CBA’s crimes waved through by APRA

Colonial First State committed more than 15,000 criminal offences on super, the royal commission has heard.

Linda Elkins leaves the royal commission. Picture: Stuart McEvoy.

Commonwealth Bank’s wealth management arm, Colonial First State, committed more than 15,000 criminal offences by failing to move super customers from a high-fee fund to low-fee accounts, the financial services royal commission has heard.

However, the regulator responsible for super funds — APRA — did not prosecute the offences, which would today carry a total maximum fine of about $160 million, and instead approved a plan to gradually move the accounts that saw Colonial flout the criminal law for another 3½ years.

This enabled financial planners to continue trousering lucrative trailing commissions, worth millions of dollars a year, that they would otherwise have lost.

Giving evidence to the commission yesterday, Colonial executive general manager Linda Elkins admitted the bank broke the law by failing to move the accounts.

Colonial also misled customers at least three times in communications designed to get them to stay in the company’s First Choice Super fund, rather than move to the low-fee MySuper product, she said.

It was Ms Elkins’s second appearance at the commission — in April, she agreed that Commonwealth Bank was the “gold medallist” in charging fees for no service when she appeared in the second round of hearings for the royal commission.

The criminal breaches relate to Colonial’s failure to move disengaged First Choice members, who had not told the company where they wanted their money invested, into a low-cost MySuper ­product.

Ms Elkins agreed that CFS had been on notice since 2011 that it would have to move those people into MySuper accounts by January 1, 2014.

Failure to do so is a criminal offence under section 29WA of the Superannuation Industry Supervision Act, punishable by a fine.

CFS told the Australian Prudential Regulation Authority it had broken the law in a breach notice filed on March 19, 2014, evidence before the commission revealed.

The bank initially told the regulator there were 13,000 breaches — one for each member it failed to move on time — but later increased the number to 15,000, counsel assisting the commission, Michael Hodge QC, said.

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CFS failed to move the members to the low-cost option due to “an error on our part in recognising” that they were eligible for MySuper, Ms Elkins told the commission.

Emails tendered to the royal commission showed financial ­advisers were concerned they could lose the lucrative commissions.

One adviser, Michael Will­iams, asked Chris Micallef, CBA’s corporate super relationship manager, if it was true that “$188k plus insurance commissions could be lost if we do not get them to change or confirm their investment option, is that right?”

Mr Micallef responded: “Yes, if there is no trustee instruction from the member (i.e., an actual investment choice of some sort held by the trustee) providers will have to transfer the balance to a MySuper option.”

This was true regardless of whether the member was in an employer fund or a personal option, he said.

“In both cases advisers will then lose any grandfathered trail from those movements.”

APRA, which declined to comment yesterday, allowed the members to be transferred over 3½ years, during which Colonial continuously broke the law, the commission heard.

After 24 updates to APRA on the saga and a remediation program overseen by EY, the scofflaw behaviour came to an end on September 21 last year.

On that date, APRA officer Nick Johns emailed Colonial thanking it for a copy of EY’s report on the remediation program.

“We have no further queries and consider this item closed,” he said.

Asked if she was surprised that APRA took no action over the 13,000 breaches to which Colonial first admitted, Ms Elkins said she “thought APRA was acting appropriately to ensure that we were resolving the breach”.

“We felt that we had worked through the contraventions and resolved them satisfactorily,” she said.

Ms Elkins admitted CBA misled customers after it instructed its call centre operators to tell superannuation members a recent change to legislation “requires” the company to confirm the customers’ “ investment option”.

The legislation required nothing of the sort.

APRA had reviewed the transcripts being provided to CBA’s call centres.

“We had confirmed with APRA that we would be calling these people to confirm the investment selection,” Ms Elkins told the royal commission.

“And APRA didn’t contact you and say, ‘this is obviously misleading, don’t do it?’” Mr Hodge asked?

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Ms Elkins responded: “Well, no.”

She admitted Colonial also misled members in letters containing similar information to the phone call script.

Mr Hodge asked if the “purpose of this letter was to assist Colonial to stop committing an offence”.

“We were focused, of course, on stopping the breach but we had genuine concern for these members who would turn their mind to their investments and their insurance,” Ms Elkins said.

CBA outlined plans in June to launch a $10 billion spin-off of Colonial that would emerge as one of the top 50 companies in the sharemarket.

Under the plan it will package up its Aussie Home Loans mortgage broker, its planning licensees Count ­Financial and ­Financial Wisdom, and its Colonial First State superannuation arm, which has $135bn under management.

Existing CBA shareholders will get a share in the new company, named CFS Group, which is ­likely to be valued between $6.5bn and $10bn on the Australian ­Securities Exchange.