Banks, super face new round of compo costs
Big banks and wealth companies face paying for another round of customer compensation following a landmark Westpac court loss.
The big banks and wealth companies face a real risk of forking out for another round of customer compensation following a landmark Westpac court loss, which also has “unintended consequences” for industry superannuation funds.
That’s the view of law firm MinterEllison after the corporate regulator won an appeal last week against Westpac that sent shockwaves through the financial advice, super and banking industries.
A panel of three judges handed the Australian Securities and Investments Commission a resounding win on appeal, after finding Westpac provided customers personal not general advice during a telephone marketing campaign to lure them into its super funds.
Westpac had won an earlier case in December by arguing the advice was general and therefore not bound by additional legal obligations to customers.
But MinterEllison believes the appeal ruling will have “unintended consequences” as wealthier consumers seek out costlier personal advice while others will have more limited choices including automated robo-advice.
“We are now in this grey zone,” MinterEllison partner Michael Lawson said of the appeal judgment. “The threshold for personal advice has been lowered … we don’t see that general advice is dead and buried.”
Fellow MinterEllison partner Andrew Bradley thinks the case will mean more remediation costs for banks and wealth groups as they reassess what category of advice customers were provided.
“If there is no appeal there will be a remediation coming out of this case,” he said,
“It is rife for remediation and rife for class actions as well.”
While the court is yet to decide penalties and Westpac has the right to seek a further appeal, industry sources last week suggested the maximum penalty the bank faced was about $15 million.
Any compensation to customers would come on top of that.
ASIC also started Federal Court action on Wednesday related to another marketing campaign which it said “purported general advice” but didn’t have regard for consumers’ best interests.
That cases centres on the promotion of the MobiSuper Fund, a division of the Tidswell Master Superannuation Plan. Tidswell is a subsidiary of Sargon Capital.
On Monday, Westpac chief executive Brian Hartzer said the bank was still considering a court appeal, as he also warned that subjecting consumers to higher costs for products and more compliance was not beneficial.
“If the ruling stands, it certainly makes the provision of financial products under a general advice carve out very difficult for financial institutions, and we think that ultimately is not good for consumers,” Mr Hartzer said
“We think given that Australians are underinsured and don’t have enough retirement planning that it would be really unfortunate if general advice were to become impractical.”
Personal advice is covered by an obligation to act in the customer’s best interest. It also typically requires that a customer is issued a statement of advice to ensure that their circumstances are taken into account.
General advice is characterised as impersonal and broad in nature.
MinterEllison also thinks the appeal ruling has implications for telemarketing, distribution of products and may prompt a rethink of which licences companies seek out.
Mr Bradley also sees negative ramifications for industry super funds many of which rely on general advice.
“For them general advice and no advice models are very important,” he said.
“If you shut that off … you end up in a situation where you dampen the investment opportunity for industry super funds.”
Mr Bradley said “deep and sensible thinking” on the distinction between general and financial advice was required by regulators and industry participants.
“What is the right outcome for consumers?”
Herbert Smith Freehills partner Michael Vrisakis said the latest court ruling meant companies could not rely on disclaimers to customers.
“The case shows that a general advice warning, particularly if given only at the outset of the adviser client interaction, will not negate a reasonable expectation flowing from the extent of the advisers interaction and dialogue with the client that the adviser has taken the clients personal circumstances and objectives into account,” he said.
Banks, super funds, insurers, financial advice and wealth companies are scrambling to assess what the ruling means for them. It also adds to the implementation of the Hayne royal commission’s recommendations, which include banning the hawking of super products.
ASIC has a regulatory guide — issued in late 2012 — which outlines how financial companies should give information, general advice and scaled advice.
“There is still room for some interpretation and it is going to be interesting where ASIC takes this,” Mr Bradley said.
To join the conversation, please log in. Don't have an account? Register
Join the conversation, you are commenting as Logout