Gliding over all: Beyond Banking Bad


Although it’s difficult to assess its impact on the broader community, there is little doubt that Four Corners’ “expose” of Commonwealth Financial Planning generated contemplation, conversation and consternation in the financial services industry.

The recent story “Banking Bad” by Adele Ferguson and Deb Masters focused on the sales-driven culture inside the Commonwealth Bank's financial planning division; but it also raised additional questions about the structure and composition of the broader advice industry.

Ferguson’s story alleged a “sales at all costs” culture of Commonwealth Financial Planning and focussed on Noel Stevens and Don Nguyen before highlighting the opinions of former employees, Jeff Morris and Rod Gayford. It was, as expected, critical of the performance of the Australian Securities and Investments Commission and very critical of the alleged ruthlessness, insensitivity and venality of some Commonwealth Bank staff.

ASIC anticipated the criticism and posted a video response to the allegations several hours before the Four Corners episode aired. ASIC also followed up the story with a formal written response to the episode (but this lacked the gravitas and solemnity of their initial video response).

The Four Corners story itself was an ambitious and compelling presentation of seemingly unconnected advice failures around a “sales first” theme. Despite reasonable concerns about balance, it was an emotive, commendable and carefully structured account that was entirely consistent with Ferguson’s previous articles on the retail financial services industry. However, while the story may have shocked and outraged some viewers, it surprised few industry insiders and also, disappointingly, skirted the fundamental issues.

Noel Steven's experience

The tragedy of Noel Steven’s advice experience has been well documented on this site; and I’d refer you to “Risk Advice and Advice Risk” and “Commonwealth Financial Planning v Couper: An Insider’s view”. My interview with Martin Culleton from March 2014 provided a more detailed insight into the entirely avoidable advice failure but Ferguson was far more successful in humanising his predicament. While industry press may refer to these tragic circumstances as the “churn case” doing so both misrepresents its significance and trivialises the cultural and structural elements of the failure.

Indeed, while Culleton talks about the adviser’s failure to humanise the compliance arrangements, the judges in the appeal seem more focused on the impact of association including the pressure on advisers to achieve growth, recommend internal products and maintain one’s employment. One of UNSW Professor Dimity Kingsford-Smith’s previous submissions to the Treasury emphasised these elements too and argued that association may create conflicts greater rather than those caused by remuneration. Couper, in many respects, proves the validity of her assertion.

“Even in the absence of direct incentives to skew financial advice such as commissions, there may be in other forms of remuneration equal incentives for preferring to recommend to clients the products and services of related and associated entities. These may not be as fit for purpose or as beneficial for the retail client as those from unrelated issuers or service providers.”

This is, I think, at the heart of Ferguson’s thesis. While it is often convenient to dismiss “compliance failures” as singular failures or the actions of “rogue planners”, ownership, association and vertical integration may provide a more compelling explanation.

However, while the dark side of vertical integration – share of wallet, group product and sales targets - needs to be acknowledged, so to do the benefits of subsidised advice and institutional “guarantees” of quality. Institutional advice groups have resources and scale that should provide a measure of security and this, in fact, is what attracts many clients to these groups.

Vertical integration

The logical response to Ferguson’s thesis is to suggest that these failures were not caused by structure per se but rather by the failure of the advisers to provide professional, impartial and disinterested advice; instead of delivering on the Licensee’s promise to provide clients with an objective and measured consideration of their needs and options, clients were provided with financial product sales and recommendations driven by the advisers’ interests.

Ferguson counters this view by suggesting that the real problem was neither a compliance failure nor the failure of the Licensee to monitor, supervise or train their advisers. Directly contradicting Mr Nguyen’s recollection, Ms Ferguson identified that Mr Nguyen was in 2006 classified in an internal report as a “critical risk” to the Licensee. Further, the report clearly asserted that the conduct in which he was engaging at that time might attract an administrative or custodial penalty[1].

Two years or more later, a range of problems became more evident and the predicted administrative penalties were applied. With the luxury of hindsight, one might not only regret the Licensee’s decision not to act decisively but wonder whether, and to what extent, “culture” influenced the Licensee’s choice[2].

Critics of the industry have been quick to highlight vertical integration as the underlying problem. Independent financial advisers, like Justin Brand, have highlighted the tendency of advisers in vertically integrated businesses to deliver sub-optimal advice outcomes for consumers; but to what extent does structure and conflict conceal, excuse or explain individual ethical failures? But is blaming “structure” just the simple way to rationalise and camouflage individual failures?

Mr Brand recommends the consumers should use an unaligned and fee based adviser to minimise the conflict cause by vertical integration but he never suggests that professional advice is incompatible with an institutional model. Nor does he suggests that using an unaligned and fee based adviser guarantees great advice. It is a point echoed by industry commentator Simon Hoyle whose recent post highlighted this inherent tension between individual ethics and organisational culture.

Insurmountable problems?

These are not a simple issues to address within financial services businesses; and it is a task complicated by the fact that fearless and honest reporting of compliance issues more often leads to restructures, redeployment and redundancies[3] than promotions, recognition and bonuses. The reality is that an organisation that encourages and supports those who have the courage to identify and escalate issues will be far more sustainable[4], more consistently profitable and, more pragmatically, avoid the same attention that Ms Ferguson and others have lavished on ASIC and CFP.

The problems identified by Ferguson and Masters are not insoluble, but the mix of individual, structural and cultural elements defies a simple resolution. Possible strategies – changes of management, organisational redesign, open governance architecture, reframing financial and behavioural expectations and explicitly recognising obligations beyond shareholder returns - will be addressed in a subsequent post. While critics may focus on the rate of incremental change, lasting progress will not depend on speed of execution but rather on the courage, imagination and perseverance of the CBA Leadership. Nothing worthwhile is easy.

In the end, it’s perhaps the complexity of the underlying causes that leaves us without a satisfying ending. Despite the closely managed remediation program, we get an ambiguous ending to a mosaic novel of personal tragedies and financial disasters; Compensated clients continue to allege unfair treatment, Don Nguyen is unable to work (but is, ironically, benefitting from receiving good insurance advice) and CBA, after bravely, successfully and significantly transforming their advice business, fronted the Senate and publicly discussed “inappropriate advice” in far more temperate terms than they might do so otherwise. Banking Bad is a compelling story of conflict, corruption and confidence, but it is also one that most advice professionals hope will not be repeated in syndication. 




[1] While it is easy with 20/20 hindsight to identify issues, the document introduced by Ms Ferguson clearly suggests that the compliance team clearly identified the risk (or, at least, identified the potential risks). Quite an achievement considering that Rod Gayford asserted that the Compliance Team consisted of 1 ½ people. I understand that in 2005-6 there were approximately 35 people in the relevant compliance team.

[2] Culture also influenced the choices made by the self-described “ferrets” involved in “whistleblowergate”. Despite “everybody” knowing about “dodgy Don” it appears that no-one reported their concerns to CFS’ Compliance Team or even anonymously contacted CBA’s leadership to share their deep unease. This is, in itself, telling. It is also important to appreciate that seven Commonwealth advisers were banned by ASIC which suggests, to Commissioner Kell’s credit, that culture and structure were more significant contributors to what has elsewhere been presented as the “individual failures” of rogue planners.

[3] If you think shooting the messenger is atypical, consider Joseph Sullivan, and the proposed legislative response. For a local perspective, consider the treatment of CBA whistleblower Jeff Morris

[4] The Economist contrasts Handelsbanken and mainstream European banks to prove this point. Handelsbanken’s , “whole ethos is about long-term returns rather than short-term profits. First there is its profit-sharing scheme, Oktogonen. If the bank makes a return on equity (ROE) above the annual average of its peers, then every employee receives an equal share of the profit. But this is only payable at the age of 60. The bank has beaten its ROE target for every one of the past 41 years. And an employee who has been in the scheme from the start can now expect a pay-out of more than £1m”