On 17 September 2018, Hagger resigned from NAB as a result of what the royal commission had revealed. Hodge had got his scalp.
*
Unfortunately, the amount of time spent on NAB crunched the time spent on other institutions. But the royal commission did manage to highlight some disturbing conduct and a poor culture at IOOF, the financial services company whose frontrunning and insider trading I had investigated back in 2015.
Letters released to the royal commission showed that APRA had written to IOOF at various times over the years outlining serious issues. One letter in September 2015 referred to ASIC’s ‘difficulty in obtaining accurate and current information in relation to issues such as . . . culture, identification of responsible persons and the information flow and relationship between the board and management and the Fairfax Media matter’.3 ‘The Fairfax Media matter’ referred to the stories Sarah Danckert and I had written (see Chapter 11).
In mid-2017 an internal APRA memo stated, ‘Since December 2015, APRA has identified a number of instances where ‘IOOF has failed to adequately identify conflicts of interest’.4 IOOF’s contempt for APRA and an apparent lack of regard for governance and processes were exposed when a board meeting – held one week before Chris Kelaher gave testimony at the banking royal commission – resulted in the production of handwritten minutes on scraps of paper, many of which were illegible.
Chris Kelaher, the CEO of IOOF, came to testify wearing a red tie, with a bright white handkerchief poking out of his jacket. The public gallery was mesmerised by his body language, sarcasm and indifference. He made it obvious he didn’t want to be at the commission. He deflected allegations with comments such as ‘That’s your construction’ or by saying something was ‘a long time ago’. When Hodge asked him if he understood what was on the handwritten minutes, he retorted that he wasn’t a handwriting expert.
Hodge grilled Kelaher over the company’s decision to dip into reserves of a super fund to compensate its members for losses suffered following a $6.1 million payment error. This was akin to them getting customers to use their nest eggs to compensate themselves, yet Kelaher told Hodge he believed it passed the ‘pub test’. The $6.1 million payment error had been detected in 2010 and become the subject of a breach report to ASIC in 2012 and an internal whistleblower report in 2013.
The commission also heard during Kelaher’s testimony that IOOF had decided not to move customers from a super fund that was paying trailing commissions to a new lower-fee product after working out that it would cost the company about $8 million a year to do so. In addition, it was revealed that APRA had been trying to get IOOF to unwind a dual structure whereby IOOF Investment Management was both trustee and responsible entity. Kelaher said it was a matter of indifference to him if the trustee and manager roles were split.
‘You don’t share the view of APRA that there are legitimate concerns about these structures?’ Hodge asked.
Kelaher was unmoved. Trying to get a response, Hodge asked, ‘And when you reflect on those events, does that cause you to think that there might be some issues with the structure?’
To which Kelaher replied, ‘No, I don’t.’
Towards the end of the grilling, Hodge said in exasperation, ‘Even now you don’t see any problem with the events that occurred.’
The irony of all this scrutiny was neatly summed up in one internal IOOF document, dated 22 March 2018, that was displayed on the screen in the courtroom. It set out how IOOF could justify to APRA their offering different prices to existing and new members: ‘I think we could expect APRA to scrutinise this decision and criticise it as another example of us not managing our conflicts accordingly.’ It went on to say, ‘These days we should have regard not only to the “How would this look on the front page of The Age test?” but also to the test of “Would we like to see this decision dissected at the royal commission?”’5
At least it got that right.
*
By the time APRA’s deputy chairman, Helen Rowell, appeared in the witness box on 17 August 2018 there was little goodwill towards the regulator. Rowell had worked at APRA for sixteen years. She had been appointed deputy chair in November 2015 then reappointed to the position for a further five-year term from 1 July 2018, ahead of her appearance at the royal commission.
Half an hour into Michael Hodge’s cross-examination of Rowell, I received a text message from a senior public servant asking, ‘Are you watching it? Think train wreck, followed by Chernobyl, followed by tsunami.’
It was a reasonable summation of the interrogation, which provided an extraordinary insight into the mindset of APRA – which, according to Rowell, preferred to be ‘collaborative’ instead of adversarial. This collaborative approach involved regular engagement with the boards of financial institutions, reviews of these same institutions and – if there were problems – experts being appointed to conduct further reviews. When that didn’t work, APRA would write the institution a stern letter.
When Hodge asked Rowell about APRA’s use of penalties and sanctions for misconduct, her responses were embarrassing. In the previous decade APRA had only disqualified one super fund trustee – a director of the collapsed Trio Capital – and it hadn’t taken any action against likely breaches of the sole-purpose test that might have occurred in the fees-for-no-service scandal.
Everything at APRA was conducted behind closed doors, except enforceable undertakings, but it hadn’t made any of those either. To double-check that he was hearing correctly, Hodge asked, ‘So enforceable undertakings, if they were to occur, they would be public?’
Rowell: ‘Yes.’
Hodge: ‘But they [enforceable undertakings] don’t occur. So what other public conduct does APRA engage in which would identify specific trustees and specific conduct of those trustees?’
Rowell: ‘None.’
For years APRA had shunned the media with a stock standard ‘no comment’ when asked about anything relating to the banks or super funds. This enabled the regulator to escape the glare of criticism, unlike ASIC, which was more public and transparent.
APRA’s collaborative approach to dealing with institutions had resulted in a litany of misconduct that had escaped public scrutiny. One of the standouts was CBA, which had made at least 15,000 criminal breaches in relation to its not moving customers who hadn’t selected a specific super product to a default no-frills, low-fee ‘My Super’ fund, as federal laws introduced in January 2014 obliged the bank to do. Yet APRA imposed no enforceable undertakings or fines.
When Hodge asked Rowell if APRA had contemplated taking action on fees for no service, she said no, and that APRA was waiting for ASIC’s conclusions. Rowell even tried to defend the payment of ongoing trailing commissions by superannuation fund members on the basis that she couldn’t be sure it wasn’t in members’ best interests. This was the same regulator that had taken until August 2017 to order an inquiry into CBA’s culture and governance after watching a string of scandals, including the financial planning, life insurance and fees-for-no-service scandals, as well as alleged bank bill swap rate rigging and the AUSTRAC money-laundering scandal.
APRA’s failure to take effective action in any of these cases was a damning indictment of the regulator.
*
Strapped for time, the royal commission did a light once-over of industry super funds, much to the disappointment of the Coalition. Industry funds are non-profit and therefore escape the myriad conflicts of interest and quagmire of unreasonable fees that characterise retail funds. When it comes to performance, most of them outperform their retail counterparts, mainly because they aren’t clipping the fee ticket.
As with other institutions, the royal commission had written to industry super funds asking for a list of inappropriate behaviour during the previous ten years. Most of the misconduct they revealed was minor.
Ian Silk, CEO of AustralianSuper, a not-for-profit industry fund and the country’s biggest super fund provider, was called as a witness. The
royal commission wanted to question him about AustralianSuper’s $2 million investment in online newspaper The New Daily and its contribution of $500,000 towards the controversial ‘Fox in the Henhouse’ ad campaign that portrayed banks as the foxes trying to get their teeth into people’s retirement savings. Hodge wanted to know whether spending that money was in members’ best interests.
Silk’s explanation was that the advertising campaign and newspaper investments had been carefully considered by the board and had been signed off with the best intentions to educate, retain and protect members. AustralianSuper had since written off its investment in The New Daily and the ads had involved only a one-off payment.
For those who might have thought both these expenditures an inappropriate use of members’ money, Silk noted that $2.5 million was chickenfeed compared with the fund’s $140 billion assets, or the antics of retail funds. ‘The difference between the best funds and the poorest funds is literally life-changing for people,’ Silk told the commission.
It was hard to disagree. However, after only such a cursory look at the numerous industry funds at the royal commission, we still can’t be sure that all of them are squeaky clean.
*
Over twenty days of gruelling hearings, the royal commission had demonstrated how trustees in superannuation retail funds had sat in conflicted silence around boardroom tables, earning tidy sums as they rubber stamped a myriad of schemes designed to squeeze as many fees out of members as possible.
Hodge’s concluding address to Hayne regarding the hearings was damning. He said, ‘Members of superannuation funds, like most beneficiaries, are vulnerable, and in respect of superannuation, many are disengaged and disadvantaged by a lack of financial literacy. They are readily able to be taken advantage of.
‘And the evidence, you may conclude, commissioner, suggests that this has occurred in some cases. In most industries, the forces of competition can be relied upon to minimise improper conduct and effective regulation can be expected to address breaches of the law when breaches occur; however, for superannuation, the disengagement of members, amongst other things, may limit the effectiveness of competition.’
For all the complexity of the hearings into superannuation, the scandals exposed resonated with Australians. Official figures from APRA show that industry funds grew by $80 billion or 13 per cent to $677 billion in the twelve months to March 2019, compared with 3.4 per cent growth in retail funds to $623 billion. For the first time, the industry funds were bigger than the retail funds. AustralianSuper was the biggest beneficiary, with Ian Silk estimating net inflows would rise more than $15 billion in the year to 30 June 2019, an increase of more than 60 per cent over the previous year. Silk told the media that more than one-third of AustralianSuper’s inflows were coming from members switching out of AMP and funds run by the big four banks. ‘Since the start of the royal commission there has been a sharp rise in member contributions,’ he said.6
This switch to industry funds was also likely influenced by finance expert Scott Pape, aka the Barefoot Investor, who has long banged the drum for low-fee-charging super funds and advised his huge following that he invests his super with industry fund HostPlus.7 Its membership jumped 350 per cent in 2018.8
Low fees, better performance and no apparent systemic misconduct all played a part in the public’s rush to park their retirement savings in industry funds. Debbie Blakey, CEO of industry fund HESTA, told The New Daily, ‘It’s about trust. The royal commission has probably made us all realise just how valuable trust is.’9
Chapter 21
Round 6: Insurance
Bleeding them dry
WHEN COMMINSURE’S BOSS, HELEN Troup, entered court 4A on 12 September 2018 for the first session of round six of the hearings, on the scandal-ridden life insurance division she had been managing director of since April 2014, it was hard to find anyone in the room who wasn’t a CBA lawyer or member of staff.
I sat in the back row of the courtroom waiting for counsel assisting, Rowena Orr QC, to begin the demolition. Lawyers, politicians, staff and victims were also tuning in to watch Troup’s testimony via live stream. One of those victims was CommInsure whistleblower Dr Ben Koh, whom Troup had personally sacked.
Life insurance is big business, but it falls through regulatory cracks. The industry has only recently devised a code of conduct, which is still weak and lacking in substance. It has been granted exemptions from laws banning unfair terms in contracts, and insurance companies have been given the power to legally discriminate; for instance, they can discriminate against people with mental illness, even if the illness is episodic.
In her introduction to the hearing two days before Troup’s appearance, Orr had told the commission, ‘It is important to note that the handling and settling of insurance claims is specifically excluded from the definition of a financial service.’ That meant, she said, that the obligation for an insurance company to do all things necessary to ensure that it provides financial services ‘efficiently, honestly and fairly’, didn’t apply to making a decision about a claim, the investigation of that claim and the interpretation of policy provisions. Nor did it apply to negotiations of settlement amounts, to estimates of loss or damage, value or repair costs, or recommendations on mitigation of loss. ‘This limits ASIC’s ability to take action against insurance companies where, for example, there are unnecessary or extensive delays in handling claims.’
Insurance falls within the Insurance Contracts Act 1984, which contains ‘a duty of utmost good faith’. If an insurer fails to comply with the duty of utmost good faith in relation to its handling or settlement of a claim, it is deemed a breach, but a breach doesn’t attract a penalty or fine. That in turn means ASIC doesn’t have the power to bring proceedings against an insurer to recover a penalty where it believes the insurer has breached this duty.
Orr started her questioning of Troup with a bang, describing a mistreated policyholder whose life insurance claim had been rejected on the basis of an outdated medical definition. Orr then provided evidence that CommInsure had misled the Financial Ombudsman Service (FOS) to avoid the $100,000 payout. Even worse, the insurer’s misconduct had happened after my joint Age and Herald media investigation with Four Corners, ‘Money for Nothing’, which had revealed issues with outdated medical definitions, including heart attacks, at CommInsure. Following the program, CBA’s Ian Narev had ‘unreservedly’ apologised to CommInsure customers for its poor behaviour and promised to update those decade-old definitions and backdate its new heart attack definition to May 2014.1
The CommInsure policyholder had suffered a severe heart attack in January 2014. After watching ‘Money for Nothing’ he had decided to re-lodge a claim the bank had previously rejected. The bank rejected it again.
The man’s heart attack had occurred in January 2014 and the bank had only backdated its definition of a heart attack to May 2014. This was despite knowing the definition was a decade out of date and most other insurers had backdated their definition to 2012. In disgust, he took the complaint to FOS to get it reassessed by an independent third party. But the bank continued to push back when the FOS requested it hand over documents and a justification for rejecting the claim. Documents submitted to the commission revealed that CBA misled FOS by redacting a medical opinion that said the man met the definition of a heart attack so that it could avoid paying the claim.
‘This email to FOS was misleading, was it not?’ asked Orr.
‘Unfortunately, yes,’ Troup replied, looking singularly unimpressed to be there at all.
The heart attack survivor was eventually paid an ex gratia payment of $90,000, but it still cast CBA in a bad light, demonstrating that despite its public apologies after the media exposé, its culture hadn’t changed.
The royal commission heard other cases where CommInsure knocked back claims using outdated definitions. One was the shocking case of a woman with breast cancer whose life insurance claim for $169,300, lodged in August 2016, had been repeatedl
y rejected. The woman, who’d been a CommInsure policyholder for twenty years, had had part of her breast removed and received radiotherapy. As she battled her cancer, she also had to fight CommInsure, which knocked back her insurance claim on the basis it didn’t meet CommInsure’s threshold of ‘radical surgery’.
What CommInsure never explained was that its interpretation of radical surgery was a full mastectomy. But that interpretation was based on a definition that was eighteen years old, and modern medicine had advanced considerably in the meantime.
In February 2017, the policyholder wrote to CommInsure and attached a series of documents from her doctor and surgeon. One was a letter written to her surgeon that said: ‘It is my understanding that in performing the surgery, the ample nature of my breasts meant that I did not require a mastectomy. I believe that you mentioned that had this not been the case and my breasts had been small, I would have required a mastectomy. I would appreciate it if you could confirm this by indicating below if this is the case.’ The surgeon did so, noting also: ‘The treatment received is radical because radiotherapy was required as an alternative to mastectomy.’
His letter was sent to CBA and a new case manager was assigned to the claim. Orr explained how the case manager referred the case to the medical consultant who had previously considered the claim. She asked Troup: ‘And the medical consultant again said that radical breast surgery had not been performed, having considered this additional material. Is that right?’
Troup responded, ‘That is right.’
Banking Bad Page 24
