Cohen: . . . ‘Inappropriate’ covers the fact that some of the behaviours, which I think you are alluding to, from some of our people just were not the appropriate behaviours, were not the behaviours that we expect today . . .
Bishop: . . . In my mind, ‘inappropriate’ is not systemic fraud, is not systemic theft, is not loss caused by systemic bad behaviour. When my three-year-old writes on the wall, that is ‘inappropriate’ and you tell her off. ‘Inappropriate’ is not the word here, is it?
Cohen: We believe it is.5
Recalling the exchange, Bishop says, ‘It made me think these guys don’t get it, refused to get it, and so the only way they would get it was a royal commission.’
*
The release of the Senate report couldn’t have come at a worse time for Tony Abbott’s recently elected Coalition government. The new Minister for Finance, Senator Mathias Cormann, had been briefed on the report’s contents by Bishop ten days before its release. He knew it was going to be contentious.
Cormann had an exquisite problem. In December 2013, three months after winning the election, the Abbott government had unveiled its much-trumpeted but controversial plan to wind back legislation known as the Future of Financial Advice (FoFA), which was due to come into force on 1 July 2014. The FoFA reforms had been devised by the previous Gillard Labor government to boost protections for consumers after the disastrous failures of Storm Financial and Opes Prime in 2009, and partly in response to the landmark November 2009 report of the parliamentary inquiry into financial products and services in Australia chaired by Bernie Ripoll. It had recommended, among other measures, the banning of commissions for financial advice, along with other forms of conflicted remuneration.6 In addition to these bans, FoFA stipulated that advisers must act in their clients’ best interests, send customers annual fee disclosure documents, and seek client approval every two years to continue to charge ongoing fees, known as ‘opt in’. The banking and financial sectors hated FoFA. Seeking to protect their cosy set-and-forget regime, they sought to portray FoFA as nothing more than costly red tape that would make financial advice unaffordable for everyday Australians. They complained they would need to spend a fortune on new systems to comply with the FoFA laws.
The Coalition government, then spruiking ‘small government’ measures such as ‘Red Tape Repeal Day’, sided heavily with the industry. Its plan was to scrap the ‘opt in’ requirement of FoFA for ongoing advice and require only new clients to be provided with annual fee disclosure statements, leaving existing clients in the dark. It would also allow commissions to be paid for so-called ‘general advice’, meaning bank tellers could still earn kickbacks for selling or referring bank products.
These efforts to dilute the FoFA reforms could not have looked worse, given what had emerged in the parliamentary committee report about culture and misconduct in CBA and the financial advice sector. The Coalition realised that getting FoFA amendments through parliament would be a problem, as Labor and the Greens controlled the Senate at this point, and even after the new Senate was sworn in on 1 July, it would have trouble passing legislation unless it could win over eight new independent senators.
With just days until the industry had to comply with the 1 July FoFA reforms, Cormann announced he would simply bypass parliament and make the desired changes to FoFA through regulations, which, unlike legislation, don’t require a vote. It was a questionable move because regulations are only supposed to be used for minor matters, such as tweaking existing legislation, not winding back significant legislation, but it would give the Coalition breathing space until a deal could be struck with the new crossbenchers – specifically, members of the Palmer United Party – and a more conventional procedure could be implemented to change the legislation.
Labor and the Greens both vowed to get the numbers to disallow or torpedo the proposed regulations. They, along with Industry Super Australia, the umbrella body for union-backed industry superannuation funds, believed it would fundamentally change the primary FoFA legislation, which was a massive overreach by the government. They were sure it would either be disallowed by the Senate or challenged in the courts.
CBA didn’t help the Coalition’s cause at all. On the day the regulations were introduced and Mark Bishop’s report was released, CBA chief executive Ian Narev was holidaying with his family in Bali and chairman David Turner was missing in action.7 The release date of the Senate report had been known for months, yet the CBA executives had planned to be away. It was gobsmackingly arrogant and short-sighted, and displayed an alarming disconnect with wider society.
Cormann, in an attempt to mitigate the damage, issued an insipid statement saying, Narev would have ‘more to say by way of a considered response to the Senate estimates report’ and that he expected him to ‘present a credible process to quickly resolve any outstanding legitimate issues from aggrieved customers’.8 It was pure spin. Behind the scenes, Cormann and other Coalition politicians were furious at CBA’s arrogance. Here was the government trying to water down FoFA (by now being called ‘WoFA’, a play on ‘woeful’), in a move that would benefit CBA and the other banks – but CBA was doing nothing to help.
Meanwhile, Narev was fielding calls from Canberra urging him to launch a compensation scheme to pacify the public. At pre-dinner drinks at a Wesfarmers centenary celebration on 2 July at Melbourne Town Hall, Treasurer Joe Hockey was shaking his head at the arrogance of CBA and Narev. There, as he mingled with other invitees who included the business and political Who’s Who of Australia, Hockey told attendees that ‘poor Matthias’ was desperately trying to get Narev to do something.
The pressure was mounting. Former Victorian Premier Jeff Kennett admitted he generally ‘loathed’ government inquiries but said in a Herald Sun column, ‘I support a royal commission into the activities of the CBA advisers, its leadership and the CBA’s conduct’ because of ‘the importance today and in the future of the financial services industry and confidence in it’.9
Even the country’s peak body representing financial planners, the FPA, turned the tables on the Coalition government, sending out a letter to members saying ‘enough is enough’. The FPA announced it would support a royal commission unless CBA agreed to certain conditions. ‘The past few weeks we have seen unprecedented events unfold before our eyes,’ FPA chairman Matthew Rowe wrote to members. ‘Like many of you, I am appalled at the damage done to many customers of the Commonwealth Bank Financial Planning business as well as the actions of some in CBA management . . . I believe we only get what we accept or tolerate, and on behalf of our members, we are no longer willing to accept what has been made public about the Commonwealth Bank’s management practices.’10
The FPA called on CBA to establish an independent review committee into client compensation, examine the professional standards and ethics of CBA financial planners, and fund ethics training for all CBA and Financial Wisdom financial planners. It suggested the bank invite an FPA Board representative to join the independent review committee into client compensation and ensure all the bank’s planners were members of a professional body. ‘Anything less than this and the FPA will fully support a royal commission.’
On 2 July, FPA chief executive Mark Rantall added his voice, calling on CBA to pay full compensation to all impacted clients. The next day CBA summoned Rantall and Rowe to discuss their requests. Rowe says when they arrived, they were surprised to see a roomful of bankers and lawyers.
The air was tense. One senior executive launched into a tirade. ‘We will smash you,’ Rowe recalls the executive saying, ‘We have an almost limitless balance sheet with which to protect our reputation.’
Rowe says he sat there thinking, ‘Oh shit.’
With nothing to lose, Rantall hit back, saying to the room, ‘The subtlety of your threat is not lost on us, but before we go on could you please tell us about Stuart Jamieson from WA?’
Rantall explained that the FPA had a whistleblower file on Jamieson, a former CBA adviser. He tol
d the room the FPA was about to ban Jamieson and suggested CBA might want to notify ASIC. The room went silent. Jamieson was another scandal CBA had mishandled and tried to bury.
Stuart Jamieson had left CBA in May 2012 after the bank had uncovered repeated misconduct. CBA allowed him to resign instead of terminating him or filing a breach report with ASIC, which enabled Jamieson to get picked up elsewhere in the industry. It wasn’t until September 2013, when the Fairfax Media and Senate scrutiny was most intense, that CBA lodged a breach report on Jamieson with ASIC, which resulted in him being banned as a financial planner for five years from October 2015.
The reference to Jamieson might have halted momentum for a moment, but CBA had other means of putting pressure on the FPA. It removed all sponsorship from the FPA Congress and FPA events. It also stopped paying members’ fees on behalf of advisers via salary sacrifice. ‘We were two blokes from a small not-for-profit professional body who had just picked a fight with the largest corporation in Australia – and they let us know it,’ Rowe recalls.
*
On 3 July, Narev jetted into Sydney to front the media with a well-rehearsed mea culpa and a commitment to reopen its compensation scheme. It had taken Narev seven days to address the explosive report from the Senate. ‘Poor advice provided by some of our advisers between 2003 to 2012 caused financial loss and distress and I am truly sorry for that,’ he told the media conference.11 He reminded everyone that the scandal was in the past and said an ‘air of defensiveness’ had been replaced by a ‘spirit of openness’. The belated response from Narev couldn’t hide the lack of contrition among senior executives and the board over the damage and hurt it had caused customers, or the lack of comprehension of the depth of anger brewing against it.
I bought a bottle of champagne to celebrate a small victory. My colleague Ruth Williams and a few others were there to share the hope that now Narev had been hauled back kicking and screaming to re-launch a compensation scheme, victims of the bank just might have an opportunity for recompense.
To keep up appearances Narev invited a few of the people he clearly saw as ‘troublemakers’ to separate meetings at his office at CBA headquarters in Sydney, where they were served coffee with the CBA logo sprinkled in chocolate on top. His first call was to Jeff Morris. It was 9 am on 4 July and it was a call Morris had waited six years to receive. Morris had offered to meet with Narev when he still worked at CBA, but Narev had declined.
Others on Narev’s list included Wacka Williams, Merilyn Swan, Jan Braund, Senator Sam Dastyari and me. My meeting with Narev was short but to the point: any victims who had contacted me should be referred to the bank to be dealt with expediently and outside the glare of the newspapers or Four Corners. I left the meeting thinking, ‘He must reckon I’m stupid.’
Wacka and Morris went to their meeting together. Morris recalls one of the bank’s media advisers, Andrew Hall, busy taking notes. He also remembers the meeting taking an interesting turn when Wacka suggested the bank’s new compensation scheme would have a lot more credibility if Morris was put in charge. ‘Narev ignored the suggestion,’ says Morris, ‘then started talking about how we should be really impressed with the plaintiff law firms they had signed up to help customers.’ Morris knew then the scheme was designed to ensure he couldn’t be involved. ‘The bank didn’t want me anywhere near it, so they signed up the law firms,’ he says, adding that he offered to meet Narev again to discuss some ideas on how to improve the scheme. Narev agreed but Morris again knew it would never happen. ‘When we left, Narev put his hand up and said, “Trust me, I would be a fool if I played games with this scheme.” That’s exactly what they did,’ Morris says.
Merilyn still remembers her meeting with Narev. She thought his apology seemed genuine – until she was about to leave the meeting. ‘I turned to leave his room and he couldn’t resist saying, “You have to remember investing is a buyer beware activity,”’ she recalls. ‘I was utterly stunned. Despite the overwhelming evidence that had been exposed through the media, Four Corners, and the parliamentary inquiries, he clearly seemed to think Mum and Dad were primarily responsible for their own plight,’ Merilyn says. ‘This confirmed what I already knew, that all of Narev’s apologies were simply hollow PR exercises and he slept soundly every night.’
Sam Dastyari’s adviser, Cameron Sinclair, recalls Narev saying to them at their meeting they wouldn’t believe how many bank customers were trying to rip off CBA. ‘I left thinking that my impression of him had been made irreparably worse.’
Dastaryi had been summoned to meet Narev because, on 1 July 2014, Labor Senator Mark Bishop had retired from politics and the diminutive thirty-one-year-old Dastyari had replaced him as chairman of the Senate Economics References Committee. Dastyari was fiercely ambitious and could see that banking and the financial services sector was a topic that resonated with the public, so he seized it as his own. He rang me to introduce himself, assuring me he would continue the good work of the committee and push for a royal commission by exposing further misconduct. Anything he could do to help, he said; he was the go-to man.
One of Dastyari’s first jobs was to get the numbers in the Senate to ‘disallow’ or block the regulations Cormann was proposing to introduce. If he could do that, the ‘original FoFA’ would be reinstated and the industry would have to comply with the law. As it was, he was short two votes. If he couldn’t find them, the industry would win the day and the regulations would become the rule of law.
*
Morris and two of the three other Ferrets reunited at the Buena Vista a few days after the Bishop Report into ASIC and CBA was released. They raised their beers to the Ferret who had recently died in his sleep at the age of thirty-six.
‘Then, as now, the cleansing ales brought clarity,’ Morris said. ‘ASIC was a complicit non-participant. Not interested in taking on the big players, not really interested in doing their job at all.’
He was right.
As Morris and the other Ferrets parted on the footpath, they agreed that the journey they had begun six years earlier had a long way to go yet.
Chapter 9
Flawed schemes
Timbercorp, ANZ and the future of financial services
WITH THE INK BARELY dry on the Senate report calling for a royal commission into CBA, a fresh scandal was exposed across the front pages of the Sydney Morning Herald and The Age. This time it was about Macquarie Group.
It was July 2014 and a whistleblower working within the so-called ‘millionaires’ factory’ had watched the CBA scandal unfold and wanted to help blow the lid on similarly poor behaviour at Macquarie. He made contact with me and Wacka Williams, saying he was concerned that Macquarie Group customers weren’t being properly compensated for poor advice and – in a familiar refrain – that ASIC wasn’t doing its job. ‘We [the Macquarie Group] have a legal and moral responsibility to shareholders to protect and inform them.’
Around the same time, another source gave me an explosive confidential document, an assessment by an external consultant of client files, which showed that Macquarie’s team of financial advisers had serious compliance problems. The stories mirrored what had happened at CBA: investors had lost their savings and struggled for proper redress, and ASIC had been slow to act. In Macquarie’s case there were also concerns that financial advisers were deliberately misclassifying retail clients as sophisticated investors – a move that involved less paperwork for the adviser and made it easier to channel the investors into high-fee-paying, complex financial products, some of which were Macquarie’s.
The other big reveal was that Macquarie advisers were habitually cheating on their mandatory online training exams, known as ‘continuous professional development’ – part of the relatively light professional accreditation requirements faced by financial advisers. According to the whistleblower, it was common practice for advisers to hand around cheat sheets during open-book exams. The cheat sheets were known as ‘the Penske File’ – a name any Seinfeld fan wo
uld immediately recognise.
I worked with senior Fairfax business journalist Ben Butler on the investigation. At the time, we agreed not to quote directly from the confidential document in our articles, or even refer to it, to protect the source. But four years on, I revisited the file and was given permission by my source to quote it for this book.
Macquarie Private Wealth had been having problems since 2008. ASIC had launched surveillance on the group in December 2011, uncovering serious compliance issues with the files of a ‘significant’ number of advisers. Macquarie had entered into a two-year enforceable undertaking in January 2013 requiring remediation for customers affected by compliance failures. Despite this, the confidential document showed that Macquarie still had much to do to clean up its act. A sample of fifteen advisers and 143 files had found that sixty files had insufficient client information, ninety-three had no record of research carried out by the adviser, 110 had no record that the adviser suggested alternative products for their client, and in 114 cases the advice or situation couldn’t be assessed.
Less than two weeks after our story was published,1 on 15 August 2014, ASIC held a press conference announcing that Macquarie would set up a remediation scheme and write to 160,000 customers who may have been receiving poor financial advice since 2004. The articles Ben and I had written also blew the lid on the lax standards and lack of professionalism that had been allowed to proliferate in a sector entrusted with people’s life savings. As Wacka Williams said in Senate estimates, ‘You can walk out of the shearing shed, do an eight-day, I repeat, eight-day – not eight-week – crash course, then you’ve qualified under the Corporations Act to be a financial planner.’2 It was extraordinary to consider that the banking and financial sector was now facing a situation where two banks were embroiled in compensation schemes potentially involving hundreds of thousands of people who, it seemed likely, had been given inappropriate advice by planners who had possibly less than two weeks’ training and only secondary education.
Banking Bad Page 12
