Under acute pressure and the threat of a royal commission, Commonwealth Bank has belatedly put forward a comprehensive scheme to compensate the victims of its financial planning scandal. Will it be sufficient to finally put the issue behind it and see the storm of criticism and threats of action subside? Probably not.
CBA has mishandled the controversies that have surrounded its financial planning businesses and allowed them to escalate to the point where a Senate Committee last week called for a royal commission into them. It should have done far more far earlier to address them and provide real redress to its customers.
Why didn’t it? CBA’s chief executive, Ian Narev, who made an abject apology to the group’s customers while announcing the scheme today, referred to a "culture of defensiveness" and a misplaced belief that in putting in place a remediation scheme in 2010 -- under which it has already paid out $52 million -- it had already done the right thing.
CBA has also restructured its financial advice businesses, installed new management and management structures, changed its remuneration structures, put in place new systems and focused on changing the culture of the businesses.
Narev referred to the complicating influence of the global financial crisis, making the point that even well-advised investors lost money in that period, making it more difficult to establish how much the poor advice given by some advisers in its own business had cost its customers.
CBA will now create an open-ended and multi-layered compensation program.
It will fund a process under which all of the 400,000-plus customers of the Commonwealth Financial Planning and Financial Wisdom businesses between 2003 and 2012 will be able to have the advice they were given reviewed by, initially, a specialist CBA team.
After the review is completed, the customers will receive an assessment and the offer of an independent customer advocate, funded by CBA, to negotiate the outcome.
If they aren’t happy with the assessment, they can seek a further review from an independent panel yet to be established to determine whether compensation is payable and, if it is, the amount. CBA would be bound by the panel’s decisions but the customers would be able to take the matter to the Financial Ombudsman or take any other action to pursue their claim.
CBA will also have an independent expert overseeing the process and making public reports.
The starting point for the assessments will be the advice the customers were given relative to the advice they should have been given according to their risk profile – the portfolios they should have been invested in. This is where the GFC and the possibility that even had they been given appropriate advice they may have lost money will create complications and continuing customer angst.
Narev said CBA has modelled the potential costs of the scheme but declined to reveal the results. He did say the prospective costs wouldn’t be material in the context of CBA. Given its market capitalisation is more than $130bn, it could still be a big number and not be material for shareholders.
While he said CBA had conducted significant investigations of its financial planning businesses, poor record-keeping and the exodus of many advisers from the businesses meant he couldn’t rule out finding out new information, which CBA would deal with in a spirit of openness if it emerged.
The angst and anger among the victims, in Canberra, within the Australian Securities and Investment Commission (which believes CBA misled it) and the community over the revelations of fabricated documents, forged signatures and greedy commission and bonus-driven advisers in the Senate committee’s report is unlikely to subside just because CBA has now put a new process for compensation in place.
Today’s announcement may not reduce the intensity of calls for a royal commission, which the Abbott government has so far resisted. Ultimately CBA will have to restore perceptions of its integrity through the integrity of the new process and its outcomes. At this point, however, it is hard to see how Narev could have announced anything much more than he has.
Narev’s reference to the culture of defensiveness within CBA is something other companies and their advisers should ponder deeply.
Companies and their advisers do tend to respond defensively to emerging scandals, both as a natural reflex and because of their perceived fiduciary responsibilities to their shareholders.
The CBA experience illustrates quite dramatically why that isn’t always a commercially sensible strategy.
The nature and scale of the behaviour of some of its advisers has done immense damage to its brand. It may take years -- and perhaps an even more substantial cost than might have been the case had the group responded differently when it became clear there was a major problem – to put the issue behind it.