The old saying that “sunlight is the best disinfectant” came to mind this week when the first reports emerged from the Royal Commission being held in Australia into Misconduct in the Banking, Superannuation and Financial Services Industry.
While Canada’s banking and wealth management sector has come under some scrutiny lately over allegations of aggressive sales practices, it’s nothing compared to what is happening in Australia, where a full inquiry has been underway now for the past week and a half.
And the early reports are not good. The testimony so far has included one large insurer, AMP Ltd. (the Australian equivalent of a Sun Life or Manulife), and a large bank, the Commonwealth Bank, admitting charging customers for services they did not provide, while other institutions have admitted to charging fees to dead people, in some cases people who had been dead for many years. While some of those transgressions and the penalties levied were known before the Royal Commission started, others have been new revelations.
For their past sins, AMP and the big banks are now paying out more than A$200 million (around $195 million), with the lead inquiry lawyer singling out the Commonwealth Bank as the “gold medal” winner when it comes to charging fees for non-existent services.
In the case of AMP, which runs Australia’s largest network of financial advisers, the transgressions go even further: reports prepared by a law firm to be given to the regulator were doctored to include a reference that the CEO “was unaware of the practices or their illegality.”
In addition, according to evidence presented at the inquiry, AMP also admitted it made about 20 false or misleading statements to the regulator, the Australian Securities and Investment Commission. In this way the so-called mistake was not a mistake but appears to have been a deliberate policy.
By week’s end AMP’s chief executive had resigned (no word yet on whether he receives any severance payments.) Institutional investors, meanwhile, are clamoring for more changes, including replacing the chairman.
AMP is no slouch, one of the six large financial players in Australia. And (in the past) it was deemed important enough that it is not allowed to merge with another large insurer or any of the country’s four large banks.
According to another newspaper report, another bank, the ANZ, logged 56 events of “improper conduct” in their financial planning and wealth management arm. Those included: forged signatures, impersonation of customers, fraudulent use of power of attorney, false witnessing of documents, and the transfer of customer’s funds to advisers’ personal accounts.
Unlike Canada, Australia has recently banned embedded fees, meaning the cost of advice must be separated from the product being sold. And, also unlike Canada, Australia has set a fiduciary duty objective for its advisers. Because the changes are relatively recent, it’s not known how those changes have affected the world of retail investing.
What’s new about the transgressions is their pervasiveness and the extent to which attempts were made to cover them up. One commentator, when assessing recent developments said they went from awful and dumb to utterly shocking. And, just like U.S. Senator Elizabeth Warren’s grilling of the former head of Wells Fargo, the commission’s lead lawyer shows no sympathy for witnesses from the offending institutions.
Given that Canada lags behind Australia in those two key areas of investor protection, one has to wonder if there are similar issues, perhaps on a lesser scale, at play here.
What is known is that once transgressions have been proven, Canadian institutions have made it more difficult for clients to receive compensation.
Over the years decisions handed down by the Ombudsman for Banking Services and Investments (OBSI) have been ignored, meaning that the offending adviser or the firm walks away without compensating the investors. The Investment Industry Regulatory Organization of Canada regularly publishes a list of advisers deemed to have done wrong who, instead of paying, leave the industry.
The website of the Mutual Fund Dealers Association of Canada (MFDA) is also full of examples of individuals who have not paid for their offences. In many cases the process drags on for years.
Canadian mutual fund managers, on the other hand, may have their fingers slapped for breaking the rules — but because they want to stay in the investment business they tend to pay up.
This week 1832 Asset Management LP, which is part of Scotia Wealth Management, agreed to an $800,000 settlement with the Ontario Securities Commission because it “failed to meet the minimum standards of conduct expected of industry participants in relation to certain of its sales practices.”
Last week Mackenzie Financial agreed to a $900,000 settlement over the same issue. Over the past year the major mutual fund managers, including the bank owned dealers, have reached settlements with the OSC for overcharging their clients of some closed end funds. Hundreds of millions of dollars are involved in the compensation.
As well, a class action lawsuit has recently been filed against TD Asset Management on the matter of discount brokers receiving trailer commissions (the annual service fee.)
The suit alleges that because discount brokers are prohibited from providing investment advice to investors, they should not be receiving a fee for providing such advice — the effect of which is to reduce the return to the investor.
When news of the proposed class action emerged, TDAM was quoted as saying that it wouldn’t comment on the lawsuit, “because the matter is before the courts.”
The irony of what’s been revealed in the Australia Royal Commission is that the Australian government was extremely reluctant to call for an inquiry — “not enough need” in the words of one minister — before it did so last November. (The Opposition called for an inquiry in April 2016.) And the banks and the financial institutions were also opposed, claiming that an inquiry was unnecessary and unwarranted.
Lets give the final word to a whistleblower who brought complaints to the Australian regulator. “The basic philosophy of ‘ripping off the customer’ is still very much alive and well.”