But as he examined the widespread and systematic gouging that our financial giants had indulged in, Commissioner Hayne came to very different view.
“The amounts of money that just ‘fell into the pocket’ of so many large and sophisticated financial entities, the number of times it happened, and the many years over which it happened, show that it cannot be swept aside as no more than bumbling incompetence or the product of poor computer systems,” he wrote in his final report.
The behaviour, he pointed out, was very deliberate. “In many cases, the advice licensee knew that the client would not receive any services in exchange for the ongoing fee.
“And there were cases where ongoing fees were charged when there could have been no possibility of providing the services for which the fees were charged,” he noted.
‘Taking something for nothing’
For instance, financial institutions continued to deduct advice fees from customers’ accounts, even when there was no financial adviser linked to their account, or even when they’d been advised of the client’s death.
In these cases, senior executives of financial institutions who directed that fees be deducted from customers’ counts committed a dishonest act. “It is dishonest because it is taking something for nothing.”
As a result, Commissioner Hayne argues there is a “real question” whether this conduct contravened section 1041G of the Corporations Act, which prohibits financial institutions from engaging in dishonest conduct in relation to providing a financial product.
But what will really strike dread into bankers’ hearts, however, are the harsh penalties that could be facing. Individuals, for instance, face a maximum penalty of 10 years’ imprisonment, or a hefty fine. Companies also face stiff financial penalties.
Another possibility would be to see the behaviour as breaching section 12D1(3) of the ASIC Act by accepting a payment for financial services at a time when there were reasonable grounds for believing that they could not be supplied within a reasonable time.
But Commissioner Hayne is not disposed to letting financiers off that lightly. He argues that “section 1041G – with its emphasis on dishonest conduct more accurately reflects both the nature and the gravity of the conduct”.
Even more alarming, Commissioner Hayne added: “I also consider that the maximum penalties applicable to a contravention of section 1041G more accurately reflect the gravity of that conduct.”
Unlike the past, bankers can’t console themselves with the idea that the corporate regulator, ASIC, will be spineless when it comes to punishing poor behaviour.
ASIC appears to have had a revelation when Commissioner Hayne asked Nicole Smith, who until recently was the chairwoman of NAB’s superannuation trustee NULIS whether she had contemplated the possibility of criminal proceedings given that the NAB wealth business had deducted service fees from clients’ super accounts without providing the particular advice.
“Did you think to yourself that taking money to which there was no entitlement raised a question of the criminal law?” he asked Smith last August. “I didn’t,” she replied.
The question caused the scales to fall from the corporate regulator’s eyes. According to the final report, documents ASIC provided to the commission show that almost immediately the corporate regulator “began to examine whether a brief of evidence should be prepared and submitted to the Commonwealth Director of Public Prosecutions in connection with one entity’s possible contravention of section 1041G”.
But Commissioner Hayne thinks that ASIC needs a little extra prodding. In November, he informed the corporate regulator that in his view “the information and evidence of at least two other entities may have contravened section 1041G”.
Although Commissioner Hayne did not name the particular institutions involved, they’ll almost certainly include AMP and Commonwealth Bank.
After all, evidence before the commission showed that AMP had a deliberate practice of putting certain clients into a “buyer of last resort” (BOLR) pool, and to keep charging them fees, even though it could not provide advisory services to BOLR pool clients.
And Commonwealth Bank continued to charge fees to “orphaned” clients who were no longer allocated to a financial planner, and so could not possibly have received financial advice.
Of course, it will be to the prosecutor to decide how to frame the charges. But, Commissioner Hayne adds that however they’re framed, “it may be expected that the prosecution would seek to lead evidence that the particular takings charged were made as part of an established system, and were not matters of accident”.