CBA is on the right track now

THE Commonwealth Bank’s ­financial planning scandal and the bank’s belated move to deal with it, actually raises three quite separate issues.

THE Commonwealth Bank’s ­financial planning scandal — disaster, debacle; call it what you will — and the bank’s belated move to deal with it, actually raises three quite separate issues. They are each of great importance and they are all linked.

The first and most important is, of course. whether it will deal ­effectively and quickly with the direct victims. The second is whether it will repair the brand damage that CBA, for so long the most trusted financial institution in Australia, has suffered. The third is what it says about financial advice and planning going forward, where two streams necessarily intersect: the structure of financial advice and the operational processes, and of course its regulation.

The CBA response therefore plays directly into not only the broader debate about the previous government’s FoFA reforms and the current government’s plans to “reform those reforms”, but all the other issues raised by the size and mandated pervasiveness of our near-$2 trillion superannuation industry.

On one level it is a discrete problem, with definable if currently unknown and unknowable boundaries, for CBA all on its own. It is a problem which has, of course, got much messier and bigger precisely because CBA refused to deal much earlier with what might reasonably have been confined in those earlier stages to “just a few rogue” financial planners.

Once again we see proof of the wisdom of the saying that “it is not the crime that gets you but the cover-up”.

In this case, CBA has added its own coda: that the cover-up doesn’t only “get you”, it also multiplies the crime. Indeed, it has “multiplied it” on two levels.

The first is for CBA narrowly, with chief executive Ian Narev inviting every one of the bank’s ­financial planning clients, numbering hundreds of thousands over a near 10-year period, to seek reassessment of their advice and possible compensation.

On the second level, it has metastasised into issues that challenge even legitimate financial planning and advice.

Now, Narev’s “invitation” is on the stated basis of his confidence that the vast majority of CBA ­clients had/have been given ethical, competent advice, so that they would either have no cause for complaint or any complaint would not be validated. He might well have done so also on the basis of an unstated belief that either apathy or the passage of time will limit the number of complainants.

Either or both underwrite his confidence that the cost will not be material for CBA and its shareholders.

It’s my belief that CBA’s offer is reasonable and appropriate and should produce effective and reasonably timely outcomes — although that is subject to CBA’s executing the process of repair and rectification in good faith.

The two points of greatest criticism are that it has to be “victim-generated” — a client who feels aggrieved has to approach CBA, and that important first stage of assessment will be done by CBA itself via a specialist team.

I suggest it would be both unreasonable and unrealistic to ask CBA to examine the circumstances of every planning client over those 10 years. It’s also doubtful that anything would be gained; what would be the para­meters of such an analysis and who would set them?

The same applies to the suggestion that it should be done by some “independent third party”. There’s a further problem with that, which seems to have escaped some commentators; that of client privacy.

CBA can’t just hand over the records of (all) its clients to a third party. It would have to seek their individual approval. It would also mean the process would be swamped by assessment of perfectly valid advice, denying a timely resolution to real victims.

By making it “victim-gene­rated” and by keeping the first stage in-house, the bank will be dealing with its client information appropriately. This should also generate a much speedier resolution to the benefit primarily of victims but also the bank itself.

The central metric chosen for assessing both harm and the degree of that harm seems to me both reasonable and appropriate, and also operationally functional.

This is to model the performance of what should have been the appropriate plan for every individual client, based on the risk profile they sought and was appropriate for them, against the performance of the actual plan they were advised to take. And for CBA to then make up the loss if any.

This raises an extremely important point which was missed in the initial reaction to the CBA statement. CBA is no longer limiting compensation only to victims of proved deliberate malpractice — the band of rogue advisers — but will now compensate victims of inappropriate advice, even if entirely well intended.

That does not mean compensating for the losses of the GFC. “Inappropriate” means the plan recommended relative to the risk profile sought.

So, will it prove sufficient in terms of CBA brand repair? I guess the answer to that lies in part in how many victims are now shaken out and how effectively the process deals with them. If it proves tardy or corrosive, CBA’s “cure” could well be worse than the (brand damage) “disease”. CBA might well have exposed itself to even more and more extended negative headlines.

I also said “in part” because this “history” will inevitably become entwined with the ongoing real-time reality of contemporary ­financial planning — its regulation, good or bad; customer experiences, similarly good or bad; and whether or not CBA has got its act together.

One very good reason not to have a royal commission into the CBA debacle, is that our focus, our time and our efforts should be on getting better if not the unreachable perfect financial planning.

It seems to me that the argument over the government’s “reforms of the FoFA reforms” has become a sterile binary one around “conflicted commissions”. That is to say, we either stick with the Future of Financial Advice legislation and its total ban or we accept the unwinding.

I suggest that both are defective. The ban went too far and was unrealistic. But the unwinding equally goes too far and would create an operational mess. We ­really need to revisit the issue, starting with a blank slate that nevertheless recognises the reality of both financial planning and the superannuation system more broadly.

We come, we should come, back to two core issues. First, how do we adequately and effectively fund financial planning?

Some mix of fee-based and commission and other incentives is clearly the answer.

The mix has to work effectively in the context of the reality of the bank’s (and AMP’s) domination of the industry.

The central challenge and contradiction is that if someone walks into a CBA (or ANZ) branch, they can hardly expect to be recommended to buy a NAB (or Westpac) product. But they can equally expect to be given the right advice for the fee or commission they are paying.

The second core issue is that the overall level of fees, the aggregate of advice and funds management, is an exercise in gouging. Something like $20 billion a year is leached out of superannuation, with precious little to show for it in return, either in terms of premium advice or premium performance. It adds to a complex multi-dimensional challenge, which we have shown precious little understanding of, far less anything remotely like an effective response.