2.2 Evidence

2.2.1Conduct in respect of MySuper

CFSIL obtained authorisation to offer a MySuper product in 2013.[1] The product was a life stages offering made available through the FirstChoice Employer Super product.[2] CFSIL also obtained authorisation in 2013 to offer a MySuper product named Essential Super through the Commonwealth Essential Super fund.[3] No MySuper offering was established within the FirstChoice Personal Super product.[4]

Two issues arose in respect of CFSIL’s implementation of the MySuper provisions. The first concerned its treatment of the contributions of a cohort of members who were invested in the FirstChoice Personal Super product. The second concerned the transition of accrued default amounts (ADAs) into a MySuper product. An accumulated amount attributed to a member is an ADA if that member has not given the trustee a direction as to how the assets of the fund attributed to the member are to be invested.[5]

The first issue related to about 13,000 members of the FirstChoice Personal Super fund. In February 2014, soon after the MySuper changes had taken effect (on 1 January 2014), CFSIL told APRA that it had no investment directions on file for these members, but it had continued to receive contributions from or in respect of the members and had not treated those contributions as default contributions and paid them into a MySuper account.[6]

In November 2013, APRA had written to RSE licensees reminding them that after 1 January 2014 default contributions could only be paid into authorised MySuper products.[7] APRA’s letter also reminded licensees that failure to comply was an offence under the SIS Act.[8] Section 29WA(3) of the SIS Act creates the offence; the offence is one of strict liability. That is, there are no fault elements for any of the physical elements of the offence, but the defence of mistake of fact is available.[9]

At a meeting held on 21 February 2014 between representatives of CFSIL and representatives of APRA, CFSIL told APRA that it may be in breach of section 29WA in respect of the contributions of members who were invested in the FirstChoice Personal Super product, which had not been attributed to a MySuper product.[10] CFSIL later said in its letter to APRA dated 6 March 2014[11] that it could not determine whether about 13,000 members invested in the FirstChoice Personal Super product who had made contributions after 1 January 2014 had given any investment direction about the contributions. The members affected had been transferred into the FirstChoice Personal Super product as a result of a successor fund transfer (SFT) or due to the operation of an automatic transfer from the employer division of the fund on cessation of the member’s employment.

In its letter, CFSIL told APRA that it had considered several options in its efforts to comply with section 29WA. These included:

  • contacting affected members to encourage them to provide an investment direction;
  • implementing a system to allow CFSIL to reject undirected contributions;
  • setting up a second account for members in the MySuper product; and
  • transferring contributions to a MySuper product at the same time as transferring the member’s ADA.

CFSIL asked APRA to agree to a proposal that it:[12]

  • continue to accept undirected contributions into the FirstChoice Personal Super product;
  • transfer undirected contributions into the MySuper product of the fund at the same time as the ADA balance of affected members was to be transferred; and
  • contact all affected members without an ADA balance by telephone in order to obtain an investment direction.

APRA wrote to CFSIL on 14 March 2014.[13] It agreed that CFSIL was in breach of section 29WA. APRA said that it considered that CFSIL had had sufficient time to prepare for the introduction of the MySuper requirements to avoid such a breach, that it did not consider CFSIL’s proposal to be acceptable and that it expected CFSIL to determine a course of action so that it ceases to be in breach of section 29WA of the SIS Act as soon as possible.[14]

Following a further meeting held on 18 March 2014,[15] CFSIL formally notified APRA on 19 March 2014 that it was in breach of section 29WA and had been since 1 January 2014.[16] CFSIL said in the breach notification that it was unable to determine whether approximately 13,000 members of the FirstChoice Personal Super product who had made a contribution since 1 January 2014 had given an investment direction in relation to all or part of that contribution. It said that CFSIL had not paid those contributions to a MySuper product.

CFSIL set out its proposal to rectify the breach in a separate letter to APRA of the same date. CFSIL told APRA that it had commenced proactive outbound calls to affected members via a call centre to obtain and record a valid investment direction.[17]

CFSIL later gave APRA a copy of the call-out script[18] and the letter that CFSIL proposed to send to affected members.[19] The call-out script directed the caller to tell the member that there had been a recent change to legislation that required confirmation of the investment option or options into which the member would like their superannuation contributions to be paid. Ms Elkins said that call centre operators would record any investment direction provided by a member over the telephone and then complete the form on behalf of the member.[20]

The template letter said that there had been a recent change to superannuation legislation that required CFSIL to hold an investment direction from the member in relation to future contributions paid into FirstChoice Personal Super.[21] The letter said that if such a direction was not held, CFSIL would be unable to accept contributions into the member’s account.

Neither the script nor the template letter referred to the possibility of a member giving no direction and contributions being directed to a MySuper account. Both the script and the letter described the issue in a way that was directed to keeping members in the fund and out of a MySuper product.

By a letter dated 29 April 2014,[22] APRA requested further information from CFSIL. It otherwise said that CFSIL’s plan was acceptable to APRA. The letter also noted that APRA expected the CFSIL Board and management to satisfy itself that all other new obligations under the SIS Act and prudential standards are being implemented appropriately and in members’ best interests.

Thereafter, CFSIL proceeded to contact tranches of members in accordance with its proposal. Each tranche of members corresponded with a particular period of time between 2014 and 2016 during which a contravention of section 29WA was identified. CFSIL gave APRA regular reports on progress.[23] At various times, CFSIL identified further members who had not previously been identified as having ADAs, which required a further tranche of members to be contacted. So, for example, CFSIL told APRA by email dated 22 February 2016 that it had identified a sixth tranche of members who were 100% invested in a cash option, which CFSIL had failed to identify as having ADAs.[24] By an update numbered 24 and dated 13 September 2017, APRA was told that the transfer of ADAs for the FirstChoice Personal Super members was complete.[25]

The second aspect of conduct examined in respect of MySuper concerned the transfer of ADAs into MySuper products. The MySuper provisions required RSE licensees who had the authority to offer a MySuper product to attribute ADAs to that MySuper product unless the member directed the RSE licensee in writing to attribute the amount to another MySuper product or investment option.[26] RSE licensees were required to do so by no later than 1 July 2017.

Ms Elkins said that the ADAs of members who were invested in the FirstChoice Employer product were transferred to the MySuper offering in two tranches:[27]

  • the first tranche of 98,700 members was transferred on 12 November 2016;
  • the second tranche of 3,400 members was transferred on 24 May 2017.

The ADAs of members who were invested in the FirstChoice Personal product were not transferred into a MySuper product. CFSIL told APRA in its letter of 6 March 2014[28] that system restrictions meant that it was not possible for these members to be invested in that product without establishing a second account, which it said might lead to the member paying two sets of fees and insurance premiums.

In its letter of 19 March 2014, CFSIL told APRA that trustee approval would be sought to commence the attribution of ADAs for these members to a suitable MySuper product and that it expected approval by 30 April 2014. The relevant board meeting took place on 30 April 2014. The CFSIL Board determined that Essential Super was a suitable MySuper product for the transfer of ADAs of FirstChoice Personal Super members.[29] The board approved transfers where no contrary instruction was provided by the affected member.

In its letter to CFSIL dated 29 April 2014,[30] APRA noted that CFSIL had informed it of approximately 70,000 FirstChoice Personal Super members with ADAs of whom approximately 14,000 had received a contribution since 1 January 2014. It also noted that the latter cohort were being dealt with via the process outlined above (in respect of the section 29WA breach) and recommended that, for the remaining accounts, CFSIL put in place appropriate controls and monitoring to avoid further breaches of section 29WA. The letter said that:

From a conversation with CFSIL on 22 April 2014 we understand that work is underway to consider steps CFSIL can take to address this risk such as introducing a phone campaign for the remaining ADA members to obtain a valid investment direction and bringing forward the date for ADA transition earlier than 2016.

At a meeting of the CFSIL Board held on 3 June 2014, management noted the proposed transition plan for ADAs for affected members and the recent suggestion by APRA that the Board consider bringing forward the transition for 60,000 members.[31] Management told the board that this would have significant business implications as the original transition date is 2016. The minutes record that the board considered and discussed the management paper and, in its capacity as trustee of CFSIL:

  • noted the updated information regarding the identified breach of section 29WA of the SIS Act and the rectification process being undertaken;
  • noted that it may not be in the best interest of members with ADAs to transfer them to Commonwealth Essential Super at that point;
  • noted that robust processes were in place for the 60,000 members with ADAs;
  • noted the principles and process in relation to the remediation of affected members; and
  • subject to the incorporation of the requested changes, approved the changes to the trustee’s MySuper Transition Plan giving effect to the proposed rectification process.

The board did not resolve to bring forward the transition date. APRA was later told that there were several reasons: potential operational risk; a possibility of members’ interests being adversely affected; a low probability of a section 29WA breach in the future; and the fact that work was already planned to engage with members and advisers regarding their intentions.[32]

At a meeting of representatives of APRA and CFSIL on 29 July 2014, APRA expressed concern that CFSIL’s transition approach was reactive and may result in a delay of up to 10 months for members who had made contributions after 1 April 2014.[33]

As well as communicating with affected members during the period of transition of ADAs, CFS also communicated with their advisers. The letters sent to advisers and planners set out the value of assets under management in respect of which commissions were being paid to the adviser or planner and which were commissions that would be lost if clients moved to a MySuper product.[34] In one standard email sent to financial planners, planners were told that the transfer date for ADAs was approaching; they were reminded of the amount of funds under administration and that commissions would be lost if these were transferred to a MySuper product.[35]

Ms Elkins agreed that emails like the one just described encouraged advisers to stop ADAs being transferred to a MySuper product by obtaining an investment direction.[36] She said that it was never discussed that CFSIL wanted to maximise the time that ADAs remained in default products so as to maximise commissions.[37] But she agreed that one of the purposes of the communications sent to advisers and members asking them to confirm their investment directions was to benefit advisers.[38] Ms Elkins also gave evidence that moving ADAs into the MySuper product early may have affected the relationship between CFSIL and its aligned advisers.[39]

The final tranche of FirstChoice Personal Super member accounts was transferred into the Essential Super product in August 2016.[40] A total of 23,451 ADA accounts, with balances totalling more than $279 million were transferred.

2.2.2Fees for no service conduct

After the Commission heard evidence in April 2018 about fees for no service, CFS management conducted a review to identify whether adviser service fees (ASFs) had been or were being deducted from the accounts of deceased superannuation fund members. Management identified that accounts in Avanteos funds had ASFs deducted following a member’s death and that the relevant product disclosure statement (PDS) did not disclose the ongoing deduction of those fees.[41] Ms Elkins said that this issue did not affect any other CBA RSE licensee.[42]

Ms Elkins’ said that, before June 2018, Avanteos’ business rules had allowed ASFs to be deducted from a member’s account even after it had received notification of the member’s death.[43] Ms Elkins also acknowledged that Avanteos did not require advisers to provide any positive confirmation that the adviser had supplied ongoing services,[44] unless the adviser was specifically investigated by Avanteos or CFSIL.[45]

The management review also found that in late 2015 or early 2016, Avanteos had become aware that relevant PDSs did not disclose that fees might be deducted after death of the member. Changes were proposed to be made to the relevant PDSs, and the register used to capture and manage proposed changes to PDSs issued by Avanteos included the change. But the change was not made. Ms Elkins said that the relevant entry was moved to the ‘completed’ section of the register before it was carried into effect.[46] No steps were taken at that time either to switch off the ASFs or report the matter to ASIC or APRA.[47]

Ms Elkins told the Commission that when she was told of the review’s findings in late April 2018, she immediately requested that steps be taken to switch off ASFs for affected member accounts and to prevent future deductions from accounts of members who died.[48] She also requested that the regulators be notified.[49] This was done on 1 May 2018.[50]

At the time of the Commission’s inquiries, the exact amount of ASFs that had been deducted from member accounts after the member’s death had not been determined. The preliminary estimates Ms Elkins provided the Commission were that 1,714 member accounts had been affected and a total of $2.93 million had been deducted.[51] A remediation program had also commenced by the time of the hearings and was expected to be substantially completed by February 2019.[52]

On 9 October 2018, after the Commission’s hearings into superannuation had concluded, CBA announced certain actions it would take in respect of adviser fees, including:[53]

  • rebating of grandfathered commissions for Commonwealth Financial Planning (CFP) customers;
  • reviewing any advice fees charged to deceased estates across its advice licensees and refunding with interest any instances where unauthorised fees have been charged;
  • taking steps to remove certain fees on legacy wealth products from January 2019, which it said would benefit around 50,000 customer accounts by approximately $20 million annually; and
  • providing all customers of CFP with an option to review their ongoing service arrangements every two years.

At the time of the announcement, CBA Wealth Management Chief Operating Officer Michael Venter said:[54]

Charging unauthorised advice fees to deceased estates is unacceptable. A broader review of deceased estates is underway across our advice licensees. It will go back seven years to ensure that any instances where unauthorised fees have been charged are identified and refunded with interest.

2.2.3Commissions, contribution fees and grandfathering

When considering what CFSIL and other superannuation entities did in response to the introduction of the MySuper arrangements three points need to be borne in mind.

First, the trustee of the MySuper fund could charge only fees of the kinds permitted by section 29V of the SIS Act. Second, when ADAs were transferred into a MySuper account, advisers could no longer be paid any trailing or other commissions out of the amounts standing to the credit of that account.[55] Third, because transferring ADAs to a MySuper account cut the flow of commissions, the transfer worked to the financial detriment of advisers. That detriment could be avoided by the adviser or fund obtaining from an existing member of a fund an investment direction. It followed that superannuation entities that relied on advisers introducing new members to their funds had reasons to delay transferring ADAs to a MySuper product, thus preserving the flow of commissions and providing time to secure investment directions.

CFSIL is a dualregulated entity. It is both the responsible entity (RE) for managed investment schemes and trustee of superannuation funds. As RE, it charged commissions on funds invested in the scheme. And, as RE, CFSIL paid the amount of commission charged to the client’s adviser, if the commission was ‘grandfathered’. (The commission was treated as ‘grandfathered’ if the advice licensee to whom the commission was paid had been engaged by the client before the FoFA changes came into force.) If there was no linked adviser, CFSIL retained the commission for itself.[56] If the member later engaged a new adviser, Ms Elkins said that CFSIL would still retain the trailing commission charged to that account.[57] And trailing commissions would continue to be paid after members died.[58] These commissions continued to be paid by the reversionary beneficiary (the person nominated by the member to receive that member’s benefits in the event of their death) even if the beneficiary had been nominated before the effective date of the FoFA legislation.[59]

Ms Elkins told the Commission that, at the time of giving her evidence, CFSIL did not have the capability to rebate commission amounts to members[60] and had not reduced its fees to remove the commissions.[61] She said that, other than at the time of FoFA’s introduction and CFSIL’s subsequent work to ensure compliance with the legislation’s grandfathering provisions, the trustee had not considered whether to continue charging trailing commissions.[62] However, the issue was under review at the time of the hearings.[63] Ms Elkins said that CBA’s strategic position with respect to trailing commissions, generally, would need to be determined and taken into consideration before CFSIL could make a decision to remove trailing commissions.[64]

As noted above, after the superannuation hearings concluded, CBA announced that it would rebate grandfathered commissions for CFP customers.[65] It was not clear from CBA’s announcement whether this would extend to grandfathered commissions paid to other CBA advice licensees. Mr Venter said at the time: ‘We support the removal of grandfathered commissions from superannuation and investment products across the wider industry and believe a legislative approach should be considered’. This suggests he believed that CBA may see a first-mover disadvantage if it were to make such changes voluntarily.

CFSIL also paid commissions in respect of members who had joined the fund before 1 July 2014, but who had switched from the accumulation to pension phase between 19 November 2014 and 30 June 2015. This was against the regulations but would have been allowed under regulations made but disallowed by the Senate.[66]

To elaborate, after the FoFA legislation took effect, regulations were introduced that provided that where a member with a superannuation interest in the growth phase before 1 July 2014 elected to receive a pension, the election or receipt of pension was not treated as having occurred on or after 1 July 2014.[67] The effect of these regulations would have been to permit the grandfathering provisions to apply. The regulations were disallowed by the Senate. ASIC announced that it would ‘take a practical and measured approach to administering the law’ as it stood after the disallowance of the regulations and that it would work with Australian financial services licensees by ‘taking a facilitative approach until 1 July 2015.[68]

In May 2015, CBA wrote to ASIC noting the relevant background and said that confusion had resulted from the disallowance of the regulations.[69] It set out various potential interpretations of the legislation that might permit the fund to grandfather commission payments.[70] CBA said that, if narrower interpretations of the applicable grandfathering provisions were to be adopted, CFSIL would require time to assess and address a number of issues so that there was an orderly and staged implementation process. CBA asked ASIC to consider issuing the affected Group entities with a ‘no-action’ letter or extend the facilitative compliance period to 31 July 2015 in order to allow the Group time to engage with ASIC.[71]

In a letter dated 22 July 2015, ASIC refused to provide the extension sought, but gave a limited no-action letter.[72] ASIC said that the facilitative compliance period was not equivalent to a transition period and could only be relied upon by licensees that were making reasonable efforts to comply with the law. ASIC said that licensees did not appear to be doing this.[73] However, ASIC said that it understood that the relevant licensees, including CFSIL, may need to undertake a range of steps in order to permanently cease the relevant payments of conflicted remuneration. It was on this basis that ASIC said it had decided to provide the limited no-action letter. ASIC confirmed that, subject to certain qualifications, it did not intend to take action for breaches of the relevant provisions where:

  • the breach occurred from 1 July 2015 to 22 October 2015; and
  • the breach occurred as a result of a benefit being given or received in relation to a client who switched from the accumulation to the pension phase within FirstChoice from 19 November 2014 to June 2015.

Ms Elkins told the Commission of efforts in October 2013 by representatives of CBA and CFSIL (including herself) to lobby Treasury officials and a ministerial adviser to allow the continuation of grandfathered commissions when a member switches from the accumulation to the pension phase.[74] Ms Elkins said that she lobbied for clarification in the law,[75] but agreed that it was not in the interests of members that grandfathered commissions be continued when the member switched from superannuation to pension. She said, in hindsight, CFSIL should not have been lobbying for that.[76]

The Commission also heard evidence about the grandfathering and payment of ‘contribution fees’. Ms Elkins said that contribution fees are payable as a percentage on each contribution made by a member[77] and were maintained and grandfathered after FoFA. Ms Elkins was not certain whether contribution fees were payable when the member was not linked to an adviser and whether, in that event, parts of the fee flowed to CBA or CFSIL.[78] CFSIL said in its submissions that if contribution fees were grandfathered, they may still be payable after a member had been delinked from an adviser and that, in that situation, CFSIL would retain the fees.[79]

During the Commission’s hearings, Ms Elkins said that, as trustee, CFSIL had not considered removing contribution fees until recently.[80] At a meeting held on 21 June 2018, the Product Governance Forum of CFS endorsed a recommendation to remove contribution fees.[81] On 9 October 2018, as noted above, CBA announced that it would take steps to rebate grandfathered commissions for CFP customers and to remove certain fees on legacy wealth products from January 2019.[82] The announcement did not say whether those fees included contribution fees.

2.2.4 Selling of superannuation through CBA branches

In 2012, CFS and CBA started developing a program for CFSIL to create a superannuation product that CBA would sell in its branches.[83] The product was to be Essential Super. As already explained, Essential Super was intended to be a low cost, simple, superannuation product. [84] The original target market was CBA customers who came through CBA’s branches and distribution network.[85]

In June 2013, CFSIL and CBA made a Distribution and Administration Services Agreement.[86] The Agreement said that CBA would provide Services to CFSIL (including distribution of Essential Super using training and compliant resources), as well as the use of its branches and the development of marketing materials and web content.[87] In exchange, CFSIL was required to pay CBA an annual fee of 30% of the total net revenue earned by the trustee in relation to the fund in the relevant financial year.[88] Mr Chun said this fee was based on the costs that CBA bank incurred versus the costs that CFSIL incurred.[89]

Mr Chun told the Commission the parties presented the proposed distribution model to ASIC in 2012 and early 2013. He said that they did so because they recognised that there were potential risks around the general advice distribution model potentially blurring into personal [advice] and because the distribution model was a major undertaking of CBA, and a new one.[90]

Under the model CBA presented to ASIC, its branch staff would seek to create customer interest in taking up Essential Super after either a transaction, financial health check or a request or referral involving that customer.[91] Mr Chun told the Commission that the person in the branch is not attempting to make any assessment of whether [Essential Super is] appropriate for the member. He said, [w]e were not recommending other products to the customer. We were making them aware of this particular superannuation offering.[92]

After the distribution model was introduced, CBA engaged KPMG to conduct mystery shopper exercises in various branches. CFSIL received copies of the reports for each exercise.[93] In its first report, in respect of an exercise conducted in September 2013, KPMG found that:[94]

  • there was a high volume of compliance exceptions;
  • 85% of shoppers were not provided with a Financial Services Guide;
  • 40% of shoppers were not provided with a PDS (for the Essential Super product);
  • 95% of customer service representatives did not follow the application process in detail; and
  • 85% of shoppers were not provided with a general advice warning as part of the inquiry/sale.[95]

Mr Chun said that further changes and improvements were made to the sales approach as a result of this report, particularly about providing a general advice warning, which he described as an important element of the control.[96]

KPMG conducted further mystery shopper exercises in December 2013 and September 2014. These exercises revealed some improvement, but compliance exceptions persisted.[97] Mr Chun said that CFSIL was aware that the conduct identified in the mystery shopper reports may have constituted breaches of applicable legislation.[98]

CFSIL did not give ASIC the results of KPMG’s mystery shopper exercises until December 2014.[99] In the meantime, in August 2014, ASIC had issued a notice to CBA seeking books and records in respect of the sale of Essential Super by CBA branch staff.[100] ASIC had become concerned about the use of the financial health check alongside a recommendation of Essential Super.[101] Mr Chun said that he became aware of ASIC’s concerns towards the end of 2016 or beginning of 2017 and that steps were taken by CBA to make changes.[102] The changes included no longer allowing consolidation of superannuation funds in branches in January 2017.[103]

Towards the end of 2016 or in early 2017, ASIC told CBA that it was concerned about CBA’s conduct.[104] A position paper provided by ASIC dated 20 February 2017 set out ASIC’s concerns.[105] These included that:

  • ASIC suspected that branch staff employed by CBA had been providing personal advice, as opposed to general advice, in the sale of Essential Super. This gave rise to contraventions by CBA of a number of provisions of the Corporations Act including sections 961B, 961K, 961L, 952C(1) and 912A(1);
  • the general advice model adopted by CBA carried the inherent risk that personal advice would be given and that CBA was aware of this;
  • this risk was exacerbated by the discussion of Essential Super being linked to, or following directly on from, the conduct of a financial health check;
  • if personal advice was provided, the customer would not have the benefit of the protections afforded by Chapter 7 of the Corporations Act; and
  • ASIC suspected that CBA had contravened its general obligation to ensure that financial services covered by its Australian financial services licence are provided efficiently, honestly and fairly in accordance with section 912A(1)(a).

In its response dated 17 March 2017, CBA said that it firmly believed that at all times it has acted in accordance with its legal obligations, ASIC regulatory guidance and, more broadly, its objective to put customers first in respect of the distribution of Essential Super’.[106] Although no particular outcome was referred to in ASIC’s paper, CBA said that it did not consider that court proceedings would be an appropriate enforcement outcome and that a negotiated outcome would represent the most appropriate and efficient outcome.[107] CBA also said that [b]ecause court proceedings are not warranted, we also do not consider that the present is a case in which an enforceable undertaking is required.[108] CBA proposed some changes to its distribution model. In July 2017, ASIC told CBA that it remained concerned that CBA’s proposal was still likely to result in personal advice being given by staff.[109] ASIC told CBA that it was prepared to resolve the matter on the basis of an enforceable undertaking (EU), the terms of which would include that CBA cease selling Essential Super in conjunction with a financial health check or any other needs based discussion.

In August 2017, CBA discussed internally how the matter might best be brought to an end. An internal email of that time suggested that CBA’s preferred approach was to resolve the matter without an EU if possible and by way of a media release, although the email acknowledged that ASIC was unlikely to resolve the matter other than through an EU. Ms Elkins said that CFS and CBA’s position was that ASIC should ‘put out a media release’.[110]

CBA wanted to ensure that, if an EU was required, the terms of the undertaking would permit retail banking and wealth management to ‘move forward with Project Everest’, which would put Essential Super ‘back into the branches’ under a general advice model ‘without the risk of straying into the personal advice territory.[111]

Ultimately, in July 2018, about a year after CBA and CFS had begun to discuss resolution of the issues with ASIC, CBA agreed to give, and gave, an EU.[112] Ms Elkins said that she thought the lapse of time was just the normal course of negotiating the EUs’.[113]

2.2.5 Returns to members on cash investments

On 11 June 2018, the Australian newspaper published an article saying that many investment options provided by retail superannuation funds were paying returns well below the actual market rates, with those lower returns not explained by differences in fees. CFSIL and CBA did not accept the criticisms they understood the article to be making and internal communication followed within CFSIL and CBA. But the internal analysis made of returns on cash investments and fees charged showed, among other things, that the fee being charged for the cash option in the FirstChoice Pension product included a trailing commission of 60 basis points.[114]

When asked why members were paying a trailing commission on cash investment options, Ms Elkins said that the cash investment options were under review.[115]

2.2.6 Related party arrangements

Two issues arose about CFSIL’s related party arrangements. The first concerned one of its investment managers, Colonial First State Asset Management (Australia) Limited (Asset Management), while the other concerned the group insurance provider, CommInsure.[116] At the relevant times, both entities were part of the CBA group and related to CFSIL.

CFSIL invests money in managed investment schemes of which CFSIL is the RE.[117] Those investments are then managed by Asset Management, which charges CFSIL fees.[118]

Ms Elkins said that the business team for CFSIL would negotiate with the business team for Asset Management to determine the fees that CFSIL would pay to Asset Management. An example was provided to the Commission in the form of a recent negotiation in respect of the distribution and marketing of investment options that used to reside in CFSIL, but were moved across to Asset Management.[119]

Ms Elkins said that the board of CFSIL did not need to sign off on the agreement reached between CFSIL and Asset Management about the investment management fees including distribution and marketing fees which would be paid by members to Asset Management.[120] A benchmarking report produced by ChantWest showed that the majority of products were outside of the benchmarking range.[121]

In respect of CommInsure, Ms Elkins told the Commission that CFSIL conducts an annual review of CommInsure in line with the CFSIL insurance management framework.[122] I take this to mean that CFSIL conducts an annual review of whether CommInsure should be its chosen insurer. The Commission received evidence of various premium comparisons included in a Rice Warner insurance benchmarking review dated 11 April 2017.[123] This contained a number of findings, including that:

  • in respect of default insurance for Commonwealth Essential Super members, CommInsure does not distinguish between bluecollar and whitecollar workers or between smokers and non-smokers;[124]
  • the non-smoker rates for Commonwealth Essential Super are on average 34% more expensive that the median of the peer group for death only cover;[125]
  • the rates for whitecollar non-smokers are on average 61% more expensive than the median of the peer group for death only cover;[126]
  • the rates for blue collar non-smokers are on average 19% more expensive than the median of the peer group for death only cover;[127]
  • for death and total and permanent disability combined cover for female non-smoker whitecollar workers aged between 41 and 45, the premium is on average 132% higher than the median;[128]
  • when CommInsure does worse than the median in respect of Commonwealth Essential Super insurance, it does much worse than the median; [129] and
  • when CommInsure for Commonwealth Essential Super insurance does better than the median, it only does a little bit better than the median.[130]

These annual benchmarking reports go to CFSIL’s board,[131] and the Office of the Trustee oversees the annual review of CommInsure.[132] Ms Elkins said that despite the benchmarking results, the board has continued to use CommInsure for its group insurance.[133] She said that the decision to retain CommInsure came down to whether CFSIL would be better off negotiating with CommInsure as the incumbent or selecting a new insurer.[134] She acknowledged that the question of changing insurer has arisen, but said that the discussion has not been minuted.[135]

2.2.7 Intra-fund advice and a banned adviser

Financial Wisdom Limited (Financial Wisdom), another company in the CBA group at relevant times, provide intra-fund advice to members of funds of which CFSIL is the RSE licensee, pursuant to an agreement between Financial Wisdom and CFSIL.[136] Mr Chun said that the advice was not personal advice, but limited to factual information and general advice.[137]

A financial adviser, who was an authorised representative of Financial Wisdom, was permitted to provide intra-fund advice pursuant to an agreement with Financial Wisdom.[138] Under the agreement, the adviser provided intra-fund advice to a subset of members of FirstChoice Employer Super.[139] The adviser received trailing commissions from some of the members to whom he provided intra-fund advice.[140]

The adviser made contact with members in respect of whom the adviser was receiving trailing commissions in relation to the upcoming ADA transfers that would be part of the MySuper transition.[141] Mr Chun said that the particular communication that adviser made[142] did not follow the template provided by CFSIL to advisers. The communication said:[143]

Around three years ago the government changed super legislation and it’s coming into effect now. As a result, if you don’t actively make an investment choice in your super account you are deemed to be disengaged and the government will make an investment choice for you.

Your investment will be moved to a government-selected investment called MySuper. It is different and may not be best for you.

Mr Chun agreed that CFSIL regarded these statements to be potentially misleading.[144] Mr Chun also accepted that CFSIL was concerned that such statements may have influenced members to provide an investment direction and avoid transfer to the MySuper product because they ‘might make a member think that it would be bad for them to transfer to MySuper’.[145] Mr Chun accepted that the communication was drafted in a way that may make the member fearful and influence them to make an election.[146] Not only that, the communication did not disclose the adviser’s potential conflict of interest in relation to the receipt of trailing commission.[147]

Between 1 July 2013 and 30 June 2017, about 1,380 of this adviser’s clients made an investment direction, the effect of which was that their accounts were not transferred to MySuper.[148]

In 2017, the financial adviser was identified by ASIC and notices were issued in respect of his conduct in late 2017.[149] On 26 July 2018, CFSIL took steps to seek information from Financial Wisdom in relation to the financial adviser. At the time of the hearings, the adviser had very recently been suspended from providing intra-fund advice to the fund.[150]

Mr Chun said that CFSIL will require Financial Wisdom to refund the fees for intra-fund advice where advisers were not providing the relevant service to clients.[151] But the refund would not be returned to members. Mr Chun explained that he considered that the community would not expect [CSFIL] to be paying fees. Asked whether the community would expect that if [CFSIL] charged to members an administration fee, that includes the provision of intra-fund advice, and no intra-fund advice has been provided, that [CFSIL] would make some refund to the members, Mr Chun said he did not think this would be the case.[152]


[1]Exhibit 5.181, Witness statement of Linda Elkins, 30 July 2018, 2 [10], 15 [57(a)].

[2]Exhibit 5.181, Witness statement of Linda Elkins, 30 July 2018, 2 [10].

[3]Exhibit 5.181, Witness statement of Linda Elkins, 30 July 2018, 3 [14].

[4]Transcript, Linda Elkins, 14 August 2018, 4879.

[5]SIS Act s 20B.

[6]Transcript, Linda Elkins, 14 August 2018, 487980.

[7]Exhibit 5.183, 15 November 2013, Letter from APRA to RSEs.

[8]Exhibit 5.183, 15 November 2013, Letter from APRA to RSEs, 1.

[9]Criminal Code Act 1995 (Cth) s 6.1.

[10]Exhibit 5.185, 6 March 2014, Letter, Colonial First State to APRA, 1.

[11]Exhibit 5.185, 6 March 2014, Letter, Colonial First State to APRA.

[12]Exhibit 5.185, 6 March 2014, Letter, Colonial First State to APRA, 2.

[13]Exhibit 5.299, 14 March 2014, Letter from APRA to CFSIL.

[14]Exhibit 5.299, 14 March 2014, Letter from APRA to CFSIL.

[15]Exhibit 5.186, 19 March 2014, Letter, Colonial First State to APRA.

[16]Exhibit 5.184, 19 March 2014, Breach Notice Colonial First State Investment to APRA.

[17]Exhibit 5.186, 19 March 2014, Letter, Colonial First State to APRA.

[18]Exhibit 5.187, 26 March 2014, Email CBA to APRA and Attached Call Script.

[19]Exhibit 5.189, 4 April 2014, Email Sutherland to APRA and Attached Template Letter to Members.

[20]Transcript, Linda Elkins, 14 August 2018, 4889.

[21]Exhibit 5.189, 4 April 2014, Email Sutherland to APRA and Attached Template Letter to Members.

[22]Exhibit 5.190, 29 April 2014, Letter from APRA to Elkins.

[23]See, eg, Exhibit 5.191, 29 March 2015, Email, Clemence of Colonial First State to APRA, Re Section 29WA Update Number 13.

[24]Exhibit 5.192, 22 February 2016, Email, Colonial First State to APRA Concerning Section 29WA Update Number 17.

[25]Exhibit 5.195, 21 September 2017, Email, APRA to Colonial First State Concerning Section 29WA Update Number 24.

[26]The legislative framework for this transition was laid down in SIS Act s 387.

[27]Exhibit 5.181, Witness statement of Linda Elkins, 30 July 2018, 15 [56].

[28]Exhibit 5.185, 6 March 2014, Letter from Colonial First State to APRA.

[29]Exhibit 5.197, 30 April 2014, Board Pack for Colonial First State Investments Limited.

[30]Exhibit 5.190, 29 April 2014, Letter APRA to Elkins.

[31]Exhibit 5.219, 30 June 2018, Minutes CFS Investments Limited.

[32]Exhibit 5.198, 4 July 2014, Email, Colonial First State to APRA.

[33]Exhibit 5.420, 29 July 2014, File Note of Meeting Held on 29/07/2014 between APRA and CFS Regarding ADA Transition.

[34]See, eg, Exhibit 5.201, 6 July 2016, Email between CFSL and Financial Planner Concerning CFS Updated Transfer ADA Accounts; see also Transcript, Linda Elkins, 14 August 2018, 4907.

[35]Transcript. Linda Elkins, 14 August 2018, 4910–11; Exhibit 5.202, 16 September 2016, Email CFSL to Financial Planner.

[36]Transcript, Linda Elkins, 14 August 2018, 4911–12.

[37]Transcript, Linda Elkins, 14 August 2018, 48845.

[38]Transcript, Linda Elkins, 15 August 2018, 4946.

[39]Transcript, Linda Elkins, 15 August 2018, 4946.

[40]Exhibit 5.194, 1 September 2016, Email, Colonial First State to APRA Concerning Section 29WA Update Number 19; Transcript, Linda Elkins, 14 August 2018, 4896.

[41]Exhibit 5.182, Witness statement of Linda Elkins, 7 August 2018, 4 [19].

[42]Transcript, Linda Elkins, 15 August 2018, 4963.

[43]Exhibit 5.182, Witness statement of Linda Elkins, 7 August 2018, 3 [12].

[44]Transcript, Linda Elkins, 15 August 2018, 4964.

[45]Transcript, Linda Elkins, 15 August 2018, 4965.

[46]Exhibit 5.182, Witness statement of Linda Elkins, 7 August 2018, 4 [20].

[47]Exhibit 5.182, Witness statement of Linda Elkins, 7 August 2018, 4 [20].

[48]Exhibit 5.182, Witness statement of Linda Elkins, 7 August 2018, 4 [21].

[49]Exhibit 5.182, Witness statement of Linda Elkins, 7 August 2018, 4 [21].

[50]Exhibit 5.182 Witness statement of Linda Elkins, 7 August 2018, Exhibit LME-2 [CBA.0002.2558.7264]; see also Exhibit 5.182, Witness statement of Linda Elkins, 7 August 2018, Exhibit LME-3 [CBA.1004.0085.0001].

[51]Exhibit 5.182, Witness statement of Linda Elkins, 7 August 2018, 9 [46].

[52]Exhibit 5.182, Witness statement of Linda Elkins, 7 August 2018, 10 [49].

[53]Exhibit 5.437, 9 October 2018, CBA ASX Announcement 9 October 2018.

[54]Exhibit 5.437, 9 October 2018, CBA ASX Announcement 9 October 2018.

[55]This was the effect of SIS Act ss 29SAC, 29S(2)(f) and 29T(1)(a), which together required an RSE licensee to elect that it would not charge a member who holds a MySuper product, in relation to that product, a fee all or part of which relates directly or indirectly to costs incurred by the RSE licensee: (a) in paying conflicted remuneration to a financial services licensee, or a representative of a financial services licensee; or (b) in paying an amount to another person that relates to conflicted remuneration paid by that other person to a financial services licensee, or a representative of a financial services licensee. The definition of ‘conflicted remuneration’ would include trail and other commissions.

[56]Transcript, Linda Elkins, 14 August 2018, 4920.

[57]Transcript, Linda Elkins, 14 August 2018, 4915.

[58]Transcript, Linda Elkins, 15 August 2018, 4967.

[59] Transcript, Linda Elkins, 15 August 2018, 4967.

[60]Transcript, Linda Elkins, 14 August 2018, 4918.

[61]Transcript, Linda Elkins, 14 August 2018, 4918; see also Transcript, Linda Elkins, 15 August 2018, 4968.

[62]Transcript, Linda Elkins, 14 August 2018, 4920.

[63]Transcript, Linda Elkins, 14 August 2018, 4918; see also Transcript, Linda Elkins, 15 August 2018, 4968.

[64]Transcript, Linda Elkins, 15 August 2018, 49513.

[65]Exhibit 5.437, 9 October 2018, CBA ASX Announcement 9 October 2018.

[66]Transcript, Linda Elkins, 14 August 2018, 4926.

[67]Corporations Amendment (Streamlining Future of Financial Advice) Regulation 2014 (Cth).

[68]ASIC, Media Release 14-307MR, 19 November 2014.

[69]Exhibit 5.210, 29 May 2015, Letter CBA to Commissioner Tanzer of ASIC.

[70]Exhibit 5.210, 29 May 2015, Letter CBA to Commissioner Tanzer of ASIC, 7.

[71]Exhibit 5.210, 29 May 2015, Letter CBA to Commissioner Tanzer of ASIC, 10.

[72]Exhibit 5.211, 22 July 2015, Letter ASIC to CBA.

[73]Exhibit 5.211, 22 July 2015, Letter ASIC to CBA.

[74]Exhibit 5.212, 25 October 2013, Email Russel to Rubinsztein and Others.

[75]Transcript, Linda Elkins, 14 August 2018, 4926.

[76]Transcript, Linda Elkins, 15 August 2018, 4926.

[77]Transcript, Linda Elkins, 15 August 2018, 4965, 4950.

[78]Transcript, Linda Elkins, 15 August 2018, 4950.

[79]CFSIL and Avanteos, Module 5 Case Study Submission, 11 [30].

[80]Transcript, Linda Elkins, 15 August 2018, 4950.

[81]Exhibit 5.221, 21 June 2018, Minutes of CFS Product Governance Forum.

[82]Exhibit 5.437, 9 October 2018, CBA ASX Announcement 9 October 2018.

[83]Exhibit 5.233, Witness statement of Peter Chun, 7 August 2018, 4 [14]; Transcript, Peter Chun, 15 August 2018, 4987.

[84]Transcript, Peter Chun, 15 August 2018, 4988; see also, Transcript, Linda Elkins, 15 August 2018, 4968.

[85]Transcript, Peter Chun, 15 August 2018, 4988.

[86]Exhibit 5.233, Witness statement of Peter Chun, 7 August 2018, 4 [16].

[87]Exhibit 5.232, Witness statement of Peter Chun, 31 July 2018, Exhibit PC-1 [CBA.0001.0398.3229 at .3258].

[88]Exhibit 5.232, Witness statement of Peter Chun, 31 July 2018, Exhibit PC-1 [CBA.0001.0398.3229 at .3258].

[89]Transcript, Peter Chun, 15 August 2018, 4988.

[90]Transcript, Peter Chun, 15 August 2018, 4989.

[91]Transcript, Peter Chun, 15 August 2018, 4990.

[92]Transcript, Peter Chun, 15 August 2018, 49934.

[93]Exhibit 5.232, Witness statement of Peter Chun, 31 July 2018, 4 [28].

[94]Exhibit 5.232, Witness statement of Peter Chun, 31 July 2018, Exhibit PC-27 [CBA.0001.0463.6783].

[95]Transcript, Peter Chun, 15 August 2018, 4991.

[96]Transcript, Peter Chun, 15 August 2018, 49912.

[97]Exhibit 5.232, Witness statement of Peter Chun, 31 July 2018, Exhibit PC-27 [CBA.0001.0463.6783], Exhibit PC-28 [CBA.0001.0463.6838], Exhibit PC-29 [CBA.0001.0463.6720].

[98]Exhibit 5.232, Witness statement of Peter Chun, 31 July 2018, 5 [31].

[99]Exhibit 5.232, Witness statement of Peter Chun, 31 July 2018, 5 [32].

[100]Exhibit 5.232, Witness statement of Peter Chun, 31 July 2018, Exhibit PC-24 [CBA.0001.0463.0629].

[101]Transcript, Timothy Mullaly, 17 August 2018, 5225.

[102]Transcript, Peter Chun, 15 August 2018, 49923.

[103]Transcript, Peter Chun, 15 August 2018, 49923.

[104]Transcript, Timothy Mullaly, 17 August 2018, 5230.

[105]Exhibit 5.310, Witness statement of Timothy Mullaly, 3 August 2018, Exhibit TM-16 [ASIC.0041.0002.6128].

[106]Exhibit 5.310, Witness statement of Timothy Mullaly, 3 August 2018, Exhibit TM-4 [ASIC.0041.0005.0407 at .0408].

[107]Exhibit 5.310. Witness statement of Timothy Mullaly, 3 August 2018, Exhibit TM-4 [ASIC.0041.0005.0407 at .4093].

[108]Exhibit 5.310, Witness statement of Timothy Mullaly, 3 August 2018, Exhibit TM-4 [ASIC.0041.0005.0407 at .0410].

[109]Exhibit 5.310, Witness statement of Timothy Mullaly, 3 August 2018, Exhibit TM-22 [ASIC.0041.0001.2789].

[110]Transcript, Linda Elkins, 15 August 2018, 4968.

[111]Exhibit 5.227, 8 August 2017, Email Shafir to Comyn and Others; Transcript, Linda Elkins, 15 August 2018, 4970.

[112]Transcript, Linda Elkins, 15 August 2018, 4969; Exhibit 5.310, Witness statement of Timothy Mullaly, 3 August 2018, Exhibit TM-34 [ASIC.0041.0001.4378].

[113]Transcript, Linda Elkins, 15 August 2018, 4976.

[114]Transcript, Linda Elkins, 15 August 2018, 4948; see Exhibit 5.220, 11 June 2018, Summary of Page 1 Article, the Australian.

[115]Transcript, Linda Elkins, 15 August 2018, 4948.

[116]Transcript, Linda Elkins, 15 August 2018, 4957.

[117]Transcript, Linda Elkins, 15 August 2018, 4954.

[118]Transcript, Linda Elkins, 15 August 2018, 4954.

[119]Transcript, Linda Elkins, 15 August 2018, 4955.

[120]Transcript, Linda Elkins, 15 August 2018, 4956.

[121]Exhibit 5.223, 24 February 2017, Board Paper 24 February ‘17, Concerning Investment Management Fee Negotiations.

[122]See Exhibit 5.179, Witness statement of Linda Elkins, 26 July 2018, Exhibit LME-27 [CBA.0517.0169.4554]; Transcript, Linda Elkins, 15 August 2018, 4958.

[123]Exhibit 5.224, 11 April 2017, Rice Warner Insurance Benchmarking Review.

[124]Transcript, Linda Elkins, 15 August 2018, 4959.

[125]Transcript, Linda Elkins, 15 August 2018, 4960.

[126]Transcript, Linda Elkins, 15 August 2018, 4960.

[127]Transcript, Linda Elkins, 15 August 2018, 4960.

[128]Transcript, Linda Elkins, 15 August 2018, 4961.

[129]Transcript, Linda Elkins, 15 August 2018, 4961.

[130]Transcript, Linda Elkins, 15 August 2018, 4961.

[131]Transcript, Linda Elkins, 15 August 2018, 4960.

[132]Transcript, Linda Elkins, 15 August 2018, 4962.

[133]Transcript, Linda Elkins, 15 August 2018, 4960.

[134]Transcript, Linda Elkins, 15 August 2018, 4962.

[135]Transcript, Linda Elkins, 15 August 2018, 4962.

[136]Transcript, Peter Chun, 15 August 2018, 497980.

[137]Transcript, Peter Chun, 15 August 2018, 4980.

[138]Transcript, Peter Chun, 15 August 2018, 4980.

[139]Transcript, Peter Chun, 15 August 2018, 4980.

[140]Transcript, Peter Chun, 15 August 2018, 4981.

[141]Transcript, Peter Chun, 15 August 2018, 4982. For an example of correspondence sent by the financial adviser, see Exhibit 5.235, 3 January 2018, Template Financial Planner Email Concerning Important Superannuation Changes.

[142]Exhibit 5.235, 3 January 2018, Template Financial Planner Email Concerning Important Superannuation Changes.

[143]Exhibit 5.235, 3 January 2018, Template Financial Planner Email Concerning Important Superannuation Changes.

[144]Transcript, Peter Chun, 15 August 2018, 4983.

[145]Transcript, Peter Chun, 15 August 2018, 4983.

[146]Transcript, Peter Chun, 15 August 2018, 4984.

[147]Transcript, Peter Chun, 15 August 2018, 4983.

[148]Transcript, Peter Chun, 15 August 2018, 4983.

[149]Exhibit 5.432, Witness statement of Mark Ballantyne, 1 August 2018, 19 [102].

[150]Transcript, Peter Chun, 15 August 2018, 4984.

[151]Transcript, Peter Chun, 15 August 2018, 4984.

[152]Transcript, Peter Chun, 15 August 2018, 4985–6.

92 thoughts on “2.2 Evidence”

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