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Economics References Committee
Performance of the Australian Securities and Investments Commission

BERRILL, Mr John, Lawyer and Principal, Maurice Blackburn Lawyers


CHAIR: I welcome our next witness, Mr Berrill, from Maurice Blackburn Lawyers in Melbourne. Thank you for your attendance today. Are you appearing in a private capacity or on behalf of your firm?

Mr Berrill : On behalf of my firm.

CHAIR: Do you have an opening statement to make, Mr Berrill?

Mr Berrill : In the interests of time, Senator, no, I do not. I did put in a submission. It is a relatively short and hopefully concise submission, so I will rely on that. The only thing I would say is that almost all of our clients—and there were 30 of them in total—were retirees aged 60 and beyond, and almost all of them originally had conservative investments. They were convinced by Mr Nguyen to transfer their moneys into much riskier and high-risk investments and they lost substantial moneys. The most stunning example we had was a couple in their mid-80s who had a $5 million portfolio and lost $2½ million of that. They were conservative investors and they were convinced by Mr Nguyen through a process that was completely flawed. It involved lots of cutting and pasting of documents, almost all of which were not completed by them or sighted by them. The cutting and pasting was done in signatures—

CHAIR: You just say it was sheer fraud?

Mr Berrill : Close. Yes, it was.

CHAIR: I just want to get a few things on the record. Can you just outline your background in this area so we have it for the record.

Mr Berrill : I am a lawyer. I have been practising for 30 years. My principal area is superannuation, insurance and financial advice disputes. As the submission says, we were approached by a number of people in late 2009, and that is how I became involved in this case.

CHAIR: You made the point in your submission and very early on today that, while Maurice Blackburn's own clients were satisfied with the process and outcome of the compensation arrangements, your firm expresses:

… some concerns about the compensation arrangements that were put in place and in particular, whether unrepresented persons' losses would have been adequately assessed.

Mr Berrill : Correct.

CHAIR: Are you, on behalf of the firm, making some pertinent observations about the process, notwithstanding your clients' expressed satisfaction?

Mr Berrill : The process our clients went through was basically the litigation process—the court process. The compensation process that was put in place was different to what our clients went through.

CHAIR: Okay. So you do not have any complaints to us about the litigation process.

Mr Berrill : About the outcome of the litigation process. No, I do not.

CHAIR: But you do make some observations about the non-litigation compensation process.

Mr Berrill : Correct.

CHAIR: Can you just cut to the heart here and tell us what your problems are.

Mr Berrill : It was basically self-assessment. That was at the heart of the problem. It was self-assessment with a lack of oversight, I think. In principle, the process was okay and the oversight was in place, but I think that in reality it was not. We saw a number of people who had been through that compensation process and had received an outcome. They came to us after that and it looked to us as if they had been short-sold.

CHAIR: When you say 'self-assessment', what do you mean by that?

Mr Berrill : CFPL had to go through the portfolio of Mr Nguyen and others and do a reassessment of what their portfolio should have been at the time they were effectively churned into products that Mr Nguyen was selling them. You go through a financial needs analysis to work out people's risk tolerance and knowledge of markets. That is what is done as part of a financial plan. From that, you provide a written statement of advice and you go from there. What they did was that they had to retrospectively reassess everybody's financial plan and, in particular, their risk tolerance, knowledge of markets et cetera. It was done on a retrospective basis three or four years after—

CHAIR: But anyone who would do that necessarily would do it on a retrospective basis.

Mr Berrill : Correct.

CHAIR: So what is your complaint? It is not the fact that it was done retrospectively.

Mr Berrill : Correct. The complaint is not that it was done retrospectively; my concern is that it was done by CFPL. It was put back to them to do the reassessment. They did the reassessment based on documents they had, some of which were tainted and flawed. They did that reassessment and came up with the risk tolerance of a person—whether they were cash, growth, assertive et cetera—and from that you then do the calculations as to what they would have ended up with had they been put in products such as that versus what they did end up with. That is how the compensation is worked out.

CHAIR: To your knowledge, who determined this own-firm self-assessment retrospective practice.

Mr Berrill : CFPL did.

CHAIR: Was that signed off on at the time by ASIC?

Mr Berrill : The individual assessments or the process?

CHAIR: The process.

Mr Berrill : The process was signed off by ASIC as part of the enforceable undertaking.

CHAIR: What is your understanding of why ASIC would have signed off on that apparently not satisfactorily independent review process?

Mr Berrill : I suppose CFPL are the people with the documents and the information, so their thinking must have been, 'Well, let's let them go back and do it again and we'll put in an oversight arrangement so that there's some rigour behind that.'

CHAIR: When did you become aware that some or a lot of the files that Mr Nguyen had been handling either were incomplete or had been doctored?

Mr Berrill : Probably in January or February 2010.

CHAIR: Was that after repeated instructions from your clients through the litigation process?

Mr Berrill : Correct.

CHAIR: So you were not aware of it at the beginning.

Mr Berrill : The first writ we issued was in March 2010. The initial contact was with a couple of clients in December 2009, and in that period we got a whole bunch of documents from the clients. Mind you, we then had to go through the court process. We went through discovery and got a whole bunch of documents, although it was a bit of a fight to get some of the documents; there were some issues around that. The documents we got we then presented back to the clients and said, 'This is an FNA. Did you complete it' 'No, I did not.' 'Is this your signature?' et cetera.

CHAIR: Based on your 30 years experience in this field as a lawyer, in relation to that internal retrospective review process initiated and carried out by CFPL, would they necessarily have been aware that the files were severely tainted?

Mr Berrill : Yes, they would have been, because that was after they entered into the enforceable undertaking. They entered into it on the basis that Mr Nguyen had conducted himself in such a way—and others had conducted themselves in such a way—

CHAIR: So, do you say to us that their review process itself, because they had full knowledge that the files were severely tainted, was fundamentally flawed?

Mr Berrill : If they relied solely on the documents, yes, but they had the ability to go back to the clients and conduct a new FNA on new information provided by clients at the time or information they had subsequently gained. I do not have much insight into the extent to which they did that, other than to say that we had seen a number of people who had been through the process and to us appeared to have been classified—because the key was in the retrospective classification.

CHAIR: So the key question for us to ask the Commonwealth Bank is: when they did their review, did they have full exposure during the full review period to all documents, tainted or otherwise, not just a few?

Mr Berrill : Correct, and also the extent to which they went back to the clients and got the clients' input into what their assessments should have been, what their knowledge of markets was et cetera.

CHAIR: So tainted files and ongoing consultation with aggrieved clients?

Mr Berrill : Correct.

CHAIR: Are those the two issues?

Mr Berrill : Yes—and the other thing was that there was external oversight, but in my view the external oversight really has very little impact on the rigor of the process unless the external oversight includes a whole raft of people conducting the same reviews on an individual basis.

CHAIR: The external oversight can only be adequate if it has full exposure to all material on the files, tainted or otherwise.

Mr Berrill : And information from the clients, correct.

CHAIR: The previous witnesses made some complaints about the independent review process, where $5,000 was offered by CFP to former clients of Mr Nguyen to help pay for accountants, lawyers and independent financial advisers in order to assess its compensation officer. Did your clients involved in litigation express any comments to you as to the utility of that offer?

Mr Berrill : No.

CHAIR: It was not raised in discussions?

Mr Berrill : No.

CHAIR: Do you have any observations to make on it?

Mr Berrill : To the extent to which people did access independent information and advice, that is fine. To the extent to which $5,000 would have been enough, it depends who you go to, I suppose, and what their expertise is. But, again, from a principled point of view, you would say: yes, there is the potential for that to provide independent rigour, independent oversight and independent review, but was it taken up and was that the way it was played out? Not from the experience we had or the information we had seen from other clients.

CHAIR: Let me get a handle on this $5,000; it appears to me to be a not unreasonable amount. When you had concluded your work on behalf your clients—without naming anyone at all—can you give us an indication of the fees that your firm charged those clients?

Mr Berrill : As part of the settlements, our costs were paid by CFPL.

CHAIR: I presumed that.

Mr Berrill : Yes, they were. The settlement process—

CHAIR: You said you had 30 clients?

Mr Berrill : Yes.

CHAIR: If I said 30 times $5,000, that is $150,000.

Mr Berrill : No, it is a lot more than that.

CHAIR: North of half a million dollars?

Mr Berrill : Yes.

CHAIR: North of $1 million?

Mr Berrill : Probably somewhere between $1 million and $1.2 million in total.

CHAIR: So we are talking the best part of, on average, $30,000 to $35,000—

Mr Berrill : That would be close.

CHAIR: charged to clients, paid for by CFPL?

Mr Berrill : Correct.

CHAIR: But the other people got an offer of $5,000?

Mr Berrill : Yes. They did not go through a court process. As part of a court process, there are adverse costs involved to the loser. Negotiations are always based on the risks of winning and losing, and you factor in the cost of that time et cetera.

CHAIR: I understand all of that, but the point I am making is that there is a serious difference. There is a lot more time involved and you have got to pay clerks and all that. I understand that. Nonetheless, the firm was billing $30,000 to $35,000 per hire. Do you have any idea of how many people were affected by this?

Mr Berrill : I do not know. I have been told that there were hundreds involved.

CHAIR: Is 'class action' a fair description of what your firm did?

Mr Berrill : I initiated a number of individual court actions on behalf of people. A class action was then lodged in relation to others. What happened was that individual offers were made to settle all the people who had signed up to the class action—and only a small number had—and those people, on instructions, decided that they wanted to settle the cases, and that is how it was resolved.

CHAIR: Let us say there had been 200 aggrieved customers of CFP and they all came to your firm. Would the outcomes, in your mind, have been materially different?

Mr Berrill : The outcomes of the direct compensation arrangements?


Mr Berrill : I think they probably would have been, yes. It seemed to us that the few clients who came to us after they had signed up to the direct compensation arrangements had been put in a higher risk tolerance category and therefore their losses were assessed as being less than they might otherwise have been. For example, one of the main people we acted for, before he came to us, was offered one-tenth of what we ultimately negotiated for him—them.

CHAIR: So if there are future scandals, the way going forward is to get some sort of legal/accountancy/auditing firm to act on behalf of the aggrieved people?

Mr Berrill : I think that would have been appropriate.

CHAIR: 'Appropriate' is a good word. I will come to the word 'appropriate' later on. Senator Williams.

Senator WILLIAMS: The enforceable undertaking placed on CFP by ASIC—has it got flaws, was it sufficient, was it good enough, did it do justice? What is your legal opinion about the enforceable undertaking? Was it too soft? Was it not looked at? Was the oversight carried out by ASIC good enough? Tell us about the enforceable undertaking. Clearly that was the corporate punishment, if I can put it that way. Was it justifiable? Was it balanced? How would you sum it up?

Mr Berrill : To the extent to which it related to our actions, I thought it was fine.

Senator WILLIAMS: That is the 30 people you represent?

Mr Berrill : Yes, those who were seeking compensation. I thought it was fine. It played out well for our clients because we were in the middle of the litigation when the enforceable undertaking was entered into. Our litigation went for about 12 months and we had some dealings with ASIC in that time. I found them to be very professional in our dealings; they told us what they could and not what they could not. There is no doubt that there was a fundamental shift in the attitude of CFPL when ASIC got to be, what appeared to us, heavily involved in the case once the litigation was on foot. When the enforceable undertaking came into being, the litigation matters all were mediated within about three months of that. The mood in the room was very conciliatory and, to that extent, the outcome was fine. As for the punishments handed down to CFPL, I cannot really comment on that other than to say that what happened was pretty disgraceful. What happened to some of our clients was terrible—the targeting of retirees. To that extent, they deserved a whack. They got a whack, and they have copped an ongoing whack in the media about it.

CHAIR: Including one today, you know.

Mr Berrill : Yes. As I said, the element of the enforceable undertaking that got my attention was the direct compensation arrangements that were put in place. I thought there was some flaws in that, and that is what I have alluded to.

Senator WILLIAMS: This Senate inquiry was probably brought on by the frustration of some senators with ASIC and their answers at Senate estimates. What we are trying to do with this inquiry is to see if ASIC can do their job better. Obviously the time they took action was terribly frustrating, with a 16-month delay to attend to the whistleblower's information when they finally knocked on the door. If you were running the corporate world and everything you said would be carried, have you any ideas on how you could improve the performance of ASIC when handling these situations?

Mr Berrill : That is a biggie. I think quick action is important.

Senator WILLIAMS: So do I.

Mr Berrill : Yes, that is a bit of a no-brainer, of course. What is clear here is that there were a lot of complaints being made by people who were genuine and who had no interest in creating trouble for the regulator, and I think that there was a lack of action early on. So, quick attention to action, and of course the resources needed to do that, is an important part in the future. As for what penalties should be imposed on people, Mr Nguyen got a seven-year ban. Is that enough? I would have thought he should have had a lifetime ban, frankly.

Senator WILLIAMS: I am with you, and perhaps more.

Mr Berrill : The targeting was so systematic and so measured—but actually it was the opposite of measured—it was so full on. You could see from the way the things went and the fact that it transpired that there were a number of people involved. It was a sort of boiler room, Amway-Mary Kay public forum style, 'I've sold the most. I've hooked in the most people.' There was undoubtedly an environment which was quite toxic and which created the problem that we have here. Is there a lesson to be learned here, and have CFPL copped a whack and learned a lesson? I think they have, it is pretty clear that they have. Is it going to moderate the behaviour of others? I think it has and I think it will. That feeds into things, like the FOFA reforms and whatever, as to how that plays out in the future. With the regulator quick action is important and resourcing is always an issue in these things. Our firm sees a lot of financial advice problems and issues involving ASIC.

Senator WILLIAMS: Do you?

Mr Berrill : Oh, yes, where ASIC gets involved as a regulator. We are at the compensation end of it and deal with that. I am not saying litigation is the be all and end all; far from it. I was on the board of the Financial Ombudsman service and one of the consumer reps on the panel, so I have dealt with financial disputes for many years now. This is not a new phenomenon; this has been going on for a long, long time. The courts are not the be all and end all; the Ombudsman scheme has a very important role to play. We had a number of cases that went to the Ombudsman and were resolved there. That has an important role to play. One of the things that was put in place was that people, potentially, could go to the Ombudsman if they had an issue, but there are monetary caps on the Ombudsman's scheme which were waived, apparently. We had a number of people who did go through that process. That was good. Looking at the compensation arrangements I think that to put CFPL back in charge of the retrospective auditing process was flawed, and I think that is a lesson to be learnt for the future.

Senator WHISH-WILSON: Chair, could I ask a point of clarification?


Senator WHISH-WILSON: Mr Berrill, you raised a very good issue about systemic targeting of retirees and putting them into high-risk tolerance categories. Can you explain why you think that occurred?

Mr Berrill : It is commission driven. If people have existing conservative portfolios, in order for an adviser to say, 'I can get you much better than the four or five per cent you are earning in a bank or through cash. The only way I can indicate that to you is by putting you in high-risk investments which have a much greater return.' Then you sort of play down the risks involved. That is how FNAs and statements of advice are supposed to work by putting some downward pressure on those sorts of extreme sales practices.

Senator WHISH-WILSON: To get this clear, you are suggesting it is because those products were commission driven. From your experience in looking at the assessment for compensation, do you have any idea whether those products were actually Commonwealth Bank financial products?

Mr Berrill : For our clients they were. A lot of the products were linked, but not all. The key thing was that they were far too risky and the timing was just terrible, because it was right before and in the middle of the GFC.

Senator WHISH-WILSON: This is very important, because when we are looking at ASIC in this inquiry—how they might react and remediate and also how they might have put in place or used measures that you talked about before, referring to regulation there—I am just very interested in the systemic problems and how we target them. So thank you.

Mr Berrill : No problem.

Senator FAWCETT: Mr Berrill, you made the comment that you found ASIC to be very professional and cooperative, which is lovely. What I am concerned about is whether they were effective in their role. They, according to their submission, had oversight of CFPL from as early as 2007. You make the comment in your submission that in March 2010 you issued the first of a number of court actions.

Mr Berrill : Yes.

Senator FAWCETT: You were advised that, within 24 hours of that, ASIC raided the premises of CFPL and confiscated documents et cetera.

Mr Berrill : Yes.

Senator FAWCETT: A number of witnesses have said to us that there has essentially been a cause-and-effect relationship between ASIC's action and it becoming public. Do you have any comment on the effectiveness of the processes that ASIC had in place beforehand, such as the continuous improvement and compliance program that had been running for some time? From what you saw, had there been any tangible improvement in CFPL's conduct and oversight of its advisors in the year or 18 months leading up to when you initiated that action in 2010?

Mr Berrill : I cannot really comment on that, because we only became involved in it in December 2009, so I was not really aware of what was put in place.

Senator FAWCETT: Can I ask the question another way, then: how many of your clients suffered from malpractice, for example, during 2009 as opposed to people much earlier, in 2002 or 2003? If you have cases that were occurring late in that period then clearly that continuous improvement had not actually had an impact.

Mr Berrill : For just about all our clients, the key period was late 2006 to mid to late 2007. For most of them, that is when Nguyen churned them into the high-risk products. From that period when our clients were exposed to Mr Nguyen, if you like, until we became involved or until ASIC's undertaking, was there any significant improvement? No. A lot of them were going through the internal processes. It took some time before the losses materialised and before a lot of them realised that they were exposed to such high-risk products. Then, when they went to CFPL about it, they were getting absolutely nowhere. They were getting stonewalled. When Mr Nguyen disappeared, they were put in touch with advisers who were basically going through the same process, and they were getting absolutely nowhere. So we saw no evidence that there was much improvement until 2010 in the processes that CFPL were going through to address people's concerns.

CHAIR: Are you referring particularly there to the litigation processes?

Mr Berrill : No—

CHAIR: The improvement in 2010?

Mr Berrill : Yes—around the time of the enforceable undertaking in particular.

Senator FAWCETT: Did you have any insight, as a result of the work you were doing, into the audit or oversight practices of ASIC on CFPL or indeed any other organisations you have dealt with in the past? For example, do you have any insight as to whether their audits consisted of system-level audits, where they might sit with senior management and look to see if a system was in place, or whether they actually delved down into individual cases and tried to proof the system right down to the individual level?

Mr Berrill : I do not have much insight into that, because, as I say, we deal with the pointy end when things turn pear-shaped, and we are dealing with individual disputes.

Senator FAWCETT: But, as part of establishing your client's case, surely part of what you try to ascertain is whether the practices of, in this case, the Commonwealth Bank—

Mr Berrill : CFPL, yes.

Senator FAWCETT: were appropriate and whether the checks and balances that are supposed to be in place were appropriate.

Mr Berrill : They were certainly not in these cases—correct. We did observe that, in the oversight of Don Nguyen and whoever was his boss, there were no checks and balances in place. He was allowed to run wild. He was rogue and there were some other people around him who were doing the same thing. So there was undoubtedly a big cultural problem there—this boiler-room mentality. As part of that, there are clearly not checks and balances and oversight in place within CFPL, but I cannot comment on the checks and balances or the oversight from ASIC down to CFPL.

Senator WHISH-WILSON: On a point of clarification, when you talk about boiler-room mentality and the fact that financial planners such as Mr Nguyen were able to go running wild without checks and balances, is that because you believe the management were incompetent, or were they in some way profiting themselves with their bonuses and remuneration through these practices?

Mr Berrill : I think they all got carried away with what was being brought in. Because the big bucks were being brought in and Nguyen was being so successful, he was sort of lauded as the pin-up boy. There was a lack of people at senior level looking at it and saying, 'Is this really doable legitimately?'

Senator WHISH-WILSON: The same thing happened with Barings Bank and Nick Leeson; the success obviously blinded management. I wonder if you were aware of any culture within Comm Bank management, with the way their bonuses were set up, and whether they also profited from deriving this business.

Mr Berrill : The CFPL made money out of it, for sure.

Senator WHISH-WILSON: Thank you.

CHAIR: On these enforceable undertakings, does ASIC, in your mind, need to set up a process where it can go in on an ad hoc basis—but go in nonetheless—to review that the enforceable undertakings are in fact being implemented and carried out?

Mr Berrill : Yes, definitely.

CHAIR: Do they do that now?

Mr Berrill : I think they do, yes.

CHAIR: We will check that in due course. But you think it should be a necessary process?

Mr Berrill : Absolutely.

CHAIR: Thank you very much for taking the trouble to come up from Melbourne, I presume, and assist us today.

Mr Berrill : You are very welcome.

Proceedings suspended from 10:17 to 10:24