Final Report - Volume 2: Case Studies
Final ReportRoyal Commission intoMisconduct in the Banking,Superannuation andFinancial Services IndustryVOLUME 2:CASE STUDIES
Commonwealth of Australia 2019 Commonwealth of Australia 2019ISBN:ISBN:978-1-920838-64-5 (print)978-1-920838-64-5 (print)978-1-920838-65-2 (online)978-1-920838-65-2 (online)With the exception of the Coat of Arms and where otherwise stated, allmaterialpresentedofinthethispublicationis providedunder astated,CreativeWith the exceptionCoatof Arms andwhere otherwiseall material presentedthisInternationalpublication islicenceprovided under a CreativeCommonsAttributionin4.0Commons Attribution 4.0 International ativecommons.org/licenses).Forthe applies to materialFor thethismeansthisthislicenceonlyonlyappliesasset out indocument.to materialas thisset outin this document.licenceconditionsare areavailableon theThe ditionsavailableonCreativethe defortheCCBYCommons website as is the full legal code for the CC BY 4.0 ativecommons.org/licenses).Use of the Coat of ArmsUse of the Coat of ArmsThe terms under which the Coat of Arms can be used are detailedThetermsunder whichCoatof Armsbe usedare detailed on theon theDepartmentof the au/government/commonwealth-coat-arms).Departmentof the Prime Minister and Cabinet at-arms).
ContentsVolume 2: Case StudiesGlossary xviiAbbreviations xxiLegislation xxvThe Commission’s tasks 1Case studies: Superannuation 5Introduction 51NULIS Nominees (Australia) Ltd 101.1Background 101.2Evidence 111.2.11.2.21.2.3Fees for no service Plan service fees ASIC proceedings Internal investigations Communications with ASIC in relation to Report 499 Adviser Service Fees Four identified events NAB’s negotiations with ASIC in relation to ASFs Breach reporting Grandfathering of commissions MySuper 11121315182829313739431.3What the case study showed 471.3.1 Conduct in respect of PSFs 1.3.2 Misconduct in respect of fees for no service 1.3.3 Misconduct in relation to reporting of breaches 1.3.4 Misconduct in relation to grandfathered commissions 1.3.5 Misconduct in relation to MySuper and transition of accrueddefault amounts 1.3.6 Conclusion 475056575960v
Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry23CBA superannuation funds 622.1Background 622.2Evidence 632.2.12.2.22.2.32.2.42.2.52.2.62.2.7Conduct in respect of MySuper Fees for no service conduct Commissions, contribution fees and grandfathering Selling of superannuation through CBA branches Returns to members on cash investments Related party arrangements Intra-fund advice and a banned adviser 637174798384872.3What the case study showed 892.3.12.3.22.3.32.3.42.3.52.3.62.3.72.3.8The MySuper transition Fees for no service Grandfathering commissions Misconduct in respect of distribution through CBA branches Cash investments Related parties Intra-fund advice Conclusion AMP 1033.1Background 1033.2Evidence 1033.2.13.2.23.2.33.2.43.2.53.2.6AMP superannuation funds Outsourcing arrangements Products offered and fees charged to members Fees under outsourcing arrangements Consequences of outsourcing arrangements Monitoring of outsourcing arrangements Trustee Services Operation of the Business Monitoring Model Exceptions criteria for underperformance Performance of cash investments Evidence What this part of the case study showed Performance of MySuper products Evidence What this part of the case study showed 3.2.8vi8992929499100101101
Final Report3.2.93.2.13Distribution of trustees’ products Evidence What this part of the case study showed Performance of investments and indirect costs Evidence What this part of the case study showed Transition to MySuper Evidence What this part of the case study showed Pricing decisions Evidence What this part of the case study showed Termination of arrangements 1301301331361361381411411451471471491503.3What the case study showed 1513.3.1 Key problem 3.3.2 Overarching conclusions about the trustees’outsourcing arrangements Section 52(2)(c) Section 52(2)(d) Section 52(2)(h) Conclusion 1513.2.103.2.113.2.124152153154156159IOOF 1614.1Background 1614.2The APRA proceedings 1634.3The 2016 letter 1664.3.14.3.2Background The letter to members 1661684.4Changing the pricing for the IPS Fund 1694.5ANZ transaction 1734.6What the case study showed 1774.6.1Did Questor mislead TPS members in breachof section 12DA of the ASIC Act? Pricing changes ANZ transaction 1771781804.6.24.6.3vii
Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry567viiiANZ branch selling program 1805.1Background 1805.2Evidence 1815.2.15.2.25.2.3The Services Deed ANZ’s consideration of risks ASIC investigation 1841841865.3What the case study showed 1875.3.15.3.2Distribution process Misconduct Effective controls? ASIC’s guidance Breaches 187188188189190Suncorp Portfolio Services Limited 1916.1Background 1916.2Evidence 1926.2.16.2.26.2.3Payments to Suncorp Life MySuper transition and ADA transfers FoFA and grandfathering of commissions 1921951976.3What the case study showed 1976.3.16.3.26.3.3Use of the tax surplus Misconduct in respect of MySuper and ADA transfers Grandfathered commissions 197201203QSuper 2037.1Background 2037.2Evidence 2047.3What the case study showed 209
Final Report8Hostplus 2098.1Background 2098.2Evidence 2128.2.18.2.2Marketing and corporate hospitality Retention strategies 2122148.3What the case study showed 2158.3.1 Keeping low balance members in the fund 8.3.2 Conduct falling below community standards andexpectations in relation to retention strategies 8.3.3 Consideration of section 68A 91011215216217Board governance 2209.1Background 2209.2Evidence 2219.2.19.2.29.2.3Director tenure – AustralianSuper Number of directors – Cbus Appointment and dismissal of directors – Sunsuper 2212222239.3What the case studies showed 226Mergers 22710.1 Background 22710.2 Evidence 22810.2.1 Energy Super 10.2.2 CSF Pty Ltd 22823310.3 What the case study showed 236Trustee money management 23611.1 Background 23611.2 Evidence 23811.2.1 AustralianSuper Investments Spending 11.2.2 Cbus 11.2.3 CSF Use of corporate credit cards 238238241244245247ix
Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry121314x11.3 What the case studies showed 24811.3.1 AustralianSuper 11.3.2 Cbus 11.3.3 CSF 248249250Payments from third party managedinvestment schemes 25112.1 Background 25112.2 Evidence 25212.2.1 IOOF Investment Management 12.2.2 OPC and Oasis 25225312.3 What the case study showed 255Fees for no service 25713.1 Background 25713.2 Evidence 25813.2.1 StatePlus 13.2.2 OPC 13.2.3 Westpac 25825926013.3 What the case study showed 261MySuper and other retail groups 26214.1 Background 26214.2 Evidence 26314.2.1 Aon Hewitt 14.2.2 Mercer Superannuation 26326514.3 What the case study showed 26814.3.1 Aon Hewitt 14.3.2 Mercer Superannuation 268269
Final Report15Regulatory responses 26915.1 ASIC proach to regulation Fees for no service Grandfathered commissions Transfer of ADAs Branch selling program 15.2 APRA 27615.2.1 Approach to regulation 15.2.2 Supervision and enforcement 15.2.3 Fees for no service 15.2.4 CFS and the transition of members to MySuperproducts by retail fund trustees 15.2.5 IOOF 277278280Case studies: Insurance 281283289Introduction 28912ClearView 2901.1Background 2901.2Evidence 2901.2.11.2.21.2.31.2.4Accidental death policies ASIC engagement – anti-hawking ASIC engagement – pressure selling Resolution and closure of the Direct business 2912922942971.3What the case study showed 298Freedom 3022.1Background 3022.2Evidence 3032.2.12.2.22.2.32.2.42.2.52.2.6Mr Stewart’s son Selling to vulnerable consumers Accidental death and accidental injury policies Remuneration and incentives Quality assurance and disciplinary processes Retention strategies 303306307309310311xi
Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry34xii2.3What the case study showed 3122.3.12.3.22.3.3Misconduct Conduct falling below community standards and expectations Causes of the conduct 312315317CommInsure 3173.1Background 3173.2Evidence 3183.2.1 First insured – heart attack 3.2.2 Second insured – breast cancer 3.2.3 The decision not to update the ‘heart attack’ definition 3.2.4 The decision not to backdate the updated‘heart attack’ definition to 2012 3.2.5 ASIC’s investigation and misleading advertising 3183223243.3What the case study showed 3283.3.13.3.23.3.3‘Heart attack’ definition and advertising Individual cases Effectiveness of mechanisms for redress 328329331326327TAL 3314.1Background 3314.2Evidence 3324.2.14.2.24.2.34.2.4The first insured The second insured The third insured The audit of declined mental health claims 3323383423434.3What the case study showed 3434.3.14.3.24.3.3Misconduct Conduct falling below community standards and expectations Causes of the conduct 344347351
Final Report56REST 3535.1Background 3535.2Evidence 3545.2.15.2.25.2.35.2.4REST’s minimum balance and prescribed employment status clauses The totally and permanently disabled member The paraplegic member REST’s definition of TPD Income protection Reasons for decisions – Death benefits 3543553553583593605.3What the case study showed 361AMP 3646.1Background 3646.2The case studies 3666.2.1Delinked members and smoker rates What this part of the case study showed The charging and refunding of premiumsto deceased members’ accounts What this part of the case study showed Breach of trustee obligation to provide insurance What this part of the case study showed 366370What the case study showed 3786.2.26.2.36.37371374375378Allianz 3797.1Background 3797.2Evidence 3807.2.17.2.2Mr Winter’s evidence Ms Callahan’s evidence 3803847.3What the case study showed 3857.3.17.3.27.3.3Misleading and deceptive content on the website Breach reporting processes Compliance processes Processes for monitoring website content Process for monitoring and closing compliance incidents Oversight of AWP Giving sufficient priority to compliance Reaction to external reports 3853873903913923933943967.3.4xiii
Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry8IAG 3988.1Background 3988.2Evidence 3988.2.18.2.28.2.38.2.48.2.5Authorised representatives and incentives Swann’s dealings with its authorised representatives IAG’s awareness of issues with add-on insurance Remediation Current position 4004024044064078.3What the case study showed 4088.3.1Misconduct Section 912A(1)(a) Section 912A(1)(ca) Section 912A(1)(aa) Exceeding commission cap Conduct falling below community standards and expectations Causes of the conduct 4084084124124134134148.3.28.3.39xivYoui 4159.1Background 4159.2Evidence 4169.2.19.2.2Sacha Murphy Glenn Sutton Inadequate make safe works Delays in repairs Temporary accommodation 4164214214224249.3What the case study showed 4259.3.19.3.29.3.39.3.4Ms Murphy’s claim Mr Sutton’s claim Effectiveness of mechanisms for response and redress Conduct falling below community standards and expectations 425428430431
Final Report1011AAI Ltd (AAMI’S Complete Replacement Cover policy) 43310.1 Background 43310.2 Evidence 43310.2.1 Wye River bushfires 10.2.2 Marketing of the CRC product 43443610.3 What the case study showed 44110.3.1 Misconduct 10.3.2 Conduct falling below community standards and expectations 10.3.3 Causes of the conduct 441443444AAI Ltd (Hunter Valley storm) 44511.1 Background 44511.2 Evidence 44511.3 What the case study showed 45311.3.1 Misconduct 11.3.2 Conduct falling below community standards and expectations 11.3.3 Causes of the conduct 453454455xv
GlossaryTermDefinitionaccrued defaultamount (ADA)An amount of superannuation accumulated in asituation where (a), the member has not given thefund’s trustee any direction about how the amountis to be invested, or (b), the amount is investedin the fund’s ‘default’ investment option.anti-hawkingprovisionsProvisions set out in Sections 736, 992AA and992A of the Corporations Act 2001 (Cth) thatprohibit offering financial products for issue orsale during, or because of, an unsolicitedmeeting or telephone call with a retail client.Australian CreditLicence (ACL)A licence issued under the National ConsumerCredit Protection Act 2009 (Cth) that authorisesa licensee to engage in particular credit activities.Australian financialservices licence (AFSL),Australian financialservices licenseeA licence under the Corporations Act 2001 (Cth)that authorises a person who carries on a financialservices business to provide financial services. Alicensee is the person who provides the services.authorised deposittaking institution (ADI)A body corporate authorised under the BankingAct 1959 (Cth) to carry on a banking businessin Australia.Bank Bill SwapRate (BBSY)An interest rate used as a benchmark whenpricing financial products.Banking ExecutiveAccountabilityRegime (BEAR)A piece of legislation set out in Part IIAA of theBanking Act 1959 (Cth) and enacted in February2018, the BEAR establishes accountabilityobligations for authorised deposit-takinginstitutions (ADIs) and their senior executivesand directors. It is administered by APRA.buyer of lastresort (BOLR)Arrangements whereby a licensee or an authorisedrepresentative acquires the business of anotherrepresentative. The purchase price is determinedusing a specific formula.xvii
Royal Commission into Misconduct in the Banking, Superannuation and Financial Services IndustryTermDefinitionconflictedremunerationAny benefit, whether monetary or non-monetary,given to a financial services licensee, or theirrepresentatives, who provides financial productadvice to retail clients that, because of the natureof the benefit or the circumstances in which it isgiven could reasonably be expected to influencethe choice of financial product recommended bythe licensee or representative or could reasonablybe expected to influence the financial productadvice given to retail clients by the licenseeor representative: see Section 963A of theCorporations Act 2001 (Cth).enforceableundertaking (EU)An undertaking enforceable in a court. Issuedunder the Australian Securities and InvestmentsCommission Act 2001 (Cth) and the NationalConsumer Credit Protection Act 2009.external disputeresolution (EDR)An independent service for resolving disputesbetween consumers and providers of financialproducts and services, as an alternative to thecourt system.financial productUnder the Corporations Act 2001 (Cth), a facilitythrough which, or through the acquisition of which,a person makes a financial investment, managesfinancial risk and/or makes non-cash payments.financial servicesentityDefined by the Letters Patent as (among otherthings) ‘an ADI (authorised deposit-takinginstitution) within the meaning of the Banking Act1959’, ‘a person or entity required by section 911Aof the Corporations Act 2001 to hold an Australianfinancial services licence, or who is exempt fromthe requirement to hold such a licence by virtue ofbeing an authorised representative’, and ‘a personor entity that acts or holds itself out as acting as anintermediary between borrowers and lenders’.xviii
Final ReportTermDefinitionFinancial ServicesGuide (FSG)A guide that contains information about theentity providing financial advice, and explainsthe services offered, the fees charged and howthe person or company providing the servicewill deal with complaints.financial serviceslicenseeAn individual or business that has been grantedan Australian financial services licence (AFSL)by ASIC.Future of FinancialAdvice (FoFA)A 2012 package of legislation intended to improvethe trust and confidence of Australian retailinvestors in the financial services sectorand ensure the availability, accessibility andaffordability of high quality financial missionGrandfathering arrangements allow for commissionsto continue to be paid to intermediaries whosold financial products prior to the Futureof Financial Advice (FoFA) reforms thatwould otherwise be classified as conflictedremuneration. This source of revenue isknown as a grandfathered commission.group life insuranceLife insurance where a group of people (forexample, members of a superannuation fund)are covered by the one contract.Household ExpenditureMeasure (HEM)A measure of what families spend on differenttypes of household items, calculated quarterlyby the Melbourne Institute of Applied Economicand Social Research.mortgage aggregatorAn intermediary between mortgage brokersand lenders. Mortgage aggregators havecontractual arrangements with lenders thatallow brokers operating under the aggregatorto arrange loans from those lenders.mortgage brokerAn intermediary between borrowers and lendersof home loans.xix
Royal Commission into Misconduct in the Banking, Superannuation and Financial Services IndustryTermDefinitionMySuper productsLow-cost, simple superannuation productsfor members who make no active choice abouttheir superannuation.registrablesuperannuationentity (RSE)A category of superannuation entity, regulatedby APRA, that includes regulated superannuationfunds, approved deposit funds and pooledsuperannuation trusts, but does not includeself-managed superannuation funds (SMSFs).successor fundtransfer (SFT)Where a member’s benefits are transferred to asuccessor fund. This is one of the few situationswhere benefits can be transferred without themember’s consent and is subject to strict regulation.third partyguarantorA person or business other than the borrowerwho guarantees to pay back a loan if the borrowerdoes not.Tier 1 CapitalCapital against which losses can be writtenoff while an authorised deposit-taking institution(ADI) continues to operate and can absorb lossesshould the ADI ultimately fail.trail commissionA regularly recurring commission to an intermediary,such as a broker, based on a proportion of thecurrent or average loan balance and payableperiodically after the loan is made/drawn.Distinct from a commission that is paid up front.vertical integrationA description of the relationship between entitieswhere financial advice, platforms and fundsmanagement are controlled by a single entity.xx
AbbreviationsABAAustralian Bankers’ Association (now Australian BankingAssociation)ABARESAustralian Bureau of Agricultural and ResourceEconomics and SciencesACBFAboriginal Community Benefit FundACCCAustralian Competition and Consumer CommissionACLAustralian Credit LicenceADAaccrued default amountADIauthorised deposit-taking institutionAFAAssociation of Financial AdvisersAFCAAustralian Financial Complaints AuthorityAFSLAustralian financial services licenceAPRAAustralian Prudential Regulation AuthorityASBFEOAustralian Small Business and Family Enterprise OmbudsmanASICAustralian Securities and Investments CommissionAUSTRACAustralian Transaction Reports and Analysis CentreBEARBanking Executive Accountability RegimeBOLRbuyer of last resortDREdual-regulated entityEDRexternal dispute resolutionxxi
Royal Commission into Misconduct in the Banking, Superannuation and Financial Services IndustryEUenforceable undertakingFASEAFinancial Adviser Standards and Ethics AuthorityFoFAFuture of Financial Advice (legislation reforms)FOSFinancial Ombudsman ServiceFPAFinancial Planning Association of AustraliaFSCFinancial Services CouncilFSGFinancial Services GuideHEMHousehold Expenditure MeasureIDRinternal dispute resolutionKPIKey Performance IndicatorLVRloan-to-value ratioPDSproduct disclosure statementREresponsible
9.3 What the case studies showed 226. 10 Mergers 227. 10.1 Background 227 10.2 Evidence 228. 10.2.1 Energy Super 228 10.2.2 CSF Pty Ltd 233. 10.3 What the case study showed 236. 11rustee money management T 236. 11.1 Background 236 11.2 Evidence 238. 11.2.1 AustralianSuper 238. Investments . 238. Spending . 241 11.2.2 Cbus 244 11.2.3 CSF 245
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