A group specialising in financial disputes has called on the corporate regulator to reopen all settlements for Commonwealth Bank planners where fraud has been proven or where they failed to investigate strong allegations of fraud.
The group, Financial Resolutions Australia, believes clients of the bank’s financial planning arm may have a claim against ASIC under the Scheme for Compensation for Detriment caused by Defective Administration (CDDA Scheme).
In a statement, it said losses caused by ASIC’s failure to act were ‘‘significant’’ and might affect thousands, many of them retirees.
The call for action follows revelations by me and colleague Chris Vedelago over recent weeks about a scandal inside the bank’s financial planning arm before and during the global financial crisis. The articles highlighted a flawed compliance structure that covered up serious transgressions, including instances of forgery, overcharging and the use of high-octane products without clients’ permission. Meanwhile, the regulator was asleep at the wheel despite receiving a detailed report from bank insiders.
The expose prompted Nationals senator John Williams to call for a Senate inquiry into ASIC.
What seems clear is that everyone turned a blind eye to what was going on. Compliance was known as the ‘‘business prevention unit’’ and planners who wrote the most business were treated like kings. According to emails and phone calls, it seems CBA wasn’t the only financial institution with issues. CBA is in the firing line because whistleblowers exposed what was going on. It raises serious questions about banks’ ownership of financial planners given the inherent conflict of interest.
For CBA, the fallout was the banning of seven planners, an enforceable undertaking that expires later this year and payment of $36.4 million in compensation to 725 clients.
It could be argued it got off lightly given the angst it caused so many who had put their faith in the bank.
The bank says it has reviewed all client files managed by planners including Don Nguyen and Ricky Gillespie. It says it engaged an independent consultant – agreed to by ASIC – for the review of files and the methodology used to compensate clients. They were offered ‘‘appropriate’’ compensation where it was deemed they received unsuitable advice.
CBA did this by reconstructing each portfolio, placing the client in an asset allocation they should have been given originally. They then ran the numbers, including refunds for service fees for inappropriate advice and reached a figure.
Most clients accepted the compensation offer, but some challenged it. Patricia Babbage is a case in point. Mrs Babbage saw her nest egg shrink from $200,000 in 2008 to $92,000 in June 2009 due to incorrect advice. She was initially offered $43,286 in compensation in August 2012, challenged the offer and received another offer of $67,092.
‘‘It was too hard to keep fighting,’’ she said. ‘‘But when I look at the miserable compensation I got and the huge profits the CBA makes each year, I ask how can this be?’’ She didn’t follow up with a formal complaint because she had to deal with cancer and was overwhelmed with what was going on.
Jan Braund is another example where the bank initially offered $200,000 in 2010, but after being challenged by FRA it increased the offer to $331,000 early last year and then $880,000 last August.
‘‘Throughout this living nightmare, facing the prospect of destitution despite a lifetime of hard work by myself and my husband, I had to support and care for my late husband, Alan, who suffered from crippling vascular dementia, and who finally died on 30 April, 2012,’’ she wrote in a letter to the bank’s board in March this year.
According to FRA, which says it managed to get 50 per cent of its clients ‘‘significant’’ increased settlements, CBA’s compensation methodology has a number of flaws, including in cases where clients were ‘‘switched’’ from cash deposits into the Colonial Income Fund, which was later frozen for four years and has not provided a return. These clients aren’t compensated as they haven’t suffered any lost value. ‘‘However, there is an argument that they should have been placed in term deposits,’’ FRA says.