Targets, bonuses, trips - inside the CBA boiler room

Even as a Senate inquiry looms, fears are being voiced that the Future of Financial Advice will do little to address the desperate quest to drive sales for planners, write Adele Ferguson and Chris Vedelago.

Even as a Senate inquiry looms, fears are being voiced that the Future of Financial Advice will do little to address the desperate quest to drive sales for planners, write Adele Ferguson and Chris Vedelago.

Amid the fracas of the global financial crisis, the top 100 of the Commonwealth Bank's financial planners flew to Auckland for an annual three-day bash in honour of the bank's biggest earners, the so-called "diamond alliance". Donning big hair and jewellery, they bopped and drank the night away at a 1980s solid gold-inspired fancy dress party.

It was Tuesday, October 28, 2008, and financial markets were looking ragged. Lehman Brothers had collapsed the month before and tensions were high as the elite of CBA's financial planners gathered together to pick up awards and trophies for a job well done at Auckland's five-star Sky City Grand Hotel, in a room decorated in gold, the bank's corporate colour.

Charging their champagne glasses as awards were handed out to the top 12 planners, including Don Nguyen, a pall hung over the evening as they tried to forget CBA's bombshell news the previous day - that it had frozen seven CBA-owned Colonial First State mortgage funds valued at $3.3 billion.

After spending the day sailing around the harbour in America's Cup boats while their cell phones ran hot from panicked investors trying to get answers, Nguyen and his fellow planners tried to focus on the night's events.

One victim, Jan Braund, a retiree, received a call from Nguyen earlier in the day advising her to "switch all monies out of existing instruments into the bank's wholesale cash fund".

Nguyen rang other clients, including an 85-year-old man who had put most of his savings in the fund. It was for a medical emergency. His wife was housebound but was described in the financial needs analysis document as in "good health".

Nguyen's advice to them was to put in a redemption request immediately. The advice was too late. The funds had been frozen, and with this his chance to churn them into several new portfolios with new upfront fees for the bank and trailing commissions for him.

Advisers were given lists of affected clients and told to hose down their fears. Nguyen hit the phone hard.

The freezing of the funds was a disaster for many of the 61,000 investors. More than four years later, some are still waiting to get back their final capital allocation. . CBA said some investors received earlier payments as a result of hardship applications.

In the months before October 2008, many bank customers had been convinced to switch from the safety of term deposits to these funds with higher rates, which gave the planners and the bank a nice trailing commission that they would not get from a humble term deposit sold by a teller over the counter at some suburban branch across Australia.

It was part of a last-ditch effort by the planners to reach their sales targets and boost their funds under management so they could earn their bonus, and qualify for the international three-day conference.

As more details emerge of the conduct of CBA's planning division between 2005 and 2010, and the corporate regulator's tardy investigation, there will now be a Senate inquiry into the Australian Securities and Investments Commission and, ominously, "other matters".

There are serious questions on how ASIC handled the tip-off from a group of bank insiders in October 2008 into allegedly corrupt conduct. The whistleblowers had urged that there was some urgency in securing the files of Nguyen as they were being "cleaned up" and that the issue had implications beyond just one dodgy planner. ASIC finally investigated the matter in March 2010.

CBA has since compensated 1127 clients of Nguyen and other planners who gave "inappropriate advice", paying out $49.4 million. Nguyen controlled up to $300 million of client money, and the bank has paid 200 of his clients a total of $23 million. All up, ASIC has banned seven CBA planners, who are understood to have represented thousands of clients and managed hundreds of millions of dollars.

It has also moved to overhaul its systems, including improving its compliance standards.

A spokeswoman for CBA says the bank has worked hard over the past three years improving the business. "Today, our financial planning business is built on a rigorous compliance and risk management framework which includes prompt investigation of issues, the most comprehensive staff training program in the industry, changes in remuneration, more rigorous systems and processes, better document management and enforcement of higher standards by new management."

Several of the managers involved have moved on, and now hold senior jobs at other institutions with similar sales-based cultures. Some threatened legal action.

The pending Senate inquiry is understood to have put the other banks into damage control as they examine the activities of their own financial planning arms before the financial crisis. CBA says: "It is unfortunate that a sales-based culture was not uncommon across the industry at that time."

Some class action law firms are looking at whether the scandal is the tip of an industry-wide iceberg.

Senator John Williams says if there is a Coalition government, the inquiry would complement the financial services one, nicknamed the "Son of Wallis" inquiry after the landmark Wallis banking investigation in the late 1990s. "We are looking at the regulation of ASIC and how it performs its duties, and this will complement Joe Hockey's inquiry," he says.

The industry is preparing for a new regulatory regime on July 1, the Future of Financial Advice, which is designed to clean up the sector and make fees more transparent. The bank believes FOFA will "ensure that advice customers receive from financial advisers is in their best interests".

But not everyone is confident this will result in dramatic change.

Whistleblower Jeff Morris, who worked as a financial planner at CBA before leaving in February this year, believes FOFA is a step in the right direction but it does not go far enough. "The elephant in the room is vertical integration. FOFA does nothing to address this. By encouraging consolidation in the industry, it has probably added to the problem."

Justin Brand, from non-aligned financial advisory Arc Financial Consulting, says the vertically integrated model is inherently conflicted. "What you have is product manufacturers controlling advice channels, setting product targets and ultimately creating a group product 'sales-is-everything' culture, as recently exposed," he says.

It was the "sales at all costs" culture that insiders and former staff believe was the cause of the problem at CBA. They warn that FOFA will address hidden fees and disclosure but it will not change the quest to drive sales.

The national assistant secretary at the Finance Sector Union, Geoff Derrick, says FOFA is a step forward but continuing dependence on commission-based remuneration and sales targets means banking culture remains "a numbers game".

"The problem is that some people in the industry have lost their moral compass. What we are particularly worried about is the conflict between what is in the best interests of the banks' bottom lines and what is in the best interests of customers coming through the door."

A Fairfax Media investigation can reveal the culture inside the planning division before the financial crisis was like a boiler room, made famous in movies such as Ben Affleck's Boiler Room, a place that thrives on high pressure sales tactics and strategy in selling financial products.

Since the Fairfax Media investigation began, dozens of former and current CBA staff have come forward to provide detailed information on what happened at the bank and an insight into the way the bank interacted with ASIC.

Insiders have outlined in detail how planners were indoctrinated to focus on sales and fees at any cost. "This was not financial planning, this was head-counting commission car selling," a former CBA planner said.

Several former staff said the excesses of the boiler room culture were best demonstrated in April 2008 when sales were dropping through the floor and managers feared their annual bonuses were shot. Two managers, who have since moved to other financial outfits, decided that the solution was to tap into CBA's massive deposit book (the largest in the country) and switch deposits into mortgage funds. This would hit the funds-under-management figures before June 30 and, bingo, problem solved.

Over the course of April and May 2008, they held meetings in state offices, handing out local branch deposit data that detailed client names and bank accounts with amounts exceeding $50,000.

"They blatantly asked planners to contact as many of these clients and 'churn' the 100 per cent secure funds into the Colonial First State Income Fund," a senior planner said. "This was so everyone - including the managers - would hit their full-year targets and qualify for a hefty bonus ... it was big money at stake."

When some got their bonuses, it was celebrations all around, with planners and managers dining out at Otto Ristorante in Woolloomooloo before finishing up in a seedy strip joint in Kings Cross. When the same managers visited planners in Melbourne, the night ended at Spearmint Rhino, a strip club in Melbourne's King Street.

Several former planners recall being actively hounded to generate excess sales and threatened with dismissal if they did not meet targets. Insiders say the relentless focus on sales and commissions meant the planners - and senior management - were often at loggerheads with the bank's compliance staff, who were there to make sure standards were met. Compliance was described as the "business prevention unit".

"My observation is the problem was that senior management had their key KPI [key performance indicators] listed as moving money to CFS [Colonial First State]," a former compliance manager said. "It was identified even in compliance meetings as a key indicator of success. Those KPIs were filtered down to middle management and then the advisers. What has that got to do with providing quality of advice?"

External compliance controls had been removed in 2004, and replaced with an internal unit that was tasked with ensuring that 700 CBA planners provided appropriate advice to clients, kept and maintained records and met guidelines.

When file reviews led to poor performance ratings, planners risked losing a significant chunk of their bonuses, and those of their superiors were threatened as well.

Documents reveal that sales targets of funds under management and fees were increased every year to the detriment of client interests.

An email sent in 2007 by a manager, who still works in a similar role at CBA, outlines targets for planners. This included 12 referrals, eight first interviews a week, five statements of advice (SOAs) a week, with the proviso that planners "only to produce SOAs where a sale will result", four sales a week and one continuing service client per month, equivalent to 12 a year. A former planner says: "Planners were expected to focus on bringing in new business, more funds under management, more upfront revenue, rather than providing service to existing clients. If they didn't, they would be sacked." There were constant threats of being placed on "performance management".

"Not many came out the other end of that 13-week process of ritual humiliation," a former planner says. "So the constant pressure for sales, from a management hierarchy whose bonuses depended on it, placed the so-called financial planners in an invidious position: do the right thing and lose your job or get on board the management bandwagon and stitch up the widows and orphans as required."

A spreadsheet of actual sales against sales targets for the February 2006 shows that out of 43 groups, only four areas were below the income target of 100 per cent, with the majority 150 per cent and above.

The whistleblowers who reported Nguyen to ASIC on October 30 described the culture as "nothing more than a sales channel". They said: "In the current difficult climate, planners are now being threatened with the sack if they don't meet their sales targets ... The message is clear, 'do what you have to do - or else'. This management culture explains why people like Don Nguyen are tolerated, even valued and protected. The client's interests don't really get a look in."

One former senior planner says each Monday would start with a sales meeting in the branch. "There would be a video clip from CBA TV featuring some luminary babbling on about some aspect of the 'sales and service' culture. The 'service' part meant that we would 'assist customers to meet their needs and objectives', which really meant sell them as many CBA products as possible."

The SOAs to clients looked impressive to the uninitiated but most of the pages were standard "boilerplate" text, a former planner says. "Again, you only needed one signature at the end and unscrupulous planners would gloss over or just lie about the fees. Come audit time and they'd give you two weeks' notice to get the specified files into shape. I believe that this is when a lot of the harassed planners, lacking client signatures, would resort to forging them," he says.

One planner recalls being present at an event where it was announced by a jubilant manager that Nguyen had convinced a widow to pay him a fee on a $1 million investment. He was referring to Nathalie Kulakowski, an 88-year-old, who signed a document that Nguyen later filled in saying "generation of more income was not important to her". It also said her time-line for investments was seven years with access to funds after five years, when she was 93. She maintains that Nguyen did not tell her $30,421 of her investment would be paid to Commonwealth Financial Planning, including $16,732 in commission to Nguyen.

Nguyen's treatment of the client would eventually be cited as a cornerstone case when he was banned by ASIC for seven years in 2011.

In a 10-month period in 2007, Nguyen brought in $39 million in new business, more than 3 his sales target. Despite repeated warnings from 2006 about the quality of Nguyen's work, including the rorting of fees, cash backhanders and warnings by compliance that he was a "serious business risk", he was promoted to senior planner in October 2008.

But even as the CBA began to face lawsuits from victims over his misleading and deceptive financial advice, Nguyen continued to work with a minimum of compliance oversight. Senior staff even debated ways to "position" past negative reports about his conduct in a response to inquiries by ASIC.

As late as March 2009, CBA's decision to assess Nguyen using centralised file reviews resulted in his receiving a "negligible risk" rating. Within four months, he would quit.

But just how routinely oversight and compliance rules had been violated became stunningly apparent when internal investigations into Nguyen began in earnest before his "resignation" in July 2009.

An inspection on May 29, 2009 found 17 client files were missing, one of which had already been declared "lost" by Nguyen after a spot check the previous year, according to internal bank documents.

While CBA would eventually wash its hands of Nguyen, it did not happen quickly and enough and he was not alone. Ricky Gillespie, a planner in Queensland, was banned from the industry for life late last year after being caught forging signatures.

Documents obtained by Fairfax Media reveal the bank knew of at least 14 instances of forgery as early as October 2008 - around the time of the annual conference - but it would take until June 2009 before he "resigned".

A CBA compliance report on Gillespie dated October 16, 2008, advised of "issues of suspected irregularities" in the signatures of four of his clients. Within a month, another 10 signatures had been identified as possibly fraudulent. In one case, the forged signature was used to obtain a one-off commission of $3200 and create a continuing fee of 0.83 per cent of the value of an investment portfolio.

Gillespie's files were also flagged for other "significant issues", including altering dates on documents and overcharging clients. One document, dated November 20, 2008, says: "Rick Gillespie, financial planner, PBS Queensland has forged signatures of 14 clients. The initial allegation has a fraud element as it appears the adviser forged the signature of his client on a FSG [financial services guide] receipt and a TWA [transaction without advice] to obtain a one-off fee of $3200 plus ongoing fee of 0.83 per cent."

The conduct of Nguyen, Gillespie and others destroyed the retirement plans of thousands of Australians, some of whom were forced into Centrelink help when their nest eggs were depleted by bad investments they never agreed to.

They include Mervyn and Robyn Blanch, who saw their life savings plunge from $260,000 to $92,000. A retired clergyman also suffered after investing $147,163 in 2006 with Nguyen and seeing it drop to $65,772 by February 2009. Initially the bank refused to compensate him but in late 2010 he was offered $37,000 without admission of liability. He was offered a further $14,000 in February this year.

Another victim was an 87-year-old man, hard of hearing and partially blind. His son, who is fighting to get compensation, says his father had saved his whole life with the Commonwealth Bank and only ever put his money into term deposits. "One day he had a visit to his house from a planner who put him into different products. Dad was on his last days and passed away three years later. Why on earth would he put his money into riskier investments?" he says. "He lost a lot of his money and we [my brothers and sisters] supported him until his death as his money got locked into the deals during the GFC."

An incensed bank client, Leo Southwell, who invested in the Colonial First State Mortgage Income Fund, says while investors received no income, planners continued to receive trailing commissions of 0.44 per cent. "There is an old saying that there are two types in this world, wolves and sheep. Well we've been fleeced and now they are coming for some mutton".

CBA was not the only financial institution offering these funds - about $24 billion was locked up during the global financial crisis.

The Senate inquiry will be wide-ranging, covering the effectiveness of ASIC. Senator Doug Cameron says it will include the Commonwealth Bank and its financial planning arm. The inquiry is seeking information from the public.

The many victims who had to wait years to be compensated are pleased to be able to have a voice. Merilyn Swan, daughter of the Blanchs, welcomes the inquiry. "Nguyen is the primary cancer, from which the malignancy spread. They all need to be held accountable, including Nguyen, and be made responsible for the misery they inflicted on their investors and face some serious repercussions for their activities. There needs to be some sort of justice extracted from this sorry episode," she says.

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How the CBA scandal unfolded

2004 - CBA removes external compliance system and relies on internal staff

September 2008 - Planner Don Nguyen suspended by the Commonwealth Bank

September 15, 2008 - GFC deepens as Lehman Brothers collapses

October 15, 2008 - Don Nguyen promoted

October 16, 2008 - Planner Ricky Gillespie suspected of acts of fraud and forgery

October 30, 2008 - Whistleblowers, including Jeff Morris, tip off ASIC

June 2, 2009 - CBA routes documents through legal department to be given protection of legal privilege in event of client lawsuits

June 4, 2009 - Morris and other whistleblowers tip off CBA

June 12, 2009 - Gillespie resigns, around the time ASIC informed of forgery allegations

July 6, 2009 - Don Nguyen resigns

February 2010 - Whistleblowers visit ASIC head office in Sydney to demand action

March 2010 - ASIC raids CBA

November 2010 - CBA creates voluntary compensation scheme for victims

March 10, 2011 - Nguyen banned for seven years

October 26, 2011 - CBA agrees to an enforceable undertaking

November 12, 2012 - Gillespie permanently banned after forging client signatures. Seven planners now banned.

February 2013 - Whistleblower Jeff Morris resigns from CBA

June 10, 2013 - Senator John Williams calls for inquiry into ASIC’s conduct

June 20, 2013 - Senate votes to proceed with inquiry

July 15, 2013 - Gillespie’s appeal to AAT to be heard

October 2013 - CBA’s enforceable undertaking ends

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