Questions Read the Commonwealth Bank of Australia: Rogue One case study and answer the following questions:

COMMONWEALTH BANK OF AUSTRALIA: ROGUE ONE

Case overview

Commonwealth Financial Planning Limited (CFPL), the financial planning arm of Commonwealth Bank of Australia (CBA), was involved in a huge fraud scheme from 2003 to 2012. Rogue financial planners at CFPL manipulated their clients' files and forged documents to invest their clients' monies in extremely high-risk investments, with the aim of earning higher commissions and bonuses. Such fraudulent financial advice caused hundreds of Australians to lose their life savings, some running into millions. Despite tipoffs by whistleblowers within CFPL, the Australian Securities and Investments Commission (ASIC) was criticised for being inexplicably slow and inadequate in its response. Meanwhile, CFPL's efforts to compensate the victims were also lambasted as covering up for their rogue planners while trying to bully their victims into settling for minimal compensation. The objective of this case is to allow a discussion of issues such as the impact of "pay for performance" on behaviour; governance in company groups; management's and directors' roles in ensuring compliance; role of regulators and the media in corporate governance; whistleblower protection; and ethics.

Dark undercurrents

Commonwealth Bank of Australia (CBA) is the largest of the big four Australian banks, holding 29% of all household deposits in Australia1 . Commonwealth Financial Planning Limited (CFPL) is a subsidiary that falls under the wealth management division of CBA, and was helmed by the Head of Wealth Management, Grahame Petersen, from 2006 to 20112 . In February 2008, as part of a surveillance program by the regulatory body, the Australian Securities and Investment Commission (ASIC), a warning notice was sent to CFPL, indicating that 38 of its planners had been classified as a "critical risk" for non-compliance with appropriate financial planning advice protocols3 . That was when Jeff Morris, a newly hired financial planner at the Chatswood, New South Wales branch, sensed something amiss in the bank.

The legend of dodgy Don

One of the 38 names highlighted in the warning notice, Donald (Don) Nguyen, was hauntingly familiar to Morris. Don was a fellow financial planner who sat just a couple of feet away from Morris at the Chatswood Branch. He was one of the top writers of CFPL, amassing 1,300 clients4 who had invested their money with him. In 2007, Don was top on CFPL's Financial Planners league table, managing portfolios worth A$39,064,657 for the bank that year alone, grossly exceeding his annual target by more than three-fold5 . But Don's ascent to the peak was a tad dubious. Better known by his colleagues as "Dodgy Don"6 , he had a sinister reputation of notching sales through unscrupulous means. After personally witnessing some of Don's dishonest acts, an outraged Morris alerted his team's Financial Planning Manager7 . To his disbelief, the manager brushed the issue aside. Morris' colleagues later explained that Don held the aegis of management protection due to his status as a top writer in CBA8 .

You get what you pay for

More than half of a CBA financial planner's total annual remuneration depended on short-term incentives such as bonuses. Commissions were pegged to the risk levels of investment assets sold, hence financial planners had an incentive to encourage their clients to opt for as risky an investment portfolio as possible9 . Furthermore, the tone at the top was unforgiving - meet your sales targets, or surrender your rice bowl10. Such was the "boiler-room" culture CBA had nurtured through an aggressive sales-driven and excessively short-term remuneration incentive scheme - one driven by a myopic chase of bonuses with little place for honesty.

First-class cover up

Clients soon started to see the value of their investment portfolios plunge to almost nothing within a short span of months, and started inundating the bank with complaints. Against the backdrop of a global financial meltdown, it made no financial sense for the clients, especially the retirees, to opt for such aggressive and risky investment portfolios. Sensing something amiss, Morris took the matter to middle management, but once again, the response he got was one of nonchalance and evasiveness11. However, growing public pressure forced CBA into a formal investigation, and it was discovered that Don had secretly manipulated the risk profiles of his clients into adopting hyper-aggressive investment portfolios for his own benefit of drawing higher commissions12. In particular, an extraordinary number of clients' files "requested" a 50% portfolio allocation to Listed Property Trusts13, an extremely risky investment asset. Don had deceived and manipulated his clients into thinking their monies were lost because of misfortune. In September 2008, Don was suspended for fraud and compliance failures. Meanwhile, complaints from clients of other planners in CFPL, most notably Christopher Baker14 and Rick Gillespie15, continued to flood in. To make matters worse, many of Don's frustrated clients who were left without a planner constantly barraged the bank for explanations. CFPL needed someone to douse the flames - someone who could discourage the clients from pursuing their complaints. Incredulously, on 15 October 2008, not only was Don reinstated, he was also promoted to the position of a Senior Financial Planner16.

Morris soon came to the realisation that an internal resolution to the matter would never succeed as the management themselves were covering up for the planners' fraudulent acts. Yet Morris wanted to keep his cover as he lacked faith in the regulator's whistleblower protection policies, and required more time to continue gathering evidence against Don's wrongdoing. On 30 October 2008, together with two other long-serving colleagues, Morris finally spilled the beans on Don. Under the alias of "The Three Ferrets17, they faxed a report to ASIC, voicing the need for urgent action. However, months passed and there was no sign of ASIC taking decisive action to obtain evidence from CFPL, despite the whistleblowers' tip-off that the clients' files were already being sanitised. Instead, ASIC opted for discussions with CFPL in December 2008, which resulted in the joint solution to "closely supervise" Don and subject his advice to "vetting before approval"18. Exasperated, "The Three Ferrets" then decided to take the issue to Darin Tyson-Chan, a journalist of the trade journal Investor Daily in May 200919.

Breaking Don

A series of articles spelling out details of Don's fraudulent acts was published by Investor Daily from May to June 2009. It was brought to light that CBA knew of "at least 14 cases of forgery as early as October 2008"20, yet did nothing to remedy the problem. CBA attributed the fraud to "a few bad apples", rather than the lack of compliance within the bank, or any conflicts of interest in their financial planning arm. In fact, to prevent certain documents from being accessed in the likely event of a client lawsuit, senior management arranged for these documents to be processed by the legal department so that these would be given protection of legal privilege21. CBA also allowed some of the fraudulent financial planners to resign and move on to other companies instead of giving them the boot22, so as to avoid "bad press". The whistleblowers also sent an anonymous email to CBA Group Security and CBA's Senior Management23, alleging CFPL management's attempts to cover up for its rogue planners. This time, it succeeded in triggering a massive knee-jerk response within the bank. CBA Group Security launched a thorough investigation within CFPL, where it was found that an alarming number of Don's client files were missing.

On 3 July 2009, Don resigned citing ill health, which allowed him to draw a lifetime A$70,000 payout per annum under CBA's group insurance policy24. To make matters worse, the annual bonuses of Chief Risk Officer, Alden Toevs, and Head of Wealth Management Division, Grahame Petersen, increased by approximately A$4.5 million and A$2.1 million respectively from 2008 to 201025. All these came amidst dismal media stories of terminally ill victims who had lost their life savings due to the rogue planners, and were struggling to seek any reasonable form of compensation from CBA. At the same time, Morris felt immense pressure from the top management, which resolved to identify the source of leaks to the media. With their covers blown and yet no action by ASIC in sight, The Three Ferrets were left defenceless. On 24 February 2010, 16 months after the first anonymous fax Morris had sent to ASIC, the whistleblowers finally stormed through the doors of the ASIC office, demanding that client files be seized and decisive action be taken. "They told me I had Whistleblower Protection from that day. He then went on to say, basically, that it wouldn't be worth much," recalled Morris of his conversation with one of the frontline officers in ASIC26. Ironically, Australia had just revised her Corporations Act in 2004 to provide stronger protection for whistleblowers. However, Morris was not surprised by this - it was a common view in the finance industry that ASIC was not the most trustworthy of regulators27.

Divide and conquer

On 24 March 2010, ASIC issued an order to CFPL, giving them two weeks to hand over client files undergoing investigation, marking the first sign of confrontation between ASIC and CFPL. CBA was also pressured to devise a compensation scheme to pacify the affected clients. In November 2010, CBA finally proposed a voluntary compensation scheme for the victims. The strategy, however, was to divide and conquer - each victim was isolated so they would have limited knowledge of the greater scheme of things28, allowing CBA to incur minimal expenses in the compensation.

Janice Lee Braund and her husband Alan were two of Don's most famous victims. In 2002, the couple entrusted A$1 million of their retirement savings to Don, on hearing of his reputation as the "star planner" of CBA. Yet Don only had his eyes fixed on maximising his commissions. Ignoring the couple's clear instructions of preserving capital, Don forged Braund's signature to transfer their capital to highrisk products that were eventually wiped out when the financial crisis struck in 2009. Under the compensation scheme, Braund was initially offered A$200,000. With good fortune, she had a note that indicated that "the Braunds had a conservative profile and they were extremely concerned and did not wish to use any of their capital in retirement."30 Using this note as a bargaining chip for negotiation, her compensation quantum was raised to A$215,000 and subsequently A$880,00031. Unfortunately, not all victims had such great bargaining power; most received a less than satisfactory amount of compensation.

Fair facts through Fairfax

ASIC's investigation confirmed the frauds of Don and other financial planners in CFPL. On 26 October 2011, CBA entered into an Enforceable Undertaking (EU) with ASIC for two years. The EU was targeted at reviewing CBA's risk management systems, its internal risk profiling, and the monitoring of its financial planners. During this time, three other financial planners were required to "remove themselves from the industry"32. At the same time, Braund's patience was running out with the inadequate responses to her complaints at CBA and ASIC. Despite Braund being granted interviews with ASIC to tell her story, she was adamant that not enough was being done to appease the anger and anguish of the victims. Her repeated complaints to CBA and ASIC had generally fallen on deaf ears, and she was disgusted at CBA's ostensible attempts to cover up. She finally decided to take her story to Fairfax Media33. The Fairfax reports triggered a Senate Inquiry the following month, on 20 June 2013, centering on two key issues - the misconduct of financial advisers in CFPL and ASIC's general poor performance.

The final report of the Senate Inquiry was released on 26 June 2014. It contained scathing criticisms of both ASIC and CFPL. "There was forgery and dishonest concealment of material facts," as reported in the inquiry34. Committee chairman Senator Mark Bishop said CFPL's actions were "facilitated by a reckless, sales-based culture and a negligent management, who ignored or disregarded non-compliance and unlawful activity as long as profits were being made35". He also commented that "ASIC appears to miss or ignore clear and persistent early warning signs of corporate wrongdoing, or troubling trends that place the interest of consumers or investors at great risk"36. Among a whole host of findings with regard to ASIC and CFPL, one was to demand for a royal commission into the saga, though it was eventually rejected.

Emerging from his shell

The negative publicity from the Senate Report that slammed CBA's financial planning arm created ripples around Australia. Seven days later, on 3 July 2014, Ian Narev, CEO of CBA, who had made an effort to stay inconspicuous, was forced to issue a public apology for the first time and propose a new compensation scheme for the victims37. The compensation scheme, titled the Open Advice Review Program, which became operational in mid-August 2014, offered an assessment of any received financial advice38. After the assessment, a compensation offer would be made by an "independent customer advocate" funded by CBA. If victims still felt that compensation offers were inadequate, they would be able to appeal to an independent panel, chaired by former High Court judge Ian Callinan, whose decision would then be binding39. Yet, questions had been asked about whether the review process was truly independent40, as the first stage of this process was still conducted by CBA. Morris even went so far as to dismiss CBA's new scheme as "first-class windowdressing", and disagreed with the 'pull' nature of the review process. "The problem with the process is [that] customers have to complain," Morris said, adding, "I suspect very few will"41.

Business as usual

Paradoxically, the share price of CBA did not experience any sustained adverse impact during the saga. The only period during which the share price saw a substantial drop was from 20 May 2013 to 10 June 2013, when the price dipped 11.5% from A$73.49 to A$65.0242. Since then, the stock has grown from strength to strength to close at A$80.48 as of 31 October 2014. An analyst report by Richard Wiles of Morgan Stanley even showed calculations of both the financial impact of compensation and the potential impact on revenues due to reputational damages43 with an eventual price target of A$87.20.

One step back, two steps forward

The reputational damage borne by CBA was coupled with uncertain financial repercussions. Customer satisfaction ratings of CBA have suffered a drastic drop. Under Roy Morgan's "most-favoured institution" satisfaction assessment, CBA slipped from first place at the start of 2014 to third place in September 2014. This would cause management to lose one quarter of their long-term bonuses44. The introduction of CBA's new compensation scheme also led to new claims surfacing daily. At present, A$52 million in compensation has already being paid out, with up to A$250 million possibly required45 eventually. In light of the CFPL scandal, questions have been asked about the integrity of the financial planning sector, with a lack of customer protection being a major concern. The Australian government has quickly responded by putting new measures into place, including a proposal to establish an enhanced, industrywide public register of financial advisers to increase transparency in the industry. Additionally, in September 2014, a Corporations Amendment Regulation with regard to the Statements of Advice was made to increase clients' accessibility to information and to minimise possible conflicts of interest. ASIC has also responded quickly to the criticisms of its role in the Senate Report, establishing an Office of Whistleblower to allow quicker response to whistleblowers and commencing an organisation-wide improvement process of its communications and transparency

1. The following areas of law are relevant to this case study: Corporations Law, Financial Law, Administrative Law, Criminal Law, Competition and consumer Law, Contract Law, Property Law, Tort Law. With reference to the facts in the case study, describe how four (4) of these areas would apply to bring justice to those who have been wronged by the conduct of CFPL?

2. The media played an important role in exposing the fraud in CFPL. Discuss the role of the media in promoting good governance in Australia. Are there factors which limit its effectiveness?

3. What is the business structure utilised by CBA and what are its main features? How does the principle of separate legal existence apply to prevent the directors, employees and shareholders of CBA from being personally liable to the clients of CFPL for the impropriety that has occurred here?

4. What business risks were ignored by the CBA/CFPL executives, and what compliance and risk management processes could have been put in place to alleviate the risks that the conduct of Dodgy Don and the other unconscionable financial planners presented?