5.3.1Distribution process
Superannuation is a complex financial product that, for many people, is one of their biggest assets. It is different in both character and importance from retail products like a bank account. However, ANZ’s distribution process effectively added Retail Smart Choice Super to its normal sales process for retail products. As ANZ identified, this process gave rise to two significant risks: first, that the customer would conclude from it being offered immediately after the A–Z review that the staff member thought the product suitable for the customer; and second, that the customer would switch superannuation accounts when it was not wise to do so. ANZ submitted to the Commission that both risks were mitigated by the ‘delinking statement’, the ‘general advice disclosure’, the statements made to the customer that they should consider their existing superannuation product, and the fact that the statements were read verbatim.[1] I do not agree.
Information about Retail Smart Choice Super was provided to customers immediately after they were asked about their financial situation and had discussed their ‘goals and needs’. As ANZ recognised, the very structure of that process could imply that staff were suggesting the product because it was right for them. If customers believed that the product was suitable for them, they would be more likely to switch. Yet, in fact, the product might not be suitable. Indeed, branch staff might know (from the A–Z Review) that Smart Choice Super was not suitable, but could not tell the customer. In other words, ANZ’s process required its staff to stand by while customers made decisions that were not in their interests. Reading out two short scripted statements could not overcome this risk.
The second risk was that customers would switch their superannuation without proper consideration, and be worse off as a result. The considerations involved in switching superannuation – such as exit fees, investment risk, and insurance – are important and often complex. Every customer should carefully consider them before making a decision. ANZ’s own risk assessments and scripts acknowledged this. Yet the distribution process ultimately led to the staff member offering to help the customer apply for an account on the spot. Few customers could appropriately consider those complex issues and make an informed decision to open a new account right away, particularly if they had not come to the branch to talk about superannuation. Again, this problem could not be overcome by short scripted statements.
5.3.2Misconduct
Despite its acknowledgment in the EU that ASIC’s concerns were reasonably held, ANZ submitted to the Commission that its conduct did not breach section 912A of the Corporations Act or fall below community standards and expectations.
Effective controls?
ANZ submitted that it had behaved prudently by identifying the risks in the process and putting in place appropriate controls.[2] It submitted that its control framework was effective, pointing to the results of the mystery shopping program.[3] But those results showed only that in most (but not all) cases, branch staff were complying with the process. They did not show that the process was effective. In particular, they did not show whether customers understood that the discussion about Retail Smart Choice Super was entirely separate from the A–Z Review.[4] And even if that was understood, ANZ’s controls did not show whether customers would be harmed by switching to the offered product.
To Mr Pankhurst’s knowledge, ANZ has never considered whether customers were worse off as a result of switching to Retail Smart Choice Super.[5] In its submissions, ANZ submitted that ASIC had not ‘definitively’ identified any customer who was worse off.[6] The suggestion appeared to be that I should not make any of the adverse findings invited by Counsel Assisting without definitive evidence that customers were worse off. I do not find this submission convincing. ASIC had only conducted ‘a preliminary analysis’ of ‘a small number of customers’.[7] At the least, some of those customers had given up Total and Permanent Disability (TPD) Insurance coverage as a result of switching to Retail Smart Choice Super.[8] ANZ further observed that of the customers ASIC reviewed, all but one were paying lower fees in Retail Smart Choice Super than in their old superannuation fund. However, as ANZ’s own scripts acknowledged, there are important matters other than fees that are relevant. The distribution process did not allow for proper consideration of those matters.
ASIC’s guidance
Underlying a number of ANZ’s submissions was the proposition that ANZ’s practices were consistent with ASIC’s published guidance, and with ASIC’s views (as ANZ understood them). In particular, ANZ referred to a risk paper dated July 2011. That paper recorded that in 2009, ANZ had sought ASIC’s view about branch distribution of a different product. According to the paper, ASIC had indicated to ANZ that:[9]
The ability to provide general advice was not compromised by prior awareness or concurrent completion of a customer fact find process. The crucial factor was the absence of a personal recommendation as to the suitability of, or, [recommendation] to acquire a product.’
ANZ referred to ASIC’s Regulatory Guide 244, which states that ASIC will ‘not consider general advice to be personal advice’ where the customer is told that they are not being given personal advice and their relevant circumstances are not considered.[10] ANZ also submitted that its training of branch staff exceeded the minimum requirements set by ASIC’s Regulatory Guide 146.[11]
I do not doubt that at the time ANZ began to sell Retail Smart Choice Super in branches, it believed that its conduct was lawful. In particular, I accept that it thought it possible to sell superannuation under a ‘general advice model’ and that this view of the matter was discouraged neither by ASIC’s response when ANZ raised the question with it nor by the requirements set out in the above-mentioned regulatory guides. It would have been better if ASIC had made clear that distributing complex financial products in this way was unacceptable. But I do not consider that this excuses ANZ’s conduct. First, ANZ knew the risks of the process from its own analyses. Its primary concern should have been whether the distribution process was appropriate for customers, which it was not. Second, ANZ did not respond to the regulator’s expressions of concern. By 2014, ANZ knew that ASIC had concerns about the process. By 2016, it knew that ASIC suspected it had breached sections 912A, 961B and 961K of the Corporations Act. By May 2017, it knew that ASIC was threatening to go to court alleging contravention of those provisions. Yet ANZ continued to use the distribution process. It continued using the process while negotiating the EU. It continued using the process after the EU was signed. In fact, it did not stop the process until three days before the absolute deadline imposed by the EU. The only conclusion can be that the profitability of this sales channel was more important than the probability that what was being done was contrary to law.
Breaches
Under section 912A(1)(a), ANZ was required to do all things necessary to ensure that its financial services were provided ‘efficiently, honestly and fairly’. As I have explained above, ANZ’s process:
- could have led customers to wrongly believe staff thought the product was suitable for their individual needs;
- prevented staff from telling customers if staff thought the product was unsuitable; and
- not only facilitated, but encouraged, customers opening an account without the customer properly considering the consequences.
ANZ recognised those risks. It should not have distributed a superannuation product in this way. In doing so, ANZ may not have ensured that financial services were provided ‘efficiently, honestly and fairly’ as required under section 912A(1)(a). As ASIC has accepted an EU from ANZ in respect of its concerns, I do not consider it necessary to refer these matters to ASIC.
[1] ANZ, Module 5 Case Study Submission, 8 [33], [35].
[2] ANZ, Module 5 Case Study Submission, 7 [32].
[3] ANZ, Module 5 Case Study Submission, 9 [37].
[4] Transcript, Mark Pankhurst, 16 August 2018, 5065–6.
[5] Transcript, Mark Pankhurst, 16 August 2018, 5067.
[6] ANZ, Module 5 Case Study Submission, 6 [23], 9 [37].
[7] Exhibit 5.310, Witness statement of Timothy Mullaly, 3 August 2018, 16 [76].
[8] Exhibit 5.310, Witness statement of Timothy Mullaly, 3 August 2018, 16 [76].
[9] Exhibit 5.263, July 2011, Wealth Risk Mass Market Wealth Australian Distribution Advice and Distribution Risk, 18.
[10] ASIC, Regulatory Guide 244, 13 December 2012, reg 244.23.
[11] ANZ, Module 5 Case Study Submission, 9 [36].