Compensation for undelivered financial services to skyrocket: ASIC

CBA is facing a $105m compensation bill as refunds tied to financial advice fee failings look set to skyrocket.

Ian Narev, chief executive officer of the Commonwealth Bank of Australia, appearing at a House of Representatives Standing Committee on Economics at Parliament House in Canberra. (Picture Kym Smith)

Commonwealth Bank of Australia is facing a $105 million bill for fresh advice failings uncovered as part of an industry-wide review ordered by the corporate regulator.

The Australian Securities and Investments Commission said today compensation from the nation’s largest financial institutions in relation to erroneous fees charged for financial advice is set to increase seven-fold, with a staggering 175,000 customers impacted, with the majority tied to CBA.

In a report into “systemic failures” that have seen fees charged without a service being provided, the corporate watchdog said the issues were more widespread than has currently been recognised through compensation payments.

The specific problems detailed in the report relate to customers either being charged ongoing fees despite an adviser not being allocated to their account or an adviser not delivering on the promise of providing a service that a client was entitled to receive.

Among the more startling examples of an industry focus on revenue over service was a case of one unnamed institution charging fees for the retention of client records, a service that is already legally required for a period of seven years.

Other advisers were called out for considering their ongoing service obligation met through the attempt to offer an annual review, even if one was never provided. The worst case of this was a suggestion an institution on occasion considered three unanswered phone calls to be enough to meet its obligations.

“We do believe this is, to a large degree, a legacy issue,” ASIC deputy chairman Peter Kell said on a conference call with media.

“(But) that does not any way reduce the significance or seriousness of what we have seen here.”

To-date, ANZ, AMP, Commonwealth Bank, NAB and Westpac have dished out $23.7 million to 27,000 affected customers, but these numbers are expected to blow out in the near-term.

This included $16.2m paid by ANZ and $3.5m for NAB.

Commonwealth Bank has only paid $575,587 for offences covered by the ASIC review, but is estimated to face a bill of $105.1m, plus interest.

The bill for CBA appears to be separate from a long-running financial planning scandal and subsequent compensation process for inappropriate advice provided to clients.

ANZ faces another $33.5m of refunds and compensation, while NAB is due to pay $13.4m.

“Further reviews are being conducted by the licensees to determine the extent of their ongoing service fee failures,” ASIC said.

“Refunds and compensation are expected to increase substantially as the licensees’ investigations and reviews continue.

“Based on estimates provided by the licensees to ASIC, compensation may increase by approximately $154 million, plus interest, to over 175,000 further customers, meaning that total compensation for related failures could be over $178 million, plus interest.”

Should the estimates prove accurate, the total number of customers charged fees for financial services they did not receive would top 200,000, a figure that represents more than 1 per cent of the entire adult population of Australia.

Mr Kell said the institutions in question were at different stages in their investigations, hinting the repayment amount could rise further.

“It’s not straightforward, but that’s the best estimate we have now,” he said.

“Several of the institutions are still part way through some of their reviews so there is the possibility that it may increase.”

However, the timing of repayments remains under question given there is no firm deadline, with the regulator saying it would provide a further update by the middle of next year when it hopes much of the money owed will have been returned.

“Our objective is to get this money back into the pockets of customers as fast as is practicable,” Mr Kell said.

“We are emphasising that they need to give this very high priority. If it carries on for too long ASIC will certainly be taking action.”

In a statement this afternoon, CBA said fees for breaches going back to 2007 had commenced and would likely be completed by June.

The bank added the $105m (plus interest) had already been factored into its financial reports, with work completed to ensure there is no re-occurrence of the issues.

“We apologise to our customers who did not receive their annual review. We are working hard to complete our review of customers and have commenced contacting customers to refund fees, wherever our records do not show that an annual review was provided,” CBA’s wealth management boss Annabel Spring said.

“We will continue to look across our business for areas where we may have made mistakes and put things right for customers.”

NAB has also responded to the ASIC analysis, saying its issues related to a shift in policy for corporate superannuation clients that went awry.

“Our approach was intended to be customer-centric, while many of our competitors elected to continue with commission-based legacy products,” Andrew Hagger, NAB chief customer officer in its consumer banking and wealth division, said.

“While our intention with the proactive restructuring of corporate super fees beginning in 2012 was to do the right thing in providing greater transparency, and we provided better outcomes for many customers, we didn’t execute the change well and we’re sorry to those customers affected.”

Earlier, ANZ respond to the report by noting its fees largely related to a previously detailed issue where some clients did not receive the documented annual review component of its Prime Access package of services.

“We want to again apologise to our clients for not delivering all of the Prime Access services we promised and assure them we have been working hard to finalise remaining reimbursements by the end of this year,” Alexis George, the managing director of ANZ’s Australian wealth arm, said.

“We’ve also significantly improved our processes, training and compliance supervision to ensure this does not happen again.”

The compensation detailed by ASIC largely covered failures before the introduction of the Future of Financial Advice regime by the previous Labor Government in 2012.

ASIC said the changes made by those reforms were a “significant factor’’ in the identification of the failures, and had also substantially reduced the chance they would happen again.

“It’s highly unlikely this issue would have come up and been identified in this way without the FOFA reforms,” Mr Kell said.

“It does help highlight why ASIC so strongly supported those reforms and will contribute to the development of the profession.”

ASIC has also commenced several enforcement investigations in relation to this conduct.

“These investigations are ongoing and are not covered in the report,” Mr Kell added.

The report forms part of ASIC’s Wealth Management Project, which shines the spotlight on the conduct of the largest players in the financial sector, including the big four banks, Macquarie and AMP.