How ASIC’s fee probe caused an earthquake

The Australian 12:00am May 19, 2018

Pamela Williams

On August 15, 2013, one of Australia’s biggest banks, ANZ, met with officials from the Australian Securities & Investments Commission in a bland meeting room at 100 Market Street, the regulator’s offices in the heart of Sydney.

The bank had a letter to hand over, a letter that would shed light on a very dirty secret rife in the financial advice business and which would start the ball rolling on a years-long crackdown by ASIC.

The letter was a breach notification from ANZ, couched in low-key legalese; in a nutshell, ANZ was notifying non-provision of advice. In plain language, that meant numerous clients of the bank’s financial advice arm had been charged fees for financial advice but had been given none.

ASIC would set up an investigation into the matter, eventually throwing a sprawling net across all the big banks and AMP, seeking evidence of similar conduct, which it found. ASIC would dub it simply Fees for no Service, or FFNS.

The regulator’s unimaginatively named Wealth Management Project was set up in October 2014. It might have sounded benign but this was the investigation that would be widened to ultimately bust the banks and AMP for ripping off clients for years via their financial advice arms.

A year after ANZ first came to the door, two things happened on April 16, 2015. Firstly, ASIC issued a press release revealing to the public that it had begun investigating multiple instances of licensees charging fees for advice that was not provided, including fees for annual reviews not done.

On the same day, ANZ issued an extraordinary press release of its own, revealing it would compensate $80 million to 8500 of its Prime Access advice customers. On the one hand, the bank was trying to wrap up the problem with remediation; on the other hand, the regulator was getting set to tighten the screws.

ASIC had already contacted all the big banks and AMP; it repeated the process to see if there were more FFNS breaches they had failed to disclose. It wrote to ANZ on May 29, 2015 (ANZ would comply with a further seven FFNS breach reports); to NAB on June 5; to AMP, CBA and Macquarie on June 12; and then to Westpac on January 29, 2016.

By 2016, ASIC had enough evidence to define the disgraceful practice, in all of its variations, as a systemic industry failing. It created an industry-wide scheme for the banks to pay back the money, client by client, reaching into totals of more than $200m and then went public again.

On October 27, 2016, ASIC ­issued Report 499. It was a 48-page update on the Wealth Management Project, with a blockbuster headline for anyone paying attention: Financial ­Advice: Fees for no Service.

ASIC was blunt. These were across-the-board failures by financial institutions and advisers charging fees but not providing services. This was because: the customer had no allocated adviser but was charged for ongoing provision of advice, usually by a direct deduction, or because the allocated adviser had failed to deliver the advice and the licensee had failed to ensure that this was done.

ASIC included a table showing each bank or financial institution covered in the report and the amount of money they had agreed to pay back to customers, and had already been made to pay back. It was a complete denunciation. It seemed to be theft at best and ­immorality at worst.

ASIC continued to issue regular public reports on its investigations into FFNS. These updates and reports were well covered by banking and finance writers. It was no secret but the story never made it big time to dominate the front pages or the evening news bulletins.

That moment lay ahead. When the Hayne royal commission into financial services misconduct rolled into the spotlight, with public and live on TV examination of banking executives, it was possibly the most riveting live TV anyone in the business community had ever seen. Polished finance executives filed into the witness box, and they appeared to fall before our very eyes. It had something of the olden days about it, with the crowd watching eviscerations in the coliseum. The tables it seemed, were finally turned.

The database of material from ASIC’s FFNS investigation was provided by the regulator to the royal commission, even as the ASIC investigation itself continued behind the scenes. The banks themselves had been obliged to admit to their behaviour, and far more besides, in their own copious filings to the royal commission. The dirty business of FFNS, regularly put into the public arena by ASIC, would now become publicly supercharged.

Giant banks hovering on a cloud of inviolability and hubris suddenly entered Kenneth Haynes’ courtroom.

The stunning vision of bankers on the witness stand at the royal commission admitting publicly to lying to the regulator, or charging the dead for advice, or siphoning thousands of dollars in annual fees from the accounts of those they were there to look after, started heads rolling. The public had witnessed years of banks being caught up in scandals over financial planning and insurance advice, always seemingly with one more scandal around the corner but seemingly an endless stack of expert reports clearing them.

In a royal commission however, the banks were in public with the cameras rolling, facing youthful prosecutors armed with an unblinking focus and the power to roam all the way to the boardroom. The commissioner himself observed all this with his own unblinking eye and a talent for dry understatement. For those in his courtroom, any hope that Hayne was napping was shot down by ­occasional interjections that went to the nub.

In a short order, the AMP lost its chief executive, its chairman, three other directors and a general counsel. More significantly it lost its reputation and with it, billions of dollars of market value.

ASIC, still finishing up its own fees for no service investigation has been vocal, in the 2016 Report 499 and subsequent updates, about the conduct it has uncovered, but silent on its next steps. There are hints however, in documents tendered to the royal commission and thus available for all to examine that ASIC has its eye on unravelling AMP further.

AMP has already admitted lying repeatedly to the regulator. It had initially told ASIC that the FFNS was an administrative breach, almost an oversight really. ASIC increased its surveillance, demanding more data. Finally, AMP admitted deliberate decisions had been made to charge customer fees in circumstances where services would not be provided and that these decisions had been made in the face of internal advice not to do so because it could breach the licence.

AMP finally was forced to unpick the conduct in its advice division. ASIC had come across documents revealing that what AMP had claimed in 2015 was not correct. This was no oversight, but a deliberate decision.

Inside AMP this was a crisis and it escalated swiftly to the general counsel, who called the chief executive and the chairman. External advisers Clayton Utz were commissioned to conduct an internal investigation.

A covering letter commissioning the Clayton Utz report, signed by chairman Catherine Brenner on behalf of the board, described the report as external and independent. It also gave clear instructions to the AMP general counsel Brian Salter to be involved with Clayton Utz on a daily basis together with others in his legal team. Anything affecting AMP directors or chief executive Craig Meller was expressly stipulated to be raised by Clayton Utz directly with Brenner.

When the report was done, it went first to AMP’s board, and then Brenner, Meller, Salter and Clayton Utz partner Nick Mavrakis took it to ASIC in October last year.

For ASIC, it must have been useful, delineating as it did layers of individuals who had been involved in some way with the fees for no service saga and laying out a chronology from within. But it also set off alarm bells. The regulator believed there were glaring omissions in this independent investigation. It would soon press for more information.

Meanwhile for AMP, a more immediately damaging encounter lay ahead in the Hayne commission. When the Clayton Utz report was submitted in evidence and defined as independent, it triggered a rolling crisis. AMP witness and head of the company’s advice division Jack Regan had revealed that the company had been misleading the regulator on numerous occasions. But causing equal fireworks was a furore over whether the Clayton Utz report was supposed to be independent of AMP.

The AMP board, which had commissioned the report through the chairman and could be expected to have seen the commissioning letter, stood aside general counsel Salter, pending another internal investigation. He was eventually fired. The board expressed surprise at the extent of Salter’s ­engagement with the report.

And yet Salter had been directed to this level of engagement by the chairman. Moreover, the chairman herself had repeatedly been involved in discussions with Clayton Utz about changes she wanted, particularly over the handling of any mention of Meller. Clayton Utz assured the board that Meller had told them he knew nothing of the fees for no service wrongdoing.

Brenner and the board fired Salter. The chairman herself finally was pressed to resign by her own directors as part of a campaign to show corporate accountability.

Meller had been pressed out the door two weeks before. In its defence, AMP later said the Clayton Utz report was never meant to be independent insofar as being literally independent.

ASIC, in the aftermath, has proceeded to use the Clayton Utz report to open a new flank in its investigation of AMP. And this new flank deepens the age-old and fundamental question of any scandal: who knew? The regulator has given strong hints that it wants to know whether there is a deeper cover-up.

ASIC’s frustrations

In a frosty and scathing letter sent by ASIC’s head of financial services enforcement Tim Mullaly on March 14 this year to Salter, the regulator made it clear it thought AMP was holding up ASIC’s continued investigation.

“We are concerned that this unsatisfactory compliance and the misrepresentations as detailed in Chapter 3 of the Clayton Utz report dated 16 October 2017, have frustrated and materially delayed the investigation of AMP’s conduct since its inception,’’ it read.

“Whilst ASIC acknowledges AMP’s co-operation in voluntarily producing the Clayton Utz report, we still harbour concerns at the time of writing.”

Mullaly went on to detail the concerns. Under the heading ­Issues with AMP’s Compliance, he made a specific point about material not available in the Clayton Utz report, and mounted the remarkable accusation that the exclusion of certain material put a question mark over both the accuracy and comprehensive nature of the Clayton Utz report. He noted “AMP’s failure, until very recently, to produce the relevant material pertaining to the Future of Financial Advice Practice Proposition Steering Committee. This material does not appear to have been considered by Clayton Utz in the Clayton Utz report, potentially raising questions concerning the comprehensiveness of their investigation and the accuracy of the conclusion reached.”

It might have sounded tied up in financial-speak, but this was a hammer. Anyone on this FoFA group, which in 2012 and 2013 was working out how to manage new laws on financial advisers and their conduct, would surely have been privy to discussions and strategy on changing away from the old fee structures.

ASIC was alleging that records on this committee did not appear to have been looked at by Clayton Utz.

So far as questions over the independence of the Clayton Utz ­report go, ASIC appeared, on a reading of this letter, to have quite different questions, and these went to the substance of the report.

The next paragraph outlined the concern: “AMP’s failure to produce to date, the relevant ­material pertaining to the FoFA Program Steering Committee (of which Mr Meller is recorded as being the Sponsor and Business Owner) and which appears to have overseen the work of various FoFA project streams …”

Mullaly then digressed on to a string of other areas in previous investigations where AMP’s compliance had been less than satisfactory.

He made it sound like a blockade strategy had been under way. Mullaly pointed out that just ahead (24 hours) of a scheduled examination of AMP in 2016, AMP had suddenly produced documents ASIC had sought in 2015 and which were relevant to the scheduled examination.

Plus, in respect of an AMP Life response to ASIC demands in February 2017, the company had notified ASIC six weeks later (and only after ASIC had sought clarification) that the information provided by AMP Life was inaccurate, and that it knew it was inaccurate when it was provided.

Mullaly accused AMP of wasting time for his investigations team on numerous occasions.

In closing the letter, he again drew attention to material ASIC wanted to see regarding Meller (a managing director of AMP financial services from 2007 to 2013) and also Salter himself.

Mullaly pushed back at the company’s attempts to quarantine board documents and emails of top executives.

“ASIC rejects any suggestion that it has ‘overreached’ in seeking AMP board and committee meeting packs and relevant emails of senior AMP personnel including, relevantly, Mr Meller and yourself,” he wrote.

“Based on material that ASIC has seen to date in its investigation, and following very careful consideration, we have formed the view that the response to these requests will be relevant to our inquiries. In the circumstances, it would be remiss of ASIC to not call for this material as part of our ­investigation.”

The explicit nature of the questions at least raises the perception that ASIC thinks Meller had oversight of a committee that might have discussed advice fees. And it raises direct questions from ASIC on whether Clayton Utz looked into this committee and any role that may, or may not, have been played by Meller.

Mullaly noted carefully that the call “for the emails and correspondence of a particular individual” does not mean that ASIC has formed the view that these persons are complicit in alleged misconduct.

“Ultimately, as you would ­appreciate, it is for ASIC to determine the scope of its own investigation. It is not something that is agreed in consultation with the party that is being investigated.”

The boardroom

For the AMP board, receipt of this March 14, 2018 ASIC letter must have been a deeply worrying development.

It would have been clear from the letter that ASIC was interested in the substance of the Clayton Utz report, not its “labelling’’ as “independent’’.

That the AMP board must have seen the letter is evident in the fact that the letter was also sent to Brenner the next day. It was also significant that ASIC regarded the matter as sufficiently serious to push it to the chairman of the board and through her, presumably to the attention of the board itself.

The AMP board could hardly have been surprised about ASIC’s pressure over FFNS. As far back as 2016, the regulator had raised highly critical observations about the culture of banks and AMP over FFNS and had made the point of sending its Report 499 to the boards of all banks and financial institutions covered by the ASIC investigation.

In the closing pages of Report 499, ASIC says: “Of particular concern is that many of the banking and financial services institutions covered by this review publicly state that their core values include being customer focused, ‘doing what is right’ for customers, and acting with integrity …

“In an organisation, values and cultural leadership must come from the top.

“The role of the board, senior executives and management is critical in setting the right culture.”

ASIC’s investigations are continuing into conduct in AMP charging FFNS, and also into the misleading nature of reports to ASIC. Already the royal commission has left it open to findings of criminal conduct by AMP.

For the general public, the fees for no service, as held up to the microscope by the royal commission has had a blinding effect. Many observers want to know what ASIC was doing and why it failed to uncover the wrongdoings now revealed.

Page 40 of ASIC’s Report 499 in 2016 shows the answer has been hiding in plain sight.

Under the headlines “Remuneration” and “Fee maximisation”, ASIC wheels out particularly egregious examples of financial advisers putting clients last.

In one horrific example the regulator notes: “We saw instances of fee arrangements where, in the licensees’ view, there was no obligation to provide advice to customers in return for the fees they paid.

“For example, some advice licensees considered that their ongoing service obligation was satisfied if an adviser offered, or attempted to offer an annual review (eg: by making three unanswered phone calls), even if this review was not provided.”

The third round of hearings for the financial services royal commission begins on Monday.