Commonwealth Bank’s top lawyer, David Cohen, was rebuked before a senate inquiry on Thursday morning for downplaying systematic fraud within the bank’s financial services arm as ”inappropriate”.
The word ”inappropriate” was suitable to describe an error of judgment in clothing choice, said Mark Bishop, chairman of the Senate inquiry into the performance of the Australian Securities and Investments Commission, but not the fraud and failure within the bank’s wealth management division which culminated in clients losing millions of dollars in savings.
It was a gruelling day for the bank’s three top lawyers who fronted the senate panel following the testimony of Commonwealth Financial Planning (CFP) victims.
Officers from the corporate regulator are scheduled to appear on Thursday afternoon to explain why their response was belated and inadequate.
A group of whistleblowers – known as the ferrets – tipped off the regulator about a scandal inside the bank’s wealth division in October 2008.
It then took ASIC 3½ years to act on the information provided by CBA in June 2009 about the serious allegations of forgery and fraud by a planner, who was allowed to continue to work in the industry during the regulator’s inaction.
The scandal was exposed in a series of articles by Fairfax Media journalists Adele Ferguson and Chris Vedelago. The articles highlighted a flawed compliance structure inside CFP that covered up serious infractions, including instances of forgery, overcharging and the use of high-risk investment products without clients’ permission.
The expose prompted all sides of politics to support a Senate inquiry into the performance of ASIC.
The inquiry heard on Wednesday how CBA’s rogue financial adviser Don Nguyen – who was a star within the financial planner business – was actually promoted despite the serious complaints of misconduct by customers.
In a statement to the inquiry, CBA whistleblower Jeff Morris said the failures were not the work of one ”rogue financial planner” Don Nguyen. Neither was the problem confined to the Commonwealth Bank. There was a ”staggering” failure of regulation by ASIC and the structure of the entire wealth management industry ran counter to the interests of its customers.
”[Mr Nguyen] is a case study into everything that is wrong with the system in Australia and everything that is wrong with ASIC,” Mr Morris said.
The vertical integration of the big four banks – who with AMP control 80 per cent of financial planners in the country – does not serve customers well. There was an industry ”quagmire of conflicts of interest” in the provision of financial advice, he said.
Earlier, the inquiry heard how most of the financial products sold to CFP victims were from another.
Before the testimony of Mr Morris, CBA’s general counsel, David Cohen, was grilled on the bank’s failure to dealing with the scandal appropriately.
He came under fire for constantly describing the failure in the bank as due to ‘inappropriate advice”.
Committee chairman Mark Bishop asked whether the word ”inappropriate” was sufficient to describe systematic fraud?
“We should have moved more quickly,” said Mr Cohen, who vowed it would not happen again.
He was also questioned over CBA’s appointment of its auditor, PricewaterhouseCoopers, could be appointed to conduct an ”independent review” into the enforceable undertakings regime which was belatedly imposed by ASIC on the bank. PwC already earns millions of dollars a year from CBA.
Mr Cohen also said it was ”regrettable” that serial fraudster Don Nguyen was promoted and paid more after his wrongdoings came to light within the bank.
The culture in CBA’s planning division had earlier been described as a ”boiler room” where success hinged on writing high commissions while checks and balances were inadequate.
Mr Nguyen and others deliberately and systemically targeted retirees and ”churned” them through various investment products so their advisers could earn higher commissions.
A lawyer for Maurice Blackburn, who ran a class action against the bank, described how an 80-year-old couple lost half their wealth despite clearly being conservative investors for whom high risk was anathema.
A victim told the inquiry she had still had no apology from the bank despite what she described as its ”illegal criminal activities”.
Meanwhile, facing the inquiry this afternoon, ASIC chairman Greg Medcraft began his testimony with a denial of last week’s statements by former ASIC lawyer James Wheeldon that ASIC did favours for the big banks and their wealth management operations.
“ASIC completely and unreservedly rejects the allegations made by Mr Wheeldon … (his) attack is without foundation,” Mr Medcraft told the senate inquiry. He did not address specifically the detail of Mr Wheeldon’s submissions.
Flanked by other ASIC commissioners, Mr Medcraft was then asked about the CFS failure.
Commissioner Greg Tanzer conceded that ASIC owed a ‘mea culpa’ in the case of CFS. There had been a problem with bad advice and the “underlying drivers [of the problems at CBA] of the bad culture and bad advice”.
The commissioners agreed that ASIC could have acted earlier to respond to the complaints.