2.3 What the case study showed

2.3.1 The MySuper transition

It is to be recalled that section 29WA of the SIS Act required RSE licensees to treat any contribution to the fund in relation to which no investment direction has been given as a contribution to be paid into a MySuper product of the fund. CFSIL did not do that in respect of contributions it received in relation to about 13,000 members of its FirstChoice Personal Super product. In both its notification to APRA and in its submissions to the Commission, CFSIL accepted that it had contravened the section. CFSIL also accepted that the conduct breached its obligations under section 912A(1)(c) of the Corporations Act and section 29E(1)(a) of the SIS Act.

I agree. CFSIL was right to make the acknowledgments it did.

In its written submissions CFSIL said that, at the relevant time, it held the view that all members of FirstChoice Personal were ‘choice’ members.[1] This is not what Ms Elkins said but, as I have noted, she said that she was not certain of her recollection of events. CFSIL rightly submitted that a mistake of fact was a defence available in respect of a contravention of section 29WA of the SIS Act,[2] but it accepted that a mistake would not excuse the breach of section 29E of that Act or section 912A(1)(c) of the Corporations Act.[3]

The evidence and submissions from CFSIL did not explain how or why management of CFSIL were unaware in 2013 of the difference between, on the one hand, an investment direction given by a member as to how amounts attributable to that member were to be invested and, on the other hand, a choice by a person as to the superannuation fund into which her or his contributions were to be paid. Nor did the evidence or submissions from CFSIL explain how CFSIL could have identified that there were ADAs in FirstChoice Personal but not understood that the relevant members were not ‘choice’ members. Those are matters that may suggest there was no reasonable basis for CFSIL to believe (mistakenly) that all members of FirstChoice Personal were ‘choice’ members. It may further be noted that CFSIL did not submit, and did not invite me to find, that the belief it held at the time was reasonable.

It is not clear to me that a belief about the application of the SIS Act would be a mistake of fact but I need not offer a concluded view. If holding this belief were to be regarded as a mistake of fact, it would then be important to notice that CFSIL was told that it was mistaken about the application of the Act during its meeting with APRA on 21 February 2014. It follows that, even if CFSIL did make a mistake, and if that mistake might be a defence to some contraventions, it could not be a defence after it became aware that its belief was mistaken. Yet CFSIL continued to receive default contributions that it did not attribute to an authorised MySuper product.

On the material available to me, I consider that CFSIL may have contravened section 29WA.

In respect of the transition of ADAs, it is to be remembered that the section required trustees to attribute default contributions to their MySuper product and to do so by 1 July 2017. In its submissions CFSIL said that ‘ADA balances were not required to be transferred until 1 July 2017’.[4] This submission puts unwarranted emphasis on the outer limit of the time for compliance. It implies that RSE licensees were entitled to wait until 30 June 2017 before complying. But that is a submission that does not take account of other obligations in the Act, including, among others, the trustee’s covenant to act in the best interests of members. Absent reason to the contrary, and none was identified, trustees were bound to transfer ADAs promptly. CFSIL did not.

APRA expressed concern about CFSIL’s delay in transitioning certain cohorts of ADAs. I have no reason to doubt that APRA’s concern was well-founded. In the circumstances, I consider that the failure to transfer at least those cohorts of ADAs identified by APRA might have breached CFSIL’s covenants, including its duty to act in the best interests of the affected members, and constitute misconduct.

These matters having already been reported to APRA, it is a matter for it to decide what, if any, further action should be taken.

I also consider that the communications from CFSIL to affected members in respect of the section 29WA breach might also constitute misconduct. CFSIL rejected characterisation of the communications as ‘misleading’. Ms Elkins accepted that characterisation but, in its written submissions, CFSIL argued that the communications must be considered in the context[5] and were to be understood as reflecting the belief that the relevant members were ‘truly “choice” members’.[6]

CFSIL’s communications to members said that the legislation had changed and that CFSIL must have an investment direction from the member. There was no relevant difference in this respect between, the telephone script and the template letter. APRA submitted that the script gives an incomplete picture of the courses of action (or inaction) open to the member.[7] I agree. The focus of the communications was on keeping members in their existing investment option. The words used may be found to have conveyed to the member that the member was required to take steps to achieve that outcome. I consider that the communications to members might have breached CFSIL’s covenant to act in their best interests. They also departed from community standards or expectations. The community expects trustees to communicate with members clearly and transparently. The script and template did not do this.

This issue has not so far been drawn to the attention of ASIC. I will refer the matter to it so it can consider whether to take action.

2.3.2 Fees for no service

When Avanteos reported to ASIC and APRA that it had taken fees for no service, its breach notifications said that Avanteos had breached:

• Section 29E(1)(a) and 52(2)(b) of the SIS Act;
• Regulation 5.08 and 6.21 of the SIS Regulations; and
• Sections 912A(1)(a) and (c) of the Corporations Act.

Ms Elkins said that Avanteos formed the view that it had breached these provisions by way of of a lack of disclosure in relevant disclosure documents.[8] I consider the better view to be that, whatever may have been said or not said in disclosure documents, the charging of ASFs to deceased member accounts when CFSIL had been told that the member had died is the conduct that might constitute breach of the identified provisions. Once Avanteos knew that the member had died, it knew that no services then could be or would be provided to warrant the fee.

As Avanteos was aware of this issue from late 2015 or early 2016 and took no steps at that stage to notify ASIC or APRA, it is also likely to have been in breach of the reporting requirements of section 912D of the Corporations Act. The evidence was that Avanteos itself formed the view that it had contravened the section.[9] I see no reason to disagree with that view. The matters having been reported to the regulators, it is for them to decide what, if any, further action should be taken.

2.3.3 Grandfathering commissions

As explained earlier, two issues about grandfathering arrangements were examined in connection with CFSIL. One concerned CFSIL retaining trailing commissions charged to members who either no longer had any adviser linked to their account, or whose linked adviser was not the adviser who had initially charged the commission or fees. The other arose out of the making and subsequent disallowance of regulations that affected the application of the grandfathering provisions to commissions paid in connection with members who had joined a fund before 1 July 2014, but had elected, after that date, to receive a pension from the fund. That is, it related to commissions charged to members who had moved from ‘accumulation’ to ‘pension’ after 1 July 2014.

CFSIL did not accept that its conduct in respect of these commissions amounted to misconduct.[10] In respect of its own retention of commissions, CFSIL accepted that such conduct may have fallen short of community standards and expectations, but submitted that it was legally permitted to retain those because the relevant trust deed permitted it to charge fees and to use and apply those fees at its discretion upon their receipt.[11] In respect of the grandfathering of commissions for members switching from accumulation to pension, CFSIL submitted that it worked with the regulator to try to understand the complex regime of regulations and to act in a manner consistent with them.[12]

Even accepting those submissions, the question remains whether a trustee acting in the best interests of its members would continue to deduct grandfathered commissions from the accounts of members in the circumstances in which CFSIL did? CFSIL’s written submissions set out six matters ‘by way of example of the complex considerations that arise in determining whether a trustee has complied [with] its duty to act in the best interests of members’.[13] The matters identified ranged from having regard to the superannuation context to the decision-making process. But ultimately, what the best interests covenant requires will depend on the circumstances.[14] CFSIL’s written submissions acknowledged this.[15] In the case of grandfathered commissions, it is necessary to begin by recognising not only that commission payments reduce members’ benefits, but also that no service or other benefit is provided to the member in return for the payment. Other considerations, if relevant, must be understood in the light of these facts. The deduction of commissions, and retention of them where there is no linked adviser, even if legally permissible, was not in the best interests of members. As stated earlier, the best interests of the beneficiaries are normally their best financial interests.[16] CFSIL did not contend that members obtained any benefit from the commissions that were deducted and retained from their accounts by CFSIL. Regarding the deduction of commissions in respect of members who switched from accumulation to pension, I consider that this also was not in the best interests of members. Again, neither CFSIL (nor any RSE licensee) sought to explain how extending the grandfathering provisions in this way, and the continued deduction of commissions from those members’ accounts, would benefit members. The matter not having been reported to APRA, I will refer CFSIL’s conduct in deducting commissions to APRA for its consideration of whether there is action it can and should take.

It remains for something to be said about CBA’s lobbying in respect of the extension of the grandfathering provisions. In its written submissions, CFSIL accepted that in meeting with Treasury officials and others in 2013 to lobby for the extension of the grandfathering provisions in respect of members who switched from superannuation (accumulation) to pension, it may have failed to meet current community standards and expectations.[17] I agree. The community is entitled to expect that RSE licensees will not lobby for outcomes that are contrary to the financial interests of their members.

2.3.4Misconduct in respect of distribution through CBA branches

The distribution of Essential Super through CBA branches was conduct that might have amounted to the provision of personal advice to retail clients. If it did, the requirements prescribed by division 3 of part 7.7 of the Corporations Act prescribing additional requirements for personal advice provided to a retail client were not met and the failure to meet those requirements was misconduct.

The premise for distributing Essential Super through the CBA branch network was that the product could be sold without providing personal advice. The model, as initially presented to ASIC, was that branch staff would seek to create an ‘interest’ in the customer for the product. And branch staff would do this in circumstances that included, but were not limited to, completing a ‘financial health check’ designed to identify the customer’s ‘needs’. The premise for saying that a branch staff member moving from a financial health check that focused on the particular circumstances of the customer to discussing Essential Super would not be providing personal advice, was that the staff member would give the customer a ‘general advice warning’. That is, that the advice would not be ‘personal’ if the staff member told the customer ‘I can give you general advice about Simple Super … I won’t be able to give you personal advice. You will need to decide if this product is suitable for you.’[18]

It may readily be accepted that the line between personal advice and general advice may not always be marked clearly or easily. But one important feature of the distinction drawn by the Corporations Act between personal advice and general advice is whether the advice has been prepared without ‘taking account of the client’s objectives, financial situation or needs’.[19] Personal advice is given where the adviser has considered one or more of the person’s objectives, financial situation and needs, or a reasonable person might expect the provider to have considered one or more of those matters.[20] The central purpose of the general advice warning that staff members were supposed to offer was to mark a boundary between what had been said and done and what was about to be said so that personal advice was not given.[21] More precisely it was to convey to the customer that whatever you, the customer, have just told me, the staff member, is entirely irrelevant to me and will wholly be ignored by me when I tell you what I am about to say. But why would the customer believe that? Why would the customer think that, having learned about at least some aspects of the customer’s objectives, financial situation or needs, the staff member would go on to tell the customer about a product that was not suitable to whatever objectives, situation or needs had been revealed?

CFSIL’s submissions acknowledged the risks in the branch sales model.[22] It submitted, however, that it was ‘utterly transparent with the regulator’ about those risks[23] and having identified them, it adopted a risk management process. CFSIL also submitted that it took immediate action to redress non-compliance identified by the mystery shopper exercises and to revise and strengthen compliance controls.[24]

While I accept that ASIC did not take issue with the distribution model before it was implemented, once ASIC had told CBA and CFSIL that it considered the law had been contravened, there could be no doubt that CBA and CFSIL had to reconsider their position. I think the better view of the evidence is that both CBA and CFSIL knew that selling superannuation in the branches was commercially desirable for both but that both also knew, from the outset, that it was legally difficult. But even if that is not right, utter transparency with the regulator, however much it is and must be applauded and encouraged, does not excuse non‑compliance with the law. And I did not understand CBA or CFSIL to suggest that it did, whether in this case or more generally.

As I have noted above, ASIC told CBA in February 2017, that it suspected that branch staff employed by CBA had been providing personal advice giving rise to contraventions by CBA of a number of provisions of the Corporations Act, including sections 961B, 961K, 961L, 952C(1) and 912A(1). ASIC also told CBA that it suspected that CBA had contravened its general obligation under section 912A(1)(a). I have no reason to doubt ASIC’s concerns. ASIC’s concerns that financial product advice in connection with Essential Super was given in close proximity to a financial health check was acknowledged by CBA in the EU given to ASIC on 3 July 2018.[25] I consider that CBA might have breached the provisions set out above and set out in the undertaking.[26] If it did, its conduct was misconduct. As ASIC has accepted an EU from CBA in respect of its concerns, there is now no reason to refer these matters to ASIC.

Counsel Assisting made a further contention in respect of the distribution arrangement between CBA and CFSIL. They submitted that the payments made pursuant to the Distribution Agreement may have contravened the conflicted remuneration provisions of the Corporations Act. The submission was that the benefit provided to CBA (an Australian financial services licensee) of 30% of the annual total net revenue earned by the trustee in relation to the fund could reasonably be expected to influence the financial product advice given by CBA to retail clients in the branches. Counsel Assisting further noted that:

• Customers of CBA who were offered the Essential Super product in branches were ‘retail clients’.[27]
• CBA branch staff were providing ‘financial product advice’ to customers in the form of a recommendation intended to influence the client to make a decision in relation to a particular financial product (Essential Super).[28] ‘General advice’ is financial product advice that is not ‘personal advice’.[29]
• The distribution model involved general advice being provided by branch staff. This was acknowledged by Mr Chun in his evidence[30] and by CBA in its response to ASIC’s position paper.[31] Indeed, this was the reason why a general advice warning was necessary and why CBA staff underwent a course called ‘General Advice in Superannuation’.
• The fee provided to CBA under the Distribution Agreement could reasonably be expected to influence the choice of the product recommended by branch staff to retail clients or the financial product advice given to retail clients. The Distribution Agreement was premised on this.

It was not apparent from the evidence that ASIC was told of the revenue-sharing arrangements underpinning CBA’s branch sales model. Nor did ASIC provide any submissions to the Commission that might clarify its position on this topic.

CBA and CFSIL submitted that the fee arrangement in the Distribution Agreement could not reasonably be expected to influence either the choice of product recommended by CBA branch staff or the advice given.[32] They submitted that branch staff were not ‘directly’ rewarded for sales of Essential Super and their incentives were determined on the basis of a balanced scorecard.[33] They also said that the revenue-sharing arrangement was not designed to incentivise CBA to sell Essential Super, but to approximate its share of the costs.[34] For these reasons, they submitted that the fee arrangement was not properly characterised as conflicted remuneration.[35]

It is to be remembered that the Distribution Agreement required CBA to use its branches to distribute Essential Super.[36] In return for that service, and others, CBA was to receive 30% of the revenue earned by the trustee in relation to the fund in the relevant financial year. It follows that the greater the volume of sales of the product, the more revenue CBA would receive. In this way, it could reasonably be expected to influence which product branch staff were trained and told to recommend and the financial product advice given to retail clients. Indeed, it would be surprising if it did not have this effect. In my view, the payments to CBA may have contravened the conflicted remuneration provisions of the Act applicable to both CBA (section 963E) and CFSIL (section 963K). As these matters were not the subject of the EU provided by CBA to ASIC, and ASIC is the entity with primary responsibility for enforcement of the relevant provisions, it is appropriate that, pursuant to paragraph (a) of the Commission’s Terms of Reference, I refer the conduct to ASIC for its consideration.[37]

2.3.5 Cash investments

In its written submissions, CFSIL accepted that differences in cash investment returns are attributable to the differences in fee structures across different products.[38] It submitted that this was not a consequence of CFSIL having intentionally applied a preferential fee structure for CBA staff.[39] Rather, it said a key reason for the difference was that commissions were payable on legacy products that it said are now closed and that, to the extent that grandfathered commissions are included in the fee, CFSIL continued to be contractually obliged to pay.[40]

CFSIL did not point to evidence showing that it had a contractual obligation to continue to pay grandfathered commission. However, even if that is assumed to be true, it would be surprising if CFSIL was unable to take steps to alter its commission arrangements with advisers or for legacy products. At the time of the Commission’s inquiries, CFSIL had not taken those steps. Indeed, the evidence was that it had not turned its mind to it until June 2018. I repeat what I have said elsewhere in respect of commissions and grandfathering and the trustee’s conduct in that regard. That is, the charging of grandfathered commissions was not in the best interests of members and there was no suggestion by CFSIL that it was.

2.3.6 Related parties

In its written submissions regarding the arrangements with Asset Management, CFSIL referred to the conflicts management framework that it applied in connection with related party transactions, the structure of its board, the use of separate teams, and disclosures in respect of related party transactions.[41] It pointed to the ChantWest benchmarking report and said that this enhanced CFSIL’s position in its negotiations and confirmed the need to take an arm’s length approach.[42] It also referred to evidence[43] that CFSIL had decided to appoint other external investment managers, instead of Asset Management, after that company announced in 2018 the closure of its ‘Australian equities core’ and ‘global resource investment’ capabilities.[44]

In respect of CommInsure, CFSIL submitted that the suitability of CommInsure’s product for members depended not only on the rate of premium charged, but also on other terms and conditions.[45] Yet, even if management did consider more than premium rates, there was no evidence of the fruits of this consideration having been put before the board.[46] CFSIL also pointed to evidence of discussions by the CFSIL Board about whether to continue to use CommInsure and referred to steps taken to ensure the arrangements in place with CommInsure were in members’ best interests after the media reports concerning CommInsure’s conduct in 2016.[47]

Retention of a service provider is an exercise of the trustee’s powers which the covenant in section 52(2)(c) of the SIS Act requires to be done in the best interests of members. In circumstances where third party reviews have revealed deficiencies in the services provided, the trustee has a duty to consider that information and, if necessary, to take steps to ensure those deficiencies are addressed. It is difficult to express a concluded view on the available evidence that CFSIL ought to have taken steps to terminate the contracts with Asset Management or CommInsure or that CFSIL breached any of its covenants.

2.3.7 Intra-fund advice

In relation to the conduct summarised regarding intra-fund advice and the financial adviser authorised by Financial Wisdom Limited, I am satisfied (as CSFIL accepts)[48] that CSFIL engaged in conduct that fell below community standards and expectations by failing to:

• bring to the attention of ADA members that their advisers may have had a relevant conflict of interest in relation to an election to a product from which they would continue to receive trail commissions;
• ask advisers to identify that conflict of interest in their communications with clients; and
• act sooner to investigate the relevant adviser’s interactions regarding ADA members.

The conduct in relation to intra-fund advice and the financial adviser authorised by Financial Wisdom Limited demonstrates the potential adverse effect of a conflict between an adviser’s interest in maintaining (or obtaining) a financial benefit and the duty to his or her client. Here, it may have led to adverse outcomes for some 1,380 clients of the relevant financial adviser. Other case studies demonstrate similar conflicts and their potential for harm. I return to this issue later in the Report.