on the ASX. If the recent history of de-mergers is any guide, CFS will be better managed with a cleaner and simplified ownership structure.
What is more damaging for your own and Mr Narev’s reputations are allegations of misconduct at your insurance arm, Comminsure, aired by the 4 Corners program earlier this year, which relate to allegations of Comminsure’s deceptive behaviour designed to not payout on legitimate TPD claims. There were also allegations that whistle blower and former Chief Medical Officer was sacked for seeking to bring the organisation to account. Mr Narev's own admissions that the bank needed to do better confirms that the firm’s culture encouraged behaviour that undermined integrity. This strikes at one of the bank’s own core values; the annual report from last year states that ‘integrity is one of the Group’s core values and has a range of policies, frameworks, compliance measures and education programs to ensure our people maintain the highest professional standards.’
Given the bank’s apparent failure to live up to its own high standards of integrity, it will be interesting to see whether yourself, Mr Narev and the bank’s group executives should be entitled to Short Term Incentives and Long Term Incentives, particularly given the potential long lasting damage that the Comminsure scandal has done to the bank’s reputation and brand.
Finally, the Prime Minister last week, in announcing that the major banks be brought to account by appearing before Parliament no less than once a year, cited the banks’ social license to operate. The CBA should be familiar with this; after all, the annual report from last year cites ‘Our role in society.’ Bank sector lobbyists may well bemoan the regulatory burden that the banks are subject to. But so they should be. I cannot think of any other listed firm in which no less than 60% of their liabilities are guaranteed by the taxpayer. Perhaps the path to integrity is best achieved by promoting a culture of disclosure, transparency and accountability not just to shareholders, but also to customers and taxpayers.