Improper conduct by financial advisers

  • NAB case study: The Commission heard that in late 2016, NAB identified a financial adviser who had forged two customers' initials and asked another employee to falsely witness a beneficiary nomination form. By October 2017, NAB had identified 353 employees who had been involved in incorrectly witnessing binding beneficiary nomination forms for superannuation funds. This incorrect witnessing, potentially affected the validity of beneficiary nomination forms for approximately 2500 customers. NAB was also questioned about in relation to reporting misconduct to ASIC, and whether the misconduct identified indicated a failure of culture at the organisation.

  • ANZ case study: The commission heard evidence about improper conduct by financial advisers including: forging customer signatures or initials, misappropriating customer funds and misleading or deceiving customers.The Commission heard that a millenium3 adviser (millenium3 is a wholly owned subsidiary of ANZ) engaged in a range of improper conduct including falsifying documents, misappropriating customer funds and engaging in misleading and deceptive conduct in relation to customers. Despite: being assessed as providing 'poor advice' in an audit; though there were a number of complaints alleging that he had misled or deceived customers; and though he was eventually 'terminated' by ANZ, ANZ did not investigate whether his customers had suffered detriment.

Disciplinary regime for financial advisers: The Commission examined the ways in which disciplinary matters are currently dealt with in relation to financial advisers, the adequacy of existing disciplinary systems and highlighted alleged gaps in those systems. The Commission considered the internal disciplinary processes within financial institutions; the role of professional associations (Financial Planning Association (FPA) and the Association of Financial Advisers (AFA)) and the role of the Australian Securities and Investments Commission (ASIC) in these processes.

  • Professional Associations: The Commission heard that there is no legal requirement for financial advisers to be members of professional associations (the Financial Planning Association (FPA) or the Association of Financial Advisers (AFA)) and that while associations can expel members, they have not done so in some cases (despite misconduct by advisers). In addition, the Commission heard that even if members are expelled, the associations are unable to prevent them from working as financial planners. As such, it is open to financial planners to withdraw from associations, without penalty, to avoid sanctions for giving poor advice. The timeliness of the handling of complaints against advisers and the objectivity and effectiveness of those processes was also questioned as were current funding arrangements for professional associations, and whether there is an 'inherent conflict' between the two financial adviser associations among other matters.

  • Australian Securities and Investments Commission (ASIC): The Commission questioned ASIC over its approach to enforcement and its practice of negotiating enforceable undertaking outcomes with financial advice licensees instead of pursuing criminal penalties. ASIC conceded that it was more likely to negotiate rather than to pursue other avenues given the limited resources available, competing priorities and the limitations of existing laws. In addition, the Commission heard that due to resourcing limitations and cumbersome processes, the timeframe for taking action against financial advisers can be up to 2 years, which ASIC conceded was unsatisfactory.

Possible criminal sanctions? Delivering her closing statement to the Commission, counsel assisting the inquiry Rowena Orr QC said that the practice of charging fees for no service and of failing to have adequate risk management systems in place may amount to contraventions of the relevant provisions of Corporations Act 2001 and ASIC Act 2001.

She also said it was open to the Commission to find that AMP's communications with ASIC in relation to misleading statements in breach reports may also have amounted to misconduct under the relevant provisions of the Corporations Act (see: Governance News 23/04/2018).

In addition, Ms Orr said it was open to the Commission to conclude that AMP's conduct in connection with AMP's alleged efforts to influence an independent report from Clayton Utz may have breached criminal provisions in the Corporations Act.

[Note: AMP announced to the market on 30 April, following Ms Orr's closing address, that Chair Catherine Brenner would step down from her role and that General Counsel Brian Salter would leave the organisation (among other measures) ahead of the upcoming AGM. The AMP board also indicated that it was satisfied that there was no misconduct on the part of Ms Brenner or the board in relation to the report. This is discussed in a separate post. See: Governance News 30/04/2018]

Possible contraventions? Commonwealth Bank of Australia (CBA): Ms Orr said CBA entities may have 'contravened their statutory obligation under section 912A(1)(a) of the Corporations Act to do all things necessary to ensure the financial services covered by their licence are provided efficiently, honestly and fairly. Each of these entities may also have contravened their statutory obligation under section 912A(1)(d) of the Corporations Act to have available adequate resources, including technological resources to provide the financial services covered by the licence and to carry out supervisory arrangements'.

Westpac: Ms Orr said that it is open to the Commission to find that that Westpac’s alleged misconduct in connection with the provision of (allegedly) inappropriate advice by financial advisers, and the conduct of the financial advisers in question (see: Governance News 23/04/2018), may amount to misconduct under the relevant statutory provisions. Ms Orr also questioned the adequacy of Westpac's risk management systems.

ANZ: Ms Orr said that it was open to the Commission to find that the conduct of financial advisers may have breached their obligations under the Corporations Act. In addition, Ms Orr said that it was open to the Commission to find that Millennium3’s conduct in relation to the period covered by the case-studies investigated might also amount to misconduct under s912A of the Corporations Act. Ms Orr added that 'the evidence also supports a finding that RI and Millennium3 did not effectively and adequately respond to the potential detriment suffered by customers'.

NAB: Commenting on the NAB case study (see above) Ms Orr said that it was open to the Commission to find that the conduct of financial advice given might have amounted to misconduct by the adviser and that NAB’s conduct in connection with the incorrect witnessing of beneficiary nomination forms might also have amounted to misconduct.

Third Round Hearing dates released: The third round of hearings will commence on 21 May and will focus on small and medium enterprises. The Commission writes that further detail will be published ahead of the hearings.