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 dual–regulated 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]