A Culture of Greed: An ASIC Investigation into Australian Financial Institutions

One of the areas faced by the financial institutions was their behavior toward customers due to vertical integration within their businesses. They formulated a very lucrative business model of selling financial advice and adding on their in-house financial products. In accordance with the Banking Royal Commission, the Australian Securities and Investments Commission (ASIC) issued a report titled “Financial Advice: Vertically integrated institutions and conflict of interest” in January 2018 (Report 562). The report sets out ASIC’s corporate plan focusing on promoting investor and consumer trust and confidence; this can be achieved if financial advisers:

• Act professionally, treat consumers fairly and prioritise consumers’ interests
• Provide accessible strategic financial product advice that is aligned with consumer needs, and delivers value for money
• Ensure that consumers are fully compensated when losses result from poor conduct

The ASIC investigation concentrated this focus on finance industry players including AMP Limited, Australia and New Zealand Banking Group Limited, Commonwealth Bank of Australia, National Australia Bank Limited, and Westpac Banking Corporation. More particularly it focused on the two largest advice licensees controlled or owned by these organizations, “where these licensees were authorized to provide personal advice to retail clients.”

The findings were staggering and a clear indictment on conflict of interest practices and policies were administered by these financial institutions; it is questionable if there was any proper corporate governance over these practices. The ASIC investigation found that funds invested by customers in external products, as a result of the advice provided, was 32% of the total value of funds invested, compared with 68% invested in in-house products. The ASIC investigation also found that of customers’ funds invested in platforms, 91% of funds were transacted through in-house products, while funds invested in investments were more evenly split between in-house (53%) and external products (47%).

Findings from the Advice Reviews

The ASIC investigation also reviewed the quality of personal advice given to consumers during this time period. Overall, the report found non-compliant advice in 75% of the customer files reviewed. The ASIC stated they had significant concerns about the impact of the non-compliant advice on the customer’s financial situations because, for these customers, switching to the new superannuation platform resulted in inferior insurance arrangements and/or a significant increase in ongoing product fees.

There were two areas, in particular, that led to a customer file being rated as not having demonstrated compliance with the best interests duty and related obligations—that is, where the adviser had not demonstrated that they had:

• Sufficiently researched and considered the customer’s existing financial products, and/or
• Based all judgements on the customer’s relevant circumstances

ASIC’s Next steps

The findings of the ASIC investigation will or has already put in place regulatory action which includes:

• Improvements to monitoring and supervision processes
• Improvements in advice processes, and
• Banning advisers with serious compliance failings

The ASIC investigation is also focusing on remediation where advice led to poor customer outcomes. However, it is clear that the governance of these financial institutions slipped markedly, was ignored for profit taking or was not there in the first place. “Commissioner Kenneth Hayne found that when misconduct was revealed, it largely ‘went unpunished’ as the Australian Securities and Investments Commission sought to negotiate, rather than litigate a penalty,” says the Australian Financial Review. Just last week, the Banking Royal Commission in Australia issued their interim report and also found ASIC’s role in the debacle as unacceptable. The Interim report released on September 28 found that a culture of greed emerged above the interests of customers, which was the main cause for the misconduct noted in the investigation.

Whole-of-organization governance is critical in financial institutions, and really no less critical in all organizations. The lack of oversight on compliance with statutes, regulations, and policies by management and the absence of proper reporting to Boards, are clear from the ASIC report. It is evident that a sense of greed and profit gouging overran officers’ fiduciary duties and their other obligations under statutes and more particularly those to their customers and the Australian community.

High-quality reporting in the organization to management and subsequently to the Board is paramount. Compliance is a large cost to all organizations but as shown in this case needs to be audited regularly to ensure it is being carried out and that it is transparent. Directors need time to consider their Board reports so they can ask the right questions and get the information they need to do their job of overseeing the organization and to make the right decisions. Good governance starts at the top and should be employed throughout the organization. Make it happen in your workplace.

About Alan Evans

Alan Evans FCIS FGIA MAICD, the founder of Governance One, is a non-executive director and chairman with extensive experience in governance, company secretarial practice and law, finance and senior executive management. He has over 30 years of practical national and international experience at the senior executive level in listed companies and large public corporations and as an executive and non-executive director.