The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Financial Services Royal Commission) commenced its second round of hearings, which will focus on financial advice, on 16 April.  During the first week of hearings (16 April to 20 April) the commission heard evidence from a number of entities on the topics of: fee-for-no-service conduct (ie the charging of fees for financial advice that is not provided or not provided in full); investment platform fees and the provision of inappropriate financial advice.  The scope of the issues identified during the hearings, was in some instances, not previously publicly known, which has prompted (among other things) a number of former opponents of the commission to alter their stance as to its potential value.  A high level overview some of the issues arising in relation to fee-for-no-service conduct is below.

Common themes and questions for the inquiry: The common themes and questions for inquiry identified by Counsel Assisting Rowena Orr QC in her opening statement included:

• Issues concerning 'the adequacy of the current arrangements for disciplining financial advisers.  In particular, by examining the ways in which disciplinary matters are currently dealt with in relation to financial advisers, this case study will highlight some of the gaps in the existing system'. 
• Whether the misconduct in question is attributable to a particular culture, system or practice within the entity, including, in particular, remuneration, incentive or commission arrangements. 
• Why did the misconduct go undetected and, in some instances, for a long period of time? 
• Were the entities’ processes adequate to prevent and detect misconduct of this nature? 
• Did the entity respond in a timely and sufficient way to the misconduct? 
• Have the legislative reforms to date been successful in preventing misconduct?  If not, why is this the case?

[Source: Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry 16 April 2018 – Draft Transcript for Day 11]

Fee-for-no-service conduct

The first case studies on which the Commission heard evidence related to the topic of fee-for-no-service conduct.  As per the schedule of topics and case studies published ahead of the hearing, the Commission heard evidence from:

1. AMP, AMP Financial Planning Pty Ltd, Charter Financial Planning Ltd and Hillross Financial Services Ltd (AMP) and;

2. the CBA, Commonwealth Financial Planning Ltd and Count Financial Planning (CBA).

A brief outline of some of the issues raised by the Commission is below.

AMP Case Study

• Acknowledgement of various fee-for-no service issues: Counsel assisting Rowena Orr said that AMP acknowledged in its submissions to the commission that it 'acknowledged 196 events across 14 AMP advice licensees of advisers failing to provide customers with services for which they had paid during 5 the period from 1 July 2008 to 30 June 2015. This resulted in $193,519 being paid to customers in compensation'.  In addition, she said, AMP acknowledged six other events which involved an AMP licensee continuing to charge a customer fees for service that were not provided by the licensee or the adviser during the period from 1 July 2008 to 30 June 10 2015.  These included: charging ongoing services fees to clients in circumstances where the client has not allocated a financial adviser and was not receiving the service for which they were paying; charging ongoing service fees to clients where the client's adviser had departed AMP; charging ongoing service fees after an adviser’s authorisation had been terminated; incorrectly charging ongoing service fees an AMP licensee had acquired the rights associated with a client register but provided no services for the fees that were being charged; inadequate systems to track clients impacted; inaccuracies in reporting to ASIC.  AMP also acknowledged that in this period it had identified 440 advisers with potential other compliance concerns.

• False and misleading statements to ASIC: The Commission heard evidence that AMP made false and misleading statements to ASIC regarding ongoing fees-for-no-service policies on 20 occasions.  This included representing to ASIC that the business decision to continue charging the fees (when the client was not receiving the service) was an a failure of process rather than a business decision/policy.   

• Influencing an independent report to ASIC regarding the policy to continue charging the fees? In addition, AMP was questioned over the independence of a report (for ASIC) compiled by Clayton Utz about the Buyer of Last Report policy at AMP and related compliance breaches.  In particular, AMP Senior Counsel Assisting Michael Hodge, questioned, given the number of drafts of the report and the alleged involvement of AMP in its preparation, it could be considered independent.  Following this evidence the Commissioner stated: 'In view of the evidence given by Mr Regan [AMP's representative], there may be some question about what conclusions, if any, I may reach about the extent to which senior management or others associated with AMP sought to influence or did influence content of the report by Clayton Utz apparently submitted to ASIC as an independent report.  It is a matter for AMP and its advisers whether it seeks to have some opportunity to provide any material which goes beyond the evidence given by Mr Regan about that matter, the documents that were tendered in relation to it'. 

[Sources: Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry transcripts of public hearings: 16 April 2018 – Draft Transcript for Day 11; 17 April 2018 – Draft Transcript for Day 12] 

ASIC statement on ongoing investigation into fee for no service conduct at AMP:  On 18 April, ASIC issued a statement confirming that it has been investigating AMP's conduct in relation to fees for no service and has, as part of its investigation received 'many thousands of documents and undertaken 18 examinations of AMP staff' and will ensure that compensation is paid to impacted clients. The statement adds that ASIC has been cooperating with the Royal Commission on a range of matters that include both current and previous investigations, reminds financial institutions of the importance of cooperating with the regulator and complying with the law when providing information to ASIC and notes that it will not comment further publicly about the investigation 'at this time'.  ASIC's statement followed a statement from the Treasurer confirming that the issues raised were already the subject of investigation by the regulator.

[Source: ASIC statement on AMP 'fees for no service'; Treasurer Scott Morrison Transcript of Doorstop interview, Sydney: Subjects: Labor’s retiree tax; IMF’s positive outlook for Australia’s economy; Financial Services Royal Commission; Budget 2018; GST distribution; Northern Australia Infrastructure Facility 18/04/2018; Interview with Ross greenwood 2GB 18/04/2018]

AMP response: Following the first day of hearings, AMP issued a statement: 'AMP is deeply disappointed that its advice business has charged customers fees where service has not been provided and for misleading the regulator in this regard. We apologise unreservedly.' 

AMP issued a further statement on 20 April in which it apologised 'unreservedly for the the misconduct and failures in regulatory disclosures in the advice business' and outlining the steps the AMP board will take 'to accelerate the necessary change within the organisation' and build on the existing program of work, commenced in 2017. 

• These additional actions include: a comprehensive review of AMP's regulatory reporting and governance processes to be overseen by an independent expert and the review, by a board committee, of the issues related to the advice issued raised at the Commission. 

• In addition, the statement announced that AMP CEO Craig Meller would step down from his role with immediate effect.  The statement added that the board would withdraw a resolution relating to an equity grant for the CEO from its Notice of Meeting to the 2018 AGM.  Mike Wilkins, a Non-Executive Director on the AMP Limited Board and a former CEO of IAG Limited, has been appointed as acting Chief Executive Officer until the search for the new CEO is completed.  AMP CEO Craig Meller said: 'I am honoured to have been the CEO of AMP.  I am personally devastated by the issues which have been raised publicly this week, particularly by the impact they have had on our customers, employees, planners and shareholders.  This is not the AMP I know and these are not the actions our customers should expect from the company.  I do not condone them or the misleading statements made to ASIC.  However, as they occurred during my tenure as CEO, I believe that stepping down as CEO is an appropriate measure to begin the work that needs to be done to restore public and regulatory trust in AMP.' 

• The statement also said that AMP Group General Counsel Brian Salter will take leave during the independent review.   David Cullen, AMP General Counsel, Governance has been appointed as acting Group General Counsel.

• AMP also said that it will be making a submission to the Royal Commission to respond to the issues raised.  The submission will, among other matters, address the issue of the independence of the Clayton Utz report.

[Source: The Guardian 17/04/2018; [registration required] The AFR 17/04/2018]

 CBA Case Study

• Counsel Assisting Rowena Orr said that CBA had acknowledged misconduct and conduct falling below community standards and expectations in relation to the provision of financial advice including in relation to fees for no service.  Examples cited by Ms Orr included (among others): charging Commonwealth Financial Planning, BW Financial Advice and Count Financial clients for ongoing advice where no financial advice services were provided and the failure to provide or failure to locate evidence regarding the provision of annual reviews (which was the subject of the Enforceable Undertaking entered into with ASIC) among others.

• The Commission heard evidence that CBA had charged clients more fees for no services than any other entity.  Questions were asked by the Commission regarding a number of issues in relation to this including: the alleged lack of action by the CBA in respect of the deduction of fees by entities under CBA management from client accounts eg in circumstances where the client was known to have died; the ability of the organisation to identify and report on the breaches given the lack of systems in place to do so; when the CBA became aware of alleged breaches/the time taken to report breaches to ASIC and the number of financial planners available to service client's needs.  Questions were also asked regarding the CBA's assessment of the scope of the alleged breaches. 

[Source: Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry transcripts of public hearings: 17 April 2018 – Draft Transcript for Day 12; 18 April 2018 – Draft Transcript for Day 13; 19 April 2018 – Draft Transcript for Day 14]

Context

• The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Financial Services Royal Commission) second round of hearings will run from 16 April to 27 April. 

• The hearings will consider 'the conduct of financial services entities that provide financial advice to consumers, including the treatment of consumers, compliance with the law and community standards and expectations, and the sufficiency of the current legal and regulatory structure' the Commission writes. 

• As per the schedule of topics and case studies released prior the hearings, the hearings will proceed by reference to case studies on five topics.  These case studies involve:  AMP, CBA, Westpac, ANZ, NAB and some other major financial planning groups.  

• The Commission is expected to provide an interim report to the Governor-General by 30 September 2018, with a final report due by 1 February 2019. 

[Source: Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Round 2 hearings]

Background papers: The Commission has released two background papers on the legal framework for providing financial advice ahead of the hearings to assist in informing proceedings.  These are:

• Background Paper 6 (Part A):Some Features of the Australian Financial Planning Industry; Background Paper 6 (Part B):  Education and Training Requirements for Financial Advisers; Background Paper 6 (Part C):  Financial Products Available to Retail Investors, Background;

• Paper 7: Legal Framework for the Provision of Financial Advice and Sale of Financial Products to Australian Households and a further paper, prepared by Treasury: Background Paper

• 8: Key Reforms in the regulation of financial advice, on the key reforms in the regulation of financial advice.