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Economics References Committee - 10/04/2014 - Performance of the Australian Securities and Investments Commission

MORRIS, Mr Jeff, Private capacity

[12:12]

CHAIR: Welcome. Mr Morris, thank you for your attendance today. Do you have a brief opening statement to make?

Mr Morris : I do. Thank you, senators, for holding this long overdue inquiry into ASIC, and thank you in particular to Senator John Williams for leading the charge and for the unanimous vote of all senators in answer to his call. The need for this inquiry was well recognised by all; but, as former US Vice President Dan Quayle once famously said, 'If we do not succeed in this, we run the risk of failure.' It is, of course, what comes out of this inquiry that matters.

You could say that the journey to here, today, began with one dodgy financial planner by the name of Don Nguyen, but that would be wrong. Don Nguyen was not a rogue planner and not an aberration, as that term implies. He was merely a symptom of a system that is fundamentally broken—a system that is destined to get far worse in the future if current trends are allowed to play out.

The financial advice industry in this country grew out of door-to-door insurance salesmen peddling policies in return for hefty commissions. It has never cast off that legacy. Despite FoFA banning some forms of conflicted remuneration, direct commissions and the like, under FOFA the ghost of conflicted remuneration through bonus schemes based on product sales has not been laid to rest. Reflecting its roots, the financial advice industry today is a quagmire of conflicts of interest, of which adviser remuneration is just one. Possibly an even greater problem is the trend to vertical integration—ownership of advice businesses by product manufacturers. This is a clear and deliberate strategy to use people posing as independent and professional advisers as a sales channel to push in-house product. Where is the client's best interest in this process? In the case of the banks, you can add the conflicts of interest created by the non-transparent use of extensive databases to identify prospects, and counter staff under enormous pressure to produce a certain number of referrals each week to harvest customers for the in-house financial planning businesses.

Who are the people who advocate for the extension of this conflicted vertically integrated model?

Commonwealth Financial Planning, for one—the same people who, as my submissions show, when things went wrong with Don Nguyen and other so-called rogue planners, sought at every turn, by every means, to cover up what occurred, to destroy or suppress the evidence in the files and to defraud the victims of the compensation they were entitled to. How did this come about? How could it happen in an industry subject to regulation? The answer can only be that the regulator is ineffective. Don Nguyen and Commonwealth Financial Planning were not outlying events but merely symptoms of the broken system overseen by ASIC.

ASIC has never wanted to grapple with the real problems in this industry, to eradicate the conflicts of interest, to put the spivs out of business, to protect consumers. ASIC's failings in relation to Commonwealth Financial Planning are staggering: failure to act on information from the whistleblowers for 17 months, to take on the big institution over the cover-up that occurred or even to investigate the file-tampering allegations at any time, and to question the years that Commonwealth Financial Planning spent grinding the victims down before a semblance of compensation was finally paid.

Most recently and heinously, as set out in detail in my submissions, ASIC has sought to mislead this inquiry in their submissions over the culpability of Commonwealth Financial Planning and the Commonwealth Bank group. Thereby ASIC seek to absolve themselves for their own long-term failure as a regulator.

Senators, you will not have time in this inquiry to consider all the detail of the Commonwealth Financial Planning matter, let alone the other myriad ASIC failures detailed in the 449 submissions you have received. I hope you will, however, be able to see clearly that there is a fundamental problem with ASIC that merits further detailed investigation; for those who do not learn from the mistakes of history are doomed to repeat them.

The Don Nguyen and Commonwealth Financial Planning matter is a case study of everything that is wrong with this industry and everything that is wrong with ASIC. That is why there should be a royal commission into ASIC, its failures in relation to Commonwealth Financial Planning and other matters. Thank you for your consideration of my submissions.

CHAIR: Thank you, Mr Morris. Mr Morris, you joined Commonwealth Financial Planning on 31 March 2008. When did you first become aware of misconduct on the part of Mr Nguyen?

Mr Morris : About a month later.

CHAIR: Is it correct to say that you were alert to his—so you were. Can you explain why you and your colleagues decided to make your report to ASIC anonymously? Why did you choose a pseudonym—the three ferrets?

Mr Morris : There was some concern on the part of the other two, who had known him for a lot longer, that he was mentally unstable. They were literally concerned; they did not know what he might do in this situation..

CHAIR: They were concerned about his mental health outcomes or consequences?

Senator WILLIAMS: His reaction.

CHAIR: His reaction. But why did you make it anonymously?

Mr Morris : I guess, in hand with that, we were concerned about ASIC's ability to keep a secret. ASIC does not have a very good reputation in the industry.

CHAIR: All right. At the time you made your anonymous report to ASIC, were you aware that the whistleblower protections under part 9.4AAA of the Corporations Act did not extend to anonymous disclosures?

Mr Morris : Yes.

CHAIR: Did that give you and your two other colleagues cause for thought?

Mr Morris : Not really, because if ASIC had acted on the information we had given them, the whole matter would have been resolved and we would never have needed to have broken cover. But also, when we finally went into ASIC to demand that they take some action in this matter, on 24 February 2010, we abandoned anonymity at that point. I was advised that I had whistleblower protection as from that date.

CHAIR: I want to come to that. At that meeting with the ASIC officer on 24 February 2010, you say that you and your colleagues were told that you had whistleblower protection but it would not be worth much. Is that correct?

Mr Morris : Yes.

CHAIR: Why were you told you had whistleblower protection but, having been made the offer, it was not worth much?

Mr Morris : I think he was just being frank.

Senator WILLIAMS: Who was 'he'?

Mr Morris : Adrian Borchok.

CHAIR: Be careful.

Senator WILLIAMS: Sorry, I just need to know who he was talking to.

Mr Morris : There were three ASIC officers in the meeting, and he was just being frank, I think, that—

CHAIR: The system leaks.

Mr Morris : No, that the whistleblower protection basically, as he said, is not worth much. But I think we had made a decision. We recognised at the outset that we would be giving up our jobs by what we were doing.

CHAIR: You appreciated the potential consequences of disclosing your identities to the ASIC officers.

Mr Morris : Absolutely.

CHAIR: And you say you did so with an open mind.

Mr Morris : Yes.

CHAIR: When the CBA's Group Security, as you put it, blew your cover and revealed to CFP line managers that you were the whistleblower, did you report that event to ASIC?

Mr Morris : No.

CHAIR: Why is that?

Mr Morris : I got to the point where I did not bother to report a lot of things to ASIC anymore because I had basically lost confidence in them.

CHAIR: Right.

Mr Morris : I may have even mentioned that to ASIC. I do not remember mentioning it. I did actually talk on the phone sometimes as well as sending emails through to ASIC.

CHAIR: Go back to when the CBA Group Security blew your cover. How did the people within the bank that you worked with react to that disclosure?

Mr Morris : I think actually, in reality, the moment the InvestorDaily articles appeared, as I have set out in my submission, there was a meeting of senior management, including the head of Colonial First State, and we were identified as the most likely suspects. So I think the line management had always known who was probably behind it.

CHAIR: Did you suffer any immediate adverse consequences?

Mr Morris : There was certainly—what is the word? There was a certain level of suppressed hostility, I guess you could say.

CHAIR: An uncomfortable workplace?

Mr Morris : It was extremely so, but also because I was seeking to continue to gather information.

CHAIR: So you continued to whistle-blow, to disclose information?

Mr Morris : To ASIC, yes.

CHAIR: Was ASIC alerted to the fact that your identity had been disclosed internally within the bank?

Mr Morris : Yes. I think even at that first meeting with ASIC we told them that the bank knew who we were. So there was never any doubt about that.

CHAIR: You originally went in anonymously. After a period of time you came to the view that there was probably good guesswork going on in the bank that you were one of the whistleblowers.

Mr Morris : Yes.

CHAIR: You then chose to reveal your identity to ASIC. You also advised ASIC that you thought the bank was aware of your identity but you continued to disclose information. Is that the net of this process—evidence?

Mr Morris : Sorry?

CHAIR: In terms of the whistleblowing protections that are in the act, do you identify any ways that they can be improved or strengthened? You almost seem to be saying that once you had made the decision to cross the line the fact that your identity would be known to all, near and far, was not a matter of concern.

Mr Morris : I do not think it made a lot of difference, because I do not think at the outset we seriously expected ASIC to protect us. If you look at their whistleblower protections, there are a lot of weasel words in there and it is very, very limited. I suspect, if a company wants to get rid of a whistleblower, they never do it because you are whistleblower.

CHAIR: No.

Mr Morris : They will be able to come up with a reason and ASIC will say, 'It's not clear; therefore the whistleblower protection does not apply.' If you read those sections, they are basically not worth the paper they are written on, so we did not place much reliance on them.

CHAIR: So you made a courageous decision, accepting the reality of the likely consequences. However, not everyone else is as brave as you or as publicly minded. What particular recommendations would you ask us to consider in terms of strengthening the whistleblower protections in the act so that persons who may not be as brave as you might take advantage of them?

Mr Morris : Interestingly, ASIC say they have looked at those policies, though possibly in the circumstances they did not feel their inquiry would be welcomed, but they did not come back to me and ask me what I would have suggested. I think there is an element of unreality in those provisions as well, in that they seem to work on the assumption that people would want their employment protected, but in fact it becomes such an unpleasant environment the last thing that you would want to do or would be able to do is—

CHAIR: To stay there.

Mr Morris : continue on in that workplace.

I think what would clean up this industry overnight would be some form of financial compensation for whistleblowers that would allow them to move on with their lives and would encourage people to come forward, as we did. In this case, the compensation paid to victims so far is in the order of $50 million. If the institution at fault, as part of whistleblowing provisions, then had to pay the whistleblower, say, a certain percentage based on the actual compensation paid to victims—so that is established malfeasance, I suspect you would have a lot more whistleblowers coming forward. I would suspect you would find the institutions would have to improve their behaviour overnight if literally any employee could bring them down when they were doing the wrong thing with some sort of incentive—not necessarily a huge incentive, like in the United States, but some reasonable basis to allow people to move on with their lives.

CHAIR: So you suggest an incentive based scheme to be incorporated to reward whistleblowers who disclose malfeasance?

Mr Morris : Either an incentive based scheme or a compensation scheme. The last time I saw the person at ASIC he basically said to me in as many words, 'Thanks for sacrificing yourself.' It is not a very attractive prospect for anybody else to want to emulate what we did.

CHAIR: Are you are career financial planner?

Mr Morris : I have been a financial planner in different guises. I have been in financial services since 1985. I started out as a tax consultant. I became a financial planner for the first time in 1990, but in a very different environment—a boutique high-level advisory firm where we rebated all commissions and charged hourly fees for our expertise. I also worked in an investment bank in the 1990s and I was involved in funds management in a funds management institution. So I have had a very broad exposure to the industry in different ways.

CHAIR: Are you still employed in the industry?

Mr Morris : No, I am not employed at the moment.

CHAIR: What do you put that down to?

Mr Morris : I guess I am recovering from the whole thing. As you would probably be able to infer, I put a lot of time into the submissions I have given to this inquiry.

CHAIR: Yes.

Mr Morris : It is almost something that I need to put to bed before I can move on. Needless to say, the phone has not been ringing hot with job offers for an honest man in the industry.

CHAIR: Are you close to putting it to bed?

Mr Morris : Yes, I am. I am at the stage where I feel I have done everything I can do to highlight what occurred here and the problems and possibly highlight some ways forward.

CHAIR: It is now time for the powers that be to act.

Mr Morris : I guess I am passing the torch to you, Senator.

CHAIR: You are. Can you remind the committee of what Project Hartnett involved and your contact with people working on it?

Mr Morris : It was an operation that was clouded in a lot of secrecy. I was interested to hear the testimony earlier that 50 people were working on it. That accords with what I gathered at the time—that there were 40 people or thereabouts. It was a huge operation. It seems very hard to reconcile with the story that there were only 79 real files and that 182 were subsequently reconstructed. Those people were working on that project for years.

CHAIR: And 52 is an enormous number of people.

Mr Morris : It is—and to reconstruct the files. It would be simple matter to print out a statement of advice. If it was on the system, all you have to do is press the print button and add that to the file. It simply does not compute that those people were engaged on an innocent file reconstruction and compensation program.

CHAIR: It was more than that. It was more than innocent file reconstruction.

Mr Morris : I believe it was, yes.

CHAIR: That was part of the remediation project, wasn't it—file reconstruction?

Mr Morris : That is the bank's position. Again, it is interesting that ASIC never came back to me. When we had finally prompted them after our visit, they served a notice and gave CBA another two weeks to hand them over. They never came back and said, 'They only gave us 79 files. Does that number sound right to you?' I would have fallen off my chair laughing. There were never only 79 files; there were 300 or 400 files.

CHAIR: That had been my understanding. Mr Morris, have you had a chance to consider ASIC's own recommendations on options for reform to the whistleblower framework?

Mr Morris : Yes. I do not think they go far enough.

CHAIR: You think they are still deficient?

Mr Morris : They are mainly talking about a whistleblower liaison officer, which is kind of whistling in the wind, as far as I am concerned. Certainly liaison was a key failure here. It was very much a one-way flow of information. It was very frustrating. Our concern—and it was sort of borne out by events—was that when we were not hearing anything there was not anything happening.

Senator FAWCETT: Mr Morris, you probably heard some of my questions to the CBA. What I am interested in is the efficacy of ASIC's engagement in their auditing and oversight. I have heard the management view about what ASIC did and the effectiveness of both the initial program and their subsequent follow-up to oversee the enforceable undertaking. From your perspective, having worked at that line level, could you talk about the effectiveness of ASIC's oversight of CBA and its financial planning area?

Mr Morris : Yes. In terms of a comment on what was said earlier, when the major industry players are saying things like that it reminds me of the joke in Yes, Minister about a minister whose department was saying he was a pleasure to work with, and that was the worst thing that anybody could say about a minister. When a major institution is saying that ASIC is a pleasure to work with, I put that in the same category—that of course they are very happy with ASIC. In this case, ASIC did not have a clue what was going on in Commonwealth Financial Planning. So, from the point of view of industry players, that is an ideal situation—with a regulator that is basically Inspector Clouseau.

In terms of their actual performance, when you look at their submission and you benchmark what they have said, on their own statement they say that they went into CFP in February 2007 and they were there until February 2008 looking at it. So they took a year to look at it, which is an awful long time to just be there gathering intelligence. They looked at 500 pieces of advice from 50 planners. Well, that should not take 12 months. Then they took another couple of months in April 2008. That is when they decided to have the much vaunted CICP program. I was in that business for years and I could not perceive any impact from that program. Leaving that side, if they commenced that program in April 2008, as they say, and yet 3½ years later, in October 2011, ASIC find it is necessary to go to an enforceable undertaking, what were they doing for those 3½ years of that CICP process?

Senator FAWCETT: Can we come back to that point. If you saw no tangible change around you, were you aware individually or were people in direct management or your peer planners aware of any intrusive questioning by ASIC, by an independent body set up by the bank, by an auditor or, in the case of the enforceable undertaking, an independent expert to actually probe down and ask questions of what had changed at the working level as opposed to the top level management documents, if you like, that describe what should be happening?

Mr Morris : No. There was none of that. I think the auditing got a little bit tighter over 2010 and 2011. Before that it had been a pretty farcical situation where people were told what files would be audited and given a couple of weeks to fix them before the auditor appeared. After a couple of years they did cut out that practice. That is about the only thing that I could put my finger on. There was no concept of any big brother looking over anybody's shoulder. In fact, when I started at the induction program one of the general managers there actually made a comment that they had just had ASIC go through and give them a clean bill of health. That was March 2008. That is what the company apparently thought of the initial review. It was virtually imperceptible that anything was going on.

I noticed earlier the response that the board were not aware of the problems at CFP until much later. Either the Commonwealth or the ASIC submission actually says that the reports from that CICP process were going to the board of CBA. So I do not understand that anomaly in the evidence.

Senator FAWCETT: Was there any visibility given internal to the bank to employees who worked in the relevant departments of what reports were going either to the board or back to ASIC, so that employees internally had an opportunity to comment on the reality, from their perspective, of whether that report was accurate, or confidentially to a particular officer or to ASIC? Was there any opportunity given for that broader internal exposure as opposed to public exposure?

Mr Morris : No, there was none of that at CICP. One of the other whistleblowers was one of the planners who was reviewed. I think I put in my submission that he was asked to change a few things in a couple of financial plans and a couple of months later he went to give it to the compliance manager who said, 'Don't worry about it. ASIC's lost interest and gone away.' Nobody took it seriously, I suspect. I would be interested to see, and I would suggest it might be interesting for the committee to see, the actual reports that came out of that CICP process. I would think there could not be too much in them because there was no apparent activity at the time.

Senator FAWCETT: Evidence was provided to us in both ASIC's submission and from the bank that ASIC were increasingly dissatisfied with the progress during that period leading up to 2010. When they then decided to take action it appears to coincide very closely with the public scrutiny that came about because of the media article. Do you have an opposition on what caused ASIC to suddenly step up the level of their engagement?

Mr Morris : Two things happened which provoked activity. The first thing was the InvestorDaily articles and there were three of them. The first on 18 May 2009 simply referred to the fact that ASIC was slow to act on a complaint about a CFP planner. The second on 25 May 2009 named Don Nguyen. As Ms Perkovic has confirmed, and I had this in my submission, Don disappeared from the office two days later. So on 27 May he was suspended again. It was like a bomb went off at CFP—those articles. Don was known as 'Dodgy Don'. He had been known as that for years. So there was a reaction. Once that was in the public, it could not be hushed up at CBA the way it had been in 2008 and, as I put in my submission, it is nonsense to suggest there was anything else responsible for Don Nguyen's forced resignation. There were the InvestorDaily articles. I marched in to CBA group security after those and gave them a pretty clear picture of what was going on. On top of that, I sent an email to senior management at CBA on 4 June 2009 and I sent him a copy of the file note where Don was reinstated after his first suspension.

On 6 July they accepted Don's resignation but that had been extracted from him after a meeting the previous week. Then three weeks later they put in a breach report. It was the InvestorDaily articles that forced their hand and the other things that happened. It had nothing to do with the review after client complaints. If you look in the Administrative Appeal Tribunal hearing decision on Nguyen, you will see there a slightly different story from the ASIC initial submission. They refer to 25 client complaints in relation to Nguyen going back to 2006 and they refer to an audit of 80 files going back to 2006. Basically, the InvestorDaily article simply made public what CFP had known for a long time. Also in the answers to the questions on notice in parliament ASIC say that they believe CBA were aware of the problems with Nguyen from at least August 2008.

Senator FAWCETT: Mr Morris, sorry to cut you off. The chair is wanting to move on. I have one more line I would like to pursue.

Mr Morris : If I could quickly address the second event which was when we went into ASIC on 24 February 2010, it was two weeks after that ASIC served the notice to seize the files and that is when I think that was the second event that prompted action on the part of ASIC and this time CBA.

Senator FAWCETT: We have had a little bit of conflicting evidence in terms of whether there was a widespread culture and you were an abnormality in that culture or whether in fact it was just a small handful of rogue advisers and the majority of the workforce were decent, honest, hardworking people. If a system had been in place whereby the workforce was encouraged to provide more feedback either directly to management or to someone like ASIC, do you think the workforce by and large would take up that opportunity or do you think that the culture and group dynamics are such in a large organisation like that that people are reluctant to speak up until it comes to the pressure point of a whistleblower situation?

Mr Morris : I think the group dynamics are always such that the majority of people will do what an organisation compels them to do. At CFP it was an incredibly loose, non-compliant culture. The emphasis was on getting sales, and so most of the planners reacted to what they were being asked to do. I think a lot of them did not necessarily stop to think about whether or not they were doing the right thing; they were being told they had to get these sales to earn a bonus. But it was a carrot-and-stick thing: it also was to avoid getting the sack. So people were responding to the environment they were in, and some people will respond worse than others. Had it been a tighter culture there, I am quite sure there would have been—Nguyen could not have operated the way he had if there had been a tighter culture there. I accept that the changes that have been made there as a result of all this mean that he could not operate the way he did then now. Quite clearly that is the case. Even people who might have been a bit rogue or a bit dodgy in the past now could not behave that way. They would have to evolve and operate in a more ethical manner to survive. I think there is no doubt that that is true.

Senator WILLIAMS: Thank you for your time. I respect you for the courage of basically giving your job up to bring out the honest, the facts and the truth, and I salute you for that. How many clients did you have when you were with CFP?

Mr Morris : At one point I had 3,000 clients; I was given 3,000 clients.

Senator WILLIAMS: You had to work after 3,000 clients?

Mr Morris : There was no serious expectation that I would look after them. This is one of the problems with the industry that I was alluding to earlier. In many ways clients are chattels; you are traded, and client books are bought and sold. The key thing there is the recurring unearned income from advice fees. Therefore, the emphasis was not on servicing those clients or providing any service in return for the fees they were paying; it was just collecting the fees. So at one point when I first became a senior planner, I had various client books dumped on me, and they added up to 3,000 clients.

CHAIR: But the income stream is the important thing.

Mr Morris : It is extremely important because they basically go on forever.

Senator WHISH-WILSON: Could I get a point of clarity there? Do you feel that that type of statement extends to smaller and independent financial planning groups around the country or just to bigger organisations?

Mr Morris : There is a spectrum as there always is. There are a small number of very good financial planning operations who deliberately restrict the number of clients per planner because they have a service standard that they want to provide in return for their fees. So at the most ethical end of the industry it is not a problem. At the retail end of the industry, which is probably bank financial planning in large part, the opposite is true. The subtlety at CFP, for example, was that the remuneration was structured to up-front revenue and new clients. That was the gate opener. You would only get remunerated in terms of the ongoing revenue if you had met your up-front revenue target first, so what most of the planners did was forget about the ongoing clients because they did not contribute to meeting that gate-opening target.

Senator WHISH-WILSON: Thank you.

Senator WILLIAMS: Was there a case where financial planners or management had to meet targets, went looking through files to see who had more than $50,000 in the bank and contacted them to set up these investments?

Mr Morris : Yes, that happened periodically. What would happen is the bank has a huge database called Com C. Everybody's details are recorded in that database, and at various times people are detailed to trawl through that database to identify prospects of financial planners.

There has been a case reported recently which I have referred to in my submission, the case of Stevens. That is a case where he was called up, I believe, and he had been identified. It was a common occurrence that prospects were identified. They might be identified, for example, from the fact that they had a large term deposit balance. The instance that you are referring to, I think, relates to the mortgage fund, where there was a push to put people into that mortgage fund. Planners were under pressure to find people with term deposit balances who could be rolled over into the mortgage fund. This was in the early stages of the GFC, when markets were choppy. It was very difficult to get people to go into share investments and the like, and so, to get the funds inflow up and earn all the tiers of managers their bonuses, they hit upon the bright idea of switching term deposit customers into the Colonial mortgage fund. There are fundamental problems with all mortgage funds—structurally I think it is a very bad product—but the problem in particular here was that, when the government bank guarantee came in in the wake of the GFC, nobody in their right mind would be in a product like that that did not have a bank guarantee when you could be in a bank deposit and have absolute security. So that prompted a surge of money coming out of those products, and ultimately that led to the liquidity problem, which meant that that fund was frozen. But the planners were all encouraged to put people out of term deposits into that product, for which they could charge a one per cent up-front fee.

In many cases clients rang me afterwards and complained about the planners who put them into it. They were told, 'It's just like a term deposit, only you get more return.' A lot of that advice was just outrageously inappropriate and irresponsible. The year of birth of one distressed client that I spoke to was 1917. That person had been put into that product. He could not get his money out. He could not get Centrelink; I think that later they put arrangements in place for these people. He was an elderly man; he told me he was on the Burma railway. All of his money had been put into this mortgage fund—it was very irresponsible to have put it all there—just so a planner could earn some revenue and so some managers could get a bonus. Then they froze the fund and these people were left high and dry.

As was said earlier, not only did the planners continue to get their trail commission paid from these funds; the Commonwealth Bank continued to charge management fees on these funds during this whole period, which I felt was absolutely reprehensible. The only situation where there might have been some benefit in a vertically integrated model was that the bank could have bought those mortgages from the fund and put everybody in funds. I would have thought that, to protect their reputation, they might have given some thought to doing that. What actually happened in this case when the fund was frozen—and this is the problem with the vertically integrated model—is that the planners at Commonwealth Financial Planning were told to hose down the clients and discourage them from making complaints. That is fundamentally wrong, and it is not very different today. Commonwealth Financial Planning may not have a direct reporting line up to Colonial funds management anymore, but they are still part of the same group. The order was given then to act in the interests of the company, not in the interests of the clients. I think that is a huge problem with vertical integration when those conflicts arise.

Senator WILLIAMS: It is a huge problem. The UK system, I believe, just does away with vertical integration of financial products.

Mr Morris : It is a matter of whether you want financial planning to be a profession or a sales channel. Accountants and lawyers charge for their professional time, and ultimately, if financial planners are going to be a profession, they should be charging for their expertise like other professionals.

Senator WILLIAMS: Let me take you to ASIC, then. You are clearly frustrated with ASIC. In October 2008 the ferrets sent the four-page fax.

Mr Morris : Yes.

Senator WILLIAMS: You were expecting a response pretty soon. You said in that original fax: 'Look, this is a matter of urgency. Your files have been sanitised.'

Mr Morris : Yes.

Senator WILLIAMS: Do you believe that the files were being sanitised?

Mr Morris : We were watching them being sanitised. I was watching. Contrary to what was said earlier, they knew Nguyen had done all the things he was accused of; he was caught red-handed. They announced he had been suspended for fraud and he would not be coming back. The trouble is that, with the GFC going on, they needed a planner to hose down Nguyen's clients who were complaining. They offered his client book to another planner. They gave him his phone. After a week of this, of all the client complaints ringing up, and being told by the complaints people that they were not going to do anything for them, he threw the phone back and he said he would not have anything to do with it.

So they brought Nguyen back and reinstated him and promoted him so that he could fob off the clients and discourage them from making complaints about what had happened. At the same time, they had done a file review and they had found photocopied risk profiles in his fact files. The risk profile is probably the most critical thing a planner does. Nguyen just gave everybody more or less the same risk profile. He got to the point where he just photocopied them. They found this in 2008, and he should have been dismissed at that point. But they brought him back for two reasons. One was to hose down the client complaints. The other was to sanitise his files. They gave him a second assistant to help sanitise the files. I saw him there, day after day, with liquid paper going through changing things in the fact files.

This is my frustration, whether it be with reports to ASIC years ago about a particular liquidator—and after four years they finally acted and the liquidator is consequently in jail. My frustration with all this is, when I asked Deputy Commissioner Kell at Senate estimates last year, 'Why did it take you so long to act from your information from your whistleblowers?' his response was, 'They got a great result.' I said, 'I didn't ask you what sort of a result you got. Why did it take so long?' This is the point I make. What would be your opinion if the government were to bring in a system where ASIC could have a stop order placed on a financial planner? For example, if Mr Cohen from the Commonwealth Bank gave a file to ASIC about one of the planners and it was pretty clear that there was wrongdoing going on there, ASIC could simply ring up the planner and say, 'From this minute, you're suspended.' Do you see that as a problem? Would it be too harsh? Would it take out good planners?

Mr Morris : I am sure there is a way of—

Senator WILLIAMS: My problem is about the delay. It took 3½ years to get Mr Gillespie out of the industry. My problem is people going on in the industry and doing the wrong thing. What can be done to give ASIC the powers to act quickly?

Mr Morris : There clearly must be a way that they can have some power to impose some sort of interim suspension—

Senator WILLIAMS: That can be appealed to the AAT, of course.

Mr Morris : after a certain amount of due diligence. The banning orders are appealable to the AAT as it is, but there have been instances like Ricky Gillespie, where he worked at two other planning firms before he was finally banned. There has been another case recently of former CFP planner Pavan Vyas, who is not counted in the statistics of the banned planners, who was caught again, I think two jobs after he left CFP. These people can go on for years. It still took years for even Nguyen to be banned. It is taking too long to go through this process.

Senator WILLIAMS: That is my problem. 'We're not a court. We're regulators.' I have put this to ASIC before and I will put it to them again today in our discussions, no doubt: if that power were in place and they could do the research, you would expect the file coming from the institution. I will call it quits there.

Senator WHISH-WILSON: Mr Morris, you made some fairly strong statements in your introduction about your concerns over the future of the industry. We have heard from Commonwealth Bank management in the last couple of hours that they pretty much accept they had to change the culture at Commonwealth Financial Planning and change systems et cetera. Do you accept that they have done enough to allay your concerns?

Mr Morris : As I said before, what they have done is what they had to do and it has probably taken the firm to where it should have been six years ago. To have taken this long to put in an electronic system to store documents seems incredible to me, particularly when a sister business of Commonwealth Financial Planning had that system in place years ago. What they have done, I think, is basically enough to address the Don Nguyen situation, but what remains is, I think, symptomatic of broader problems in the industry, in that, although they have changed their remuneration model, when you look at the detail of their submission, they do not say that the bonus scheme is now based purely on quality of advice. There is a reduced emphasis on sales volumes. I do not know exactly what that means. I have a difficulty with any professionals with a fiduciary duty where you are also making them salesmen. I think that is an impossible conflict of interest to reconcile. As well, I have broader concerns about vertical integration in the industry based on what I have seen at CFP and what happened there.

Senator WHISH-WILSON: In relation to that, obviously ASIC, whom we are having this inquiry into, will uphold regulations. You did also mention FoFA reforms in your introduction. Do you then accept that the changes to general advice and the commissions being disclosed on that type of advice are suitable in preventing these problems occurring in the future?

Mr Morris : I actually think the whole FoFA package is well intentioned and a step in the right direction but it does not go nearly far enough to address the real problems in this industry. For example, I think the former Chief Justice of the High Court, Sir Anthony Mason, was of the opinion that the best interests duty was always there. In fact, the judges in the court case which I referred to earlier imputed that duty. So FoFA is not really adding anything there, other than codifying a duty that was probably always in place. It is not a bad thing to codify these implied duties. In terms of FOFA, for example—

Senator WHISH-WILSON: Could you address your views on reflective remuneration specifically?

Mr Morris : On remuneration?

Senator WHISH-WILSON: On conflicted remuneration, yes.

Mr Morris : As to the problem with CFP, it is not quite what Mr Kell of ASIC is suggesting. It is not actually conflicted remuneration that is the bulk of the problem at CFP. It is more payment by means of bonus based on gross product sales—not specific commissions for certain products. So FoFA will not actually change that. CFP's remuneration model has changed, but it has a reduced emphasis on those product sales.

Senator WHISH-WILSON: Could you clarify the bonus culture. It presumably went further up the chain, above the advisers to management? Were they also getting bonuses based on what you were writing on the floor?

Mr Morris : That is exactly right. That is part of the problem. It is the cascading effect of the tiers of bonuses—the managers who are getting bonuses based on sales further down the line. FoFA does not address the managers at all. The problem at CFP was that, when you have a planner like Nguyen, who was the second biggest writer in the organisation, as I think he was on the league ladder, he was the last guy the managers would have wanted to pull into line or put out of business, because they were getting bonuses on the back of the business that he was writing. The stories about the widows and the orphans that he is stitching up along the way tends to fall on deaf areas when managers are getting directly remunerated for that conduct. FoFA is not changing that.

The point I made earlier about the 3,000 clients and the lack of desire to service those clients in return for the recurring revenue goes to the point about opt-in. I think the virtue of opt-in is that it would at least force planners to contact their clients every couple of years, which I do not think is an excessive ask when you are taking remuneration from them—charging fees.

Senator WHISH-WILSON: Thank you very much.

CHAIR: I have a couple of quick questions. With this business on enforceable undertakings when they are negotiated and implemented, do you have any suggestions on how the committee and perhaps those who have been involved as clients can be satisfied that the undertakings given in the EUs are being carried out in the organisation?

Mr Morris : I would be fairly confident that they are. The question is whether the EU has necessarily gone far enough or has done the things that need to be done. It is the question that would concern me. I think the enforceable undertaking is a punishment of the institution, because you are employing a larger accounting firm and basically they are going to charge a fortune for that enforceable undertaking; it is a punishment in itself. Part of my problem with ASIC is that I do not think they have the industry experience. They do not understand this industry, and I think the same is true of the big accounting firms. In their submission, ASIC say that the independent expert had relevant financial planning qualifications. That is not the same as being a financial planner. Working as a compliance person is not necessarily the same as being a financial planner. If you actually look at the minimum requirement to be a financial planner, PS146, it is a ludicrously low standard.

CHAIR: If you are looking to be satisfied that the EU is being complied with and you have expressed doubts as to the utility of an accountancy firm or whatever, what sort of firm generically would you think appropriate to that job?

Mr Morris : An accounting firm could be the overall manager of the project. I think they approach it probably more as accountants. It is a matter of just making sure that there is the blend of skills there. In a sense, the problem is not even necessarily the EU. The EU at CFP has probably brought CFP up to current minimum industry standards. The problem is just the subtleties that allow a place like CFP to operate that are not picked up in the EU. For example, at Commonwealth Financial Planning one of the big problems was that because it is basically a bucket shop and a sales channel, the overwhelming proportion of the advice that I saw and most of the advice that Nguyen gave is what is called defined scope advice. By narrowing the scope down to advice to invest in a certain product, you basically wipe out all your duties to the client to take into account other considerations. All you are going to do is invite them to invest in this product and the EU does not address that problem.

CHAIR: Are you saying to us that in our recommendations much more attention needs to be made in the EU to the composition of the review team?

Mr Morris : Yes. But that, again, stems from ASIC because I do not think they have the people there, based on my experience, who really know how to instruct the expert.

CHAIR: They may not have, that is correct, but that advice is available.

Mr Morris : It is.

CHAIR: Finally, do you have a comment on this business of PwC being the auditors to the Commonwealth Bank and then being the auditors involved in the review?

Mr Morris : I would have thought it was a conflict of interest. I am just a simple financial planner. But I do have very strong views on conflict of interest and that is why I think there are a lot of conflicts still in financial planning. I wonder if I could say a word about the compensation scheme at CFP. It is in my submissions. I observed that very closely and I think there was a lot of bad faith that underlined that. The vast majority of people got a letter in the mail with an offer of money that said: 'You may have received inappropriate advice. Here is $100,000'—or $50,000 or whatever number was—'and here is a panel of six law firms or you can see somebody else if you want to. Here is five grand to get that ticked off.' For most people who get an offer like that in the mail it is just going to be manna from heaven. I observed close-up what they were doing to massage that process to minimise the compensation cost. Aside from that, I observed what happened earlier before the ASIC compensation scheme was put in place.

CHAIR: I will cut to the chase here because I understand the point you are making. When we come to making our recommendations, is the evidence you have heard sufficient that we should recommend that there be a full, properly independent review of all those client files?

Mr Morris : Absolutely and also of more clients than just the Don Nguyen ones. It is a business where even ASIC said there were fundamental widespread problems with the advice. Of the 7,000 pieces of advice that were reviewed, 16 per cent of them resulted in compensation being paid. That is a massive proportion. It is a business that was clearly non-compliant. To say there were only seven rogue planners and only 7,000 pieces of advice that needed to be considered in that environment I think is ludicrous. I suspect a broader review is going to uncover there are a lot more, like tens of thousands of clients, who are probably entitled to compensation. It has never been looked at.

CHAIR: Right, you have answered the question. Mr Morris, thank you very much for your various submissions. Thank you for your assistance today and I hope you are able now to move on, and I hope we are able to do the job.

Proceedings suspended from 13:04 to 13:46