In the Interim Report, I identified several considerations that pointed towards the conclusion that the root cause of the fees for no service conduct was greed: greed by licensees, and greed by advisers.
The evidence that emerged in later rounds of the Commission’s hearings only served to reinforce that conclusion.
However, expressed at that level of generality, the identification of the root cause provides little guidance about whether the responses that have been made are adequate, or about what changes should be made to ensure that these events do not occur again.
It is therefore appropriate that I say something further about the causes of the fees for no service conduct.
Before doing so, it is important to notice that, as the proceedings of the Commission continued, and the nature and extent of the fees for no service conduct became more evident, it seemed to me that some sought to deflect attention away from whether the conduct was dishonest. There began to emerge a narrative, reflected even in the evidence of Mr Wayne Byres, Chair of the Australian Prudential Regulation Authority (APRA), that fees for no service was all just a series of careless mistakes capable of being swept aside as ‘processing errors’.
This explanation was advanced by Mr Andrew Thorburn, CEO of NAB. He sought to portray the charging of fees for no service as a product of poor systems and carelessness. It was, in his words, ‘just professional negligence’.[1] And Mr Byres said, in his statement, that ‘in many cases the fees for no service issue was in large part a product of poor IT infrastructure … [and] legacy system issues’.[2]
I cannot and do not accept this.
As I put to Mr Thorburn, his proposition was that ‘this money fell into the pocket of NAB accidentally’.[3] Mr Thorburn’s frank, and inevitable response was ‘I can’t disagree with that … it wasn’t intended to be ours but it became ours’.[4] The amounts of money that just ‘fell into the pocket’ of so many large and sophisticated financial entities, the number of times it happened, and the many years over which it happened, show that it cannot be swept aside as no more than bumbling incompetence or the product of poor computer systems. I say more about these matters when considering whether the responses to fees for no service have been adequate.
In identifying the causes of the conduct, the observations made by ASIC in its October 2016 report provide a useful starting point. In that report, ASIC observed that during the time fees were being charged for no service:
- the financial advice industry had a culture of reliance on automatic periodic payments such as sales commissions and adviser service fees;
- some advice licensees prioritised advice revenue and fee generation over ensuring that they delivered the required services;
- some licensees and advisers did not keep adequate records to enable monitoring and analysis; and
- some licensees did not develop and enforce effective monitoring and checking procedures to prevent systemic failures.[5]
No doubt these observations were then, and remain, accurate. But, as I said in the Interim Report, they are observations that do not go far beyond the proposition that fees were charged for no service. Points made in the Interim Report should be repeated.
The first is obvious. Charging for what you do not do is wrong. No doubt, as Mr Anthony Regan – then AMP’s Group Executive, Advice and New Zealand – pointed out, fees were charged for no service during a period that saw great legal and regulatory change.[6] But contrary to Mr Regan’s evidence, neither the pace nor the extent of regulatory change made any contribution to the occurrence of these events. As Mr Regan himself accepted, charging fees for no service is obviously wrong.[7]
Since Mr Regan’s evidence, others have also recognised that this conduct is wrong. In his evidence in the seventh round of hearings, Mr Matthew Comyn, CEO of CBA, accepted that charging fees for no service reflected not only an unacceptable culture and lack of professional conduct among CBA’s advisers, but an unacceptable culture on the part of managers.[8] Mr Thorburn said that retaining fees charged for a service when NAB did not provide that service was ‘absolutely wrong’.[9] Mr Thorburn accepted that where a financial adviser charges and retains fees to a client for services they know they have not provided, that is dishonest conduct.[10] (As explained above, Mr Thorburn sought to assert that no‑one knew this was happening. The money just kept ‘falling into NAB’s pocket’.)
Second, and equally obviously, making an ongoing fee arrangement gives the adviser a financial advantage. The adviser stands to earn, and to continue to earn, annual amounts from the client. The less the adviser does before the fee is paid, the greater the financial advantage. And, as ASIC noted in its 2016 report, licensees did not have systems in place to ensure that any services were provided in return for the fees being charged. Licensees did, however, have systems in place that recorded incoming revenue.[11]
Third, licensees did nothing to prevent advisers having more customers on their books than they could monitor or advise annually. Often, the advisers had ‘acquired’ (or ‘inherited’) those clients from some other adviser.[12] And licensees such as AMP and its associated entities, that have provided, and continue to provide, ‘buyer of last resort’ arrangements for advisers who wish to leave the business, not only facilitate, but actively encourage, the treatment of client books as a tradeable asset to be valued as a multiple of annual income earned. The annual income in this case consisted of commissions and fees paid by clients.[13]
Fourth, the services to be provided under ongoing fee arrangements often were, and still are, neither well‑defined nor onerous. Evidence showed how the services to be provided under ongoing service arrangements may not only be very loosely defined but also defined in a way that has little or no substantive content beyond a promise to speak with the client once each year. Describing the services (as Mr Michael Wright, the national head of BT Financial Advice did) as ‘strategic advice and reassurance’[14] may encourage both adviser and client to view the provision of ongoing services as a matter of form rather than substance and as a matter that is not of any immediate or pressing moment or value. What exactly was, or is, to be provided in an ‘annual review’? What is meant when it is said that the client may ‘have access’ to the adviser? Was (or is) the only promise made to ‘offer’ an annual review? And some advisers have in the past charged fees for services that ASIC said had ‘limited’ (I would say no) value such as maintaining records that the law required the advisers to maintain and retain.[15]
As ASIC pointed out in its submissions, the promised services, even if provided, may not give the client a benefit commensurate with their cost. If, as each of Ms Marianne Perkovic (on behalf of CBA), Mr Regan (on behalf of AMP) and Mr Darren Williams (on behalf of ANZ) said may be the case, the future advice fee is fixed as a percentage of the ‘funds under advice’ (rather than as a fixed dollar sum), the question of value for money is all the more evident. Ms Perkovic said that the maximum fee charged by CFPL, under its Legacy package, was 0.94% of funds under advice;[16] Mr Regan produced an example of an agreement between an adviser at Hillross and a client where the ongoing service fee was fixed at 0.6% of funds under advice;[17] Mr Williams said that some ongoing service fees were calculated as a percentage of the fees under advice but that other such fees were fixed as a flat dollar amount.[18]
When asked to describe what was generally provided under ongoing advice arrangements, Mr Wright said, that ‘before FoFA, the conversation was much more around performance. Post‑FoFA, and particularly now in our business, the conversation is much more around strategic advice and reassurance’.[19] Mr Wright spoke of how the ‘conversation’ was now used to reflect on statutory changes, and ensure that strategic advice was going to meet the client’s goals and aspirations by, if needs be, ‘rebalanc[ing] or reposition[ing]’ to meet those goals.[20]
Subject to one important qualification, the descriptions that Ms Perkovic, Mr Regan and Mr Williams gave of ongoing services were not substantially different from the description given by Mr Wright. The qualification that must be noted is that Ms Perkovic described the ‘core component’ of ongoing services as an annual review[21] but, according to Ms Perkovic, at least in the case of Bankwest Financial Advice (BWFA), the mere offer of an annual review was considered sufficient for the fee to be charged.[22]
If done properly, an annual review might require the application of a deal of time, skill and judgment. Whether it did would depend not only upon the skill and diligence of the adviser but also upon what investments the client had, whether the client’s circumstances had changed and whether investment conditions had changed either generally or in relation to one or more of the products in which the client had invested. Absent extraordinary external events or radical change in the client’s personal position, it would be very easy to provide the service with little time and little effort. And, as pointed out above, the less work that is done, the greater the financial advantage to the adviser.
The fifth consideration to notice is that the fees charged under ongoing fee arrangements were, and still are, often charged ‘invisibly’: by being deducted from the client’s investment accounts. If there is no recognition of a pressing need for the services and the charge is deducted automatically against funds under investment, neither adviser nor client may think about whether the services promised have been or should be provided. One line in a periodic investment statement recording the payment will draw the matter to attention only if the client is attentive enough to look beyond the total given at the foot of the statement. And there are many who will not do that. Whether a fee disclosure statement draws the matter to the client’s attention may depend upon what emphasis the adviser gives when presenting the statement, to how beneficial the adviser’s past advice has been, and how well the client’s investments have proved or are proving to be.
Sixth, before the FoFA reforms required advisers to obtain client agreement every two years for the charging of ongoing fees, and to provide information each year about the services provided in exchange for the ongoing fee, the client may have made the agreement for ongoing fees at the time advice was first provided and neither at that time nor thereafter adverted to, or been reminded of, the adviser’s obligation. This problem was made worse by the transitional arrangements for the FoFA reforms. Although those reforms commenced on 1 July 2012, the Corporations Act provided that compliance with the new provisions (including the provisions requiring the giving of renewal notices and fee disclosure statements) was not compulsory until 1 July 2013.
Because of the way the provisions of the Corporations Act requiring the giving of fee disclosure statements and renewal notices were structured, the first occasion on which an adviser could have been required to give a fee disclosure statement was 1 July 2014, and the first occasion on which an adviser could have been required to give a renewal notice was 1 July 2015. This meant that, even after the FoFA reforms took effect, it was some years before advisers were required to bring to their clients’ attention the services provided (or not provided) in exchange for their ongoing fees.
Seventh, income from trail commissions was, and has remained, an important part of the revenue earned from the provision of financial advice. This is consistent with ASIC’s observation of an industry culture that relies on automatic periodic payments from customers.[23] The highest source of revenue for financial advisers providing advice on behalf of three out of AMP’s four advice licensees for every year between 2008 and 2018 (for which AMP had records)[24] was ongoing or trail commissions.[25] And for the fourth of those advice licensees, where fees for service were the largest source of revenue for advisers, the advisers were employees of the licensee.
Yet Mr Wright gave evidence that despite clients not going to an adviser for ongoing advice,[26] most clients of authorised representatives of the financial advice businesses conducted by Westpac’s advice licensees (Magnitude and Securitor) would be on an ongoing fee arrangement.[27] (He said that fewer clients of Westpac’s employed financial advisers would have ongoing arrangements. Even so, it is to be noted that the case study relating to Mrs McDowall showed that an adviser employed by Westpac signed Mr and Mrs McDowall up for an ongoing fee of $3,000 per annum.[28] The point not having been explored in evidence, one can only wonder what the purpose of that ongoing fee might have been thought to be.)
[1]Transcript, Andrew Thorburn, 26 November 2018, 7073.
[2]Exhibit 7.145, Witness statement of Wayne Byres, 27 November 2018, 91 [363]; Transcript, Wayne Byres, 30 November 2018, 7475.
[3]Transcript, Andrew Thorburn, 26 November 2018, 7070.
[4]Transcript, Andrew Thorburn, 26 November 2018, 7070.
[5]ASIC, Report 499, 27 October 2016, 8.
[6]Exhibit 2.13, Witness statement of Anthony Regan, 11 April 2018, 54 [291].
[7]Transcript, Anthony Regan, 16 April 2018, 1072–3.
[8]Transcript, Matthew Comyn, 20 November 2018, 6679.
[9]Transcript, Andrew Thorburn, 26 November 2018, 7067–8.
[10]Transcript, Andrew Thorburn, 26 November 2018, 7073.
[11]ASIC, Report 499, 27 October 2016, 39–40 [191(a)].
[12]ASIC, Report 499, 27 October 2016, 40 [191(b)].
[13]Transcript, Anthony Regan, 16 April 2018, 1061–2.
[14]Transcript, Michael Wright, 20 April 2018, 1450.
[15]ASIC, Report 499, 27 October 2016, 40.
[16]Exhibit 2.73, Witness statement of Marianne Perkovic, 3 April 2018, 5 [29].
[17]Exhibit 2.13, Witness statement of Anthony Regan, 11 April 2018, Exhibit AGR-1 [AMP.6000.0020.0234 at .0236].
[18]Exhibit 2.92, Witness statement of Darren Williams, 13 April 2018, 10–11 [49].
[19]Transcript, Michael Wright, 20 April 2018, 1450 (emphasis added).
[20]Transcript, Michael Wright, 20 April 2018, 1450.
[21]Provided in the past, by one CBA licensee, BWFA, by telephone. See Exhibit 2.73, Witness statement of Marianne Perkovic, 3 April 2018, 4 [24], 9 [62].
[22]Transcript, Marianne Perkovic, 18 April 2018, 1289–92.
[23]ASIC, Report 499, 27 October 2016, 8.
[24]AMP did not have records about revenue sources for two entities (Charter and iPac) for 2008 to 2011 because those entities were not then part of AMP. See Exhibit 2.171, Witness statement of Anthony Regan, 11 April 2018, 21 [78].
[25]Exhibit 2.171, Witness statement of Anthony Regan, 11 April 2018, 19–21 [77]–[78].
[26]Transcript, Michael Wright, 20 April 2018, 1451.
[27]Transcript, Michael Wright, 20 April 2018, 1449–50.
[28]Exhibit 2.98, Witness statement of Jacqueline McDowall, 4 April 2018, Exhibit JM-2 [WIT.0900.0001.0037 at .0059].