Title Economics References Committee
Performance of the Australian Securities and Investments Commission
Database Senate Committees
Date 10-04-2014
Source Senate
Parl No. 44
Committee Name Economics References Committee
Page 20
Questioner CHAIR
Williams, Sen John
Fawcett, Sen David
Whish-Wilson, Sen Peter
Responder Mr Cohen
Ms Perkovic
Ms Spring
System Id committees/commsen/0f3b88f3-7994-43a0-ad24-fb43a13d0e5f/0003

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

COHEN, Mr David, General Counsel and Group Executive, Group Corporate Affairs, Commonwealth Bank of Australia

PERKOVIC, Ms Marianne, Executive General Manager, Wealth Management Advice, Commonwealth Bank of Australia

SPRING, Ms Annabel, Group Executive, Wealth Management, Commonwealth Bank of Australia

CHAIR: Do you have an opening statement you wish to make?

Mr Cohen : A very brief one. Thank you. The Commonwealth Bank appreciates this invitation to appear before the committee. I would like to make three brief points before we turn to questions from the committee. First, we fully recognise why we are here today. The committee has received a number of submissions as well as evidence today relating to our financial planning business for matters that occurred over five years ago. We apologise to our customers for these events. As the Chairman of the Commonwealth Bank has acknowledged, we should have moved more quickly on this issue. However, it is pleasing for our customers that almost all of those customers who were affected by these events have been restituted to their satisfaction.

Second, we deeply regret the situation that arose and, as a result, we have significantly transformed the way we run our financial advice business. This includes changing the management, the culture, the processes and the business systems. The substantial investment we have made resulting in major improvements to the business demonstrate our determination to ensure we have no repeat of these regrettable events of five years ago.

Third, we are also here today to discuss the performance of ASIC and the importance of having strong, effective regulators. We are firmly of the view that the regulation of the Australian financial services industry by agencies including ASIC held Australia in good stead in the lead-up to, during and after the global financial crisis. We also understand, of course, that, just like businesses, regulators need to evolve, and we are happy to contribute to that discussion today. We are here to answer your questions.

CHAIR: Thank you. Did you sign off on the submission or submissions that were made to the committee?

Mr Cohen : I was part of that process, yes.

CHAIR: But who is the senior officer responsible for those submissions?

Mr Cohen : I suppose I could say I finally gave the approval for that submission to be lodged.

CHAIR: All right, then. When you read through it, the submission constantly uses the word 'inappropriate'. On a number of occasions it uses the word 'inappropriate' and characterises the advice as 'inappropriate advice'. Do you stand by that description?

Mr Cohen : Absolutely, yes. We acknowledge that the business as it was in the days when these events arose was a business that did not have the right people in it, the right culture, the right business processes or the right record keeping. We acknowledge that. We have also acknowledged that some of the advice received by our customers was inappropriate.

CHAIR: Does the term 'inappropriate advice' capture the seriousness of misconduct at Commonwealth Financial Planning? If I wear a brown tie and grey suit, my wife will say to me: 'They don't match. That's inappropriate.' If I engage in some bad language, someone will say to me: 'Mark, you shouldn't be saying that. That's not appropriate in those circumstances.' 'Inappropriate' behaviour is when you miss the bus—bad luck—and you are late for the meeting. It should not have occurred but, in the scheme of things, it is not a killing offence. Do you think 'inappropriate advice' captures the seriousness of what occurred here: the fraud, the doctoring of files, the lying to clients, the cheating, the lack of oversight by senior executives? Is 'inappropriate' the exact, correct description?

Mr Cohen : We used 'inappropriate' because it covers a range of issues. I acknowledge what you are saying about the fact that there were a range of issues, and we agree that there were. 'Inappropriate' is the word we used because it covers the fact that in some cases advice was just not suitable for the client in question. 'Inappropriate' covers the fact that some of the behaviours, which I think you are alluding to, from some of our people just were not the appropriate behaviours, were not the behaviours that we expect and enforce today. As I said, the people, the structures and the culture just were not the right people, structures and cultures at the time, and we should have done better.

CHAIR: 'Inappropriate', as I said, can be bad advice. 'Inappropriate' can be late for a meeting. 'Inappropriate' can be a junior carrying out the work of a senior while not subject to supervision. In my mind, 'inappropriate' is not systemic fraud, is not systemic theft, is not loss cause by systemic bad behaviour. When my three-year-old writes on the wall, that is 'inappropriate' and you tell her off. 'Inappropriate' is not the word here, is it?

Mr Cohen : We believe it is. We acknowledge that there have been submissions made, and you have heard evidence this morning around claims of forgery and fraud, claims of doctored files. We understand that. We can take you through detail—my colleagues and I are very ready to do that—in which in some cases we have found fraud. You may be aware that we have reported advisers to the police and to ASIC for that very thing. So we acknowledge that existed. As to the widespread nature of it, the vast majority of Commonwealth managed planners are not people who engaged in that type of activity. We certainly acknowledge that there were a number of planners who did not behave the way they should have.

CHAIR: All right. Who is Mr David Turner?

Mr Cohen : He is the Chairman of the Commonwealth Bank.

CHAIR: So he is the most senior officer within the company?

Mr Cohen : He is.

CHAIR: At the shareholders meeting last year—and I thank Senator Williams for providing me this advice—the press reports indicate that Chairman David Turner conceded the bank was far too slow in responding to serious misconduct in its financial planning arm, describing the behaviour of rogue planners as 'shocking'. That is the word he used to shareholders who attended the meeting. He did not use the word 'inappropriate'. He then went on to say:

What we did was shocking.

…   …   …

There's no excuse for giving bad advice, absolutely no excuse. We had the wrong people giving the advice and the business was structured wrongly, and remunerated wrongly, and the culture was wrong.

'Inappropriate' is over there in that corner. Those remarks of Mr Turner are pretty well over at the other end of the continuum line. Do you still sit there and stand by your submission to this committee that the behaviour of those people in those days in Commonwealth Financial Planning was merely 'inappropriate', or do you now accept the characterisation of Mr Turner?

Mr Cohen : I accept that the range of conduct ranged from the very poor—'shocking', as Mr Turner described it—to conduct that in our view was inappropriate and poor. So there was a range; there is no doubt about that. I do not think it is correct to say that all of the conduct was in that worst category, but there certainly was conduct in that category.

CHAIR: So some of the conduct was more than inappropriate.

Mr Cohen : Some of the conduct was at the worst end of that spectrum, yes.

CHAIR: That is right. And Mr Turner did not seek to qualify his remarks to shareholders by saying it was only some or it was only a few or it was only a minority; he used all-embracing language, generalist description that the unit behaved in a shocking manner because of what he said was wrong structure, wrong remuneration and wrong culture. We do not have a great deal of time; but, if the position of Commonwealth Bank to this committee was that its behaviour was by and large merely inappropriate, I come to the view that, notwithstanding all of the remarks in your submission, your bank has not yet learned the lessons.

Mr Cohen : We have definitely learned the lessons and we can take you through the changes that we have made since these events occurred five years ago. They are substantial changes. The reason they are substantial changes—

CHAIR: No, I am not arguing with any of that. I have read your submission and I applaud a lot of the work that you are doing. I applaud a lot of the review work that was done and I applaud a lot of the changes that have been made on the organisational side and the cultural response. I am not criticising that. What I want to hear you say is that the overall workings of that unit were, as your chairman said, 'shocking'—not 'inappropriate'.

Mr Cohen : Some of the workings of that business were shocking.

CHAIR: All right. You might care to take advice on that, because that attitude here today is going to inform the minds of committee members.

Mr Cohen : I understand that. All I would add is that we are in no way suggesting that the circumstances that occurred should be treated lightly, and we certainly do not treat it lightly. We had taken the view—a very serious view—that we needed to substantially improve the business because it was not run the way it should have been run. There is no doubt about that. I do not wish to downplay for a second the fact that the impact on customers was severe. The way we ran the business was not the way it should have been run. We do not treat lightly the fact that we did have poor systems, we did not have the right people and we did not have the right culture, as the chairman has said.

CHAIR: I understand your remarks there, but I have now read about 5,000 pages of submissions. With due respect to your bank—and I am a customer of your bank, so I do not have any problem with your banking arrangements—I do not in any way regard the behaviour of those people involved in Commonwealth Financial Planning in those days as merely 'inappropriate'. So we can agree to disagree.

What prompted the Commonwealth Bank to file a breach report with ASIC regarding Mr Nguyen on 27 July? Perhaps one of your colleagues can help.

Mr Cohen : I might give you a very-high-level view and then ask Marianne Perkovic on my left to give you some of the detail. As you are probably aware, an initial investigation into Mr Nguyen was carried out in September-October 2008. As you are aware, that investigation was inconclusive. Mr Nguyen continued in his role, albeit differently—

CHAIR: He came back in October.

Mr Cohen : That is right. And then further issues arose and complaints were received. That led to a further investigation that commenced at the end of May 2009. The result of that further information was that we obtained information that we felt was serious enough to go to ASIC, and that is what we did. But Marianne Perkovic can perhaps give you some insight into the events that actually led to that second investigation occurring.

Ms Perkovic : At the time leading up to the period that we did put the breach report, there was a combination of customer complaints. There was also engagement with ASIC and an internal investigation into Don Nguyen and his activities. That led to a group security investigation into some of the accusations that were being made. As a result of looking through all of that information, the business at that time did make the decision to further investigate and suspend Don Nguyen.

CHAIR: To what extent was the breach report to ASIC in July 2009 prompted by publication of allegations by Mr Nguyen in InvestorDaily?

Ms Perkovic : In reviewing the situation at that time, that was one contributing factor but not the sole one. There was already an investigation taking place and the information that actually came out allowed us to have some more information to follow up. So it was not the sole issue but it led to a combination of pieces of information.

CHAIR: But it was a significant factor?

Ms Perkovic : I think it was significant in the case that obviously information that had come to light that was not being given back into the business but was being sent out to other outlets.

CHAIR: But it was not so significant that you thought to mention it in your response to my first question?

Ms Perkovic : Well I guess—

CHAIR: You gave me four reasons, none of which was the InvestorDaily publication. Why is that?

Ms Perkovic : That was—

CHAIR: You have now conceded that it was significant.

Ms Perkovic : It was one of a few—

CHAIR: Yes, you said one of a few but you also said it was significant.

Ms Perkovic : Yes, agree—

CHAIR: So why did you not say that at the outset?

Ms Perkovic : When I say there was a number of contributing factors, that was one that was in there—

CHAIR: But you never mentioned it.

Ms Perkovic : Okay, so I apologise. However, I think the important component is that there was enough information and, as the events through Don Nguyen unfolded, enough information came and more pieces of information came to light that actually did lead to that purpose. I think information that comes out to media is investigated but it was already being investigated at the time.

CHAIR: When was Mr Nguyen first suspended from work?

Ms Perkovic : Mr Nguyen had a formal suspension on 27 May 2009.

CHAIR: Right—

Mr Cohen : Senator, I think you are referring to his very first suspension back in September 2008. Marianne is talking about the suspension following the second investigation.

CHAIR: The very first?

Mr Cohen : The very first was September 2008.

CHAIR: Why did you not contact ASIC back in September of 2008 when Mr Nguyen was first suspended from work to notify ASIC of concerns regarding Mr Nguyen's failure to meet your Commonwealth Financial Planning's own compliance standards?

Mr Cohen : Senator, the investigation that was carried out in September-October 2008 was inconclusive in its findings. I would like to add right upfront about that that we do not think the decision made around what to do following the inconclusive findings was the right decision, but that decision was made by management at the time and he was allowed to return to work after a period of suspension when the initial investigation proved to be inconclusive.

CHAIR: Alright—bad decision but move on. Did the breach report you made to ASIC about Mr Nguyen in late July, on 27 July 2009, at any point note that several of Mr Nguyen's former clients—including Mrs Braund, who was here this morning—had written to the CBA alleging forgery by Mr Nguyen? And if not, why not?

Mr Cohen : I believe it did not. The breach report that we lodged with ASIC was a form of breach report that indicated the issue at a general level that we had discovered, the concerns that we had vis-à-vis possible breaches of the law and therefore the need to report, and the steps that we were taking.

CHAIR: You described the breach report as 'general'. Is it necessarily general or was that a decision made by the officer who prepared the report?

Mr Cohen : We have a process around breach reporting generally. We, as you can imagine, have lots of intersection points with ASIC across the entire group. So across the group we have a process around breach reporting. That process involves obviously the investigation phase and then notifying ASIC. Our notification to ASIC seeks to provide information that is timely, albeit it might be before an investigation is complete, but timely enough, although we have acknowledged that sometimes our breach reporting has not been fast enough. It seeks to provide that general level of information so that the issue can be identified at large, not every single element of the behaviour.

CHAIR: No, and that is an issue about the extent of particularising in the report. Having said that, allegations that were made to you in writing of repeat instances of forgery would be received as being serious matters?

Mr Cohen : Very serious.

CHAIR: I presumed that. I was just getting it on the record. But not so serious to particularise it in the general breach complaint to ASIC?

Mr Cohen : Not the specific item. If it was from a client, we would not necessarily specify it, unless that was the prime issue that caused the breach to need to be reported. In Mr Nguyen's case, there were various aspects of his performance that led to our concerns about a breach that needed to be reported.

CHAIR: A submission from Mrs Merilyn Swan, whose parents, as you know, were clients of Mr Nguyen, argued to us that there is strong evidence of forgery, bribery and fraud on the part of Mr Nguyen—I do not think that is seriously disputed now—and yet the CBA failed to report this misbehaviour to the New South Wales police. Is it the Commonwealth Bank's position that it had not received any such evidence that would require a report at that time to the New South Wales police?

Mr Cohen : I will give you an answer and then I will ask Marianne to perhaps supplement with a bit of detail, if you would like it. My answer is that the investigation that we carried out at the time was not conclusive about forgery. We did note that there were a number of documents that appeared to have client signatures on them that clients claim could not have been placed on them, and we have heard some of that testimony today. We noted that. But there was no conclusive evidence. We had our security team investigate those issues. Our security team is a team comprised, in many cases, of ex-police officers, so they do have experience in these types of issues. We were not able to conclusively find evidence that we felt would be sufficient to lead to a brief to go to the police. I would draw a distinction there, because in other cases of advisers we did actually find clear evidence of forgery and we did report the matter to police and the police looked into the issues. In this particular case with Mr Nguyen, we were not able to form a conclusive view that there had been forgery.

Senator WILLIAMS: Mr Cohen, is it the rule that, if you think there has been a breach of responsibility of financial planners, you have to report it to ASIC within 10 days?

Mr Cohen : Within 10 days of becoming aware of the facts—yes. That is a reasonably onerous requirement in some cases where particular facts are extremely complex, but that is the rule that we seek to comply with.

Senator WILLIAMS: In September 2008 was the first inquiry into Mr Nguyen and you did not have enough facts to think that you should have reported him within 10 days of that period?

Mr Cohen : It is fair to say that, following the first investigation of Mr Nguyen in September 2008, we now consider the decisions made around that were the wrong decisions.

Senator WILLIAMS: So you feel you should have reported him within 10 days?

Mr Cohen : Today, when we look at that, the investigation that should have been carried out would have been much more thorough. We believe it would have, using today's standards that the business now applies. We believe that investigation would have uncovered far more facts and that would have led to different action.

CHAIR: In the first group of witnesses this morning, I think it was Mrs Braund from New Zealand who said that signatures were attached to documents and provided to Mr Nguyen when she was variously in Fiji, New Zealand and somewhere else—

Mr Cohen : Madrid.

CHAIR: Madrid, Spain—that is right. It would simply have been physically impossible for her to have attached the signatures, unless Mr Nguyen came to see her in those places and got her to sign them. Secondly, she said that each of the signatures that were attached were identical—in 12 cases, she went on to say. In terms of the first investigation, what more evidence could you require as to the veracity of the signature if you have been advised by the client that, one, she did not sign it and, two, she could not have signed it because she was out of the state and, three, she had given no authority to Mr Nguyen to attach her signature to documents. What more evidence could the most exhaustive investigation in the world find for you that would persuade you that the matter should have gone immediately to ASIC or to the New South Wales police?

Mr Cohen : I understand. Marianne can take you through the detail of that—and it is relevant, because the context of past history is relevant and it did have an impact. One question, which Marianne has raised and it is quite appropriate, is whether we should go in camera for some of the client details. To answer your question fully, we will be disclosing some client details. We are under an obligation of confidentiality to disclose those details, and it does concern us.

CHAIR: Let me consult with the secretary, Mr Cohen.

Senator WILLIAMS: Why not go in camera towards the last section?

CHAIR: Yes. We will come back to that at the end.

Mr Cohen : Just on that note, there might be a number of matters concerning clients, employees and customers, all of which could perhaps be dealt with in the one in camera session.

CHAIR: The secretary will make a note and we will return to those at the end and do them in camera. That is a better way to handle it. After the circus started to find feet and things got hot, Mr Nguyen was initially suspended and then brought back to a more senior position in October, as I recall from the submission. Has CBA reviewed the specifics of the decision to promote Mr Nguyen to senior planner and to adjust the policy so that that situation could not occur again?

Mr Cohen : Yes, we have. Annabel can take you through that.

Ms Spring : In hindsight, it is very clear to us that he should not have been promoted. The reasoning at the time seems to have been that in this more senior position he would actually see fewer clients. He would supervise but he would actually physically see fewer clients. He was also relocated to Chatswood, where he would be under the closer supervision of his manager. Clearly, that was the wrong decision in view of the investigative reports and as events unfolded, but it was the decision taken at the time. Furthermore, I think at the time the full extent of his misconduct was clearly not known; but, with the benefit of hindsight, it was the wrong decision.

CHAIR: At the time he was promoted to senior planner and relocated to Chatswood, did that involve an increase in his salary package?

Ms Spring : It did.

CHAIR: A significant increase in his salary package?

Ms Spring : As to the exact numbers—

Ms Perkovic : It was not significant. It was a couple of hundred dollars that took him up to a higher base.

CHAIR: So a couple of hundred dollars per annum or per week?

Ms Perkovic : Per annum, to take him up to a higher base.

CHAIR: Who was the most senior in the CBA Group who would have been aware of this decision to promote Mr Nguyen?

Ms Spring : I would have felt that it would have been head of CFP.

Mr Cohen : The general manager of Commonwealth Financial Planning.

CHAIR: So the then general manager of Commonwealth Financial Planning would have approved of the promotion of Mr Nguyen.

Ms Spring : That is right.

CHAIR: What has happened to him since?

Ms Spring : He has left the business.

CHAIR: Shortly thereafter?

Ms Perkovic : He left the business in 2009.

CHAIR: A report by Ms Ferguson and Chris Vedelago in the Fairfax Sydney Morning Herald on 14 June last year headed 'Bank tried to hide documents from victims of banned planner' states that, upon Mr Nguyen’s return from suspension in late 2008, he was placed under supervision and his statements of advice were vetted before being sent to clients. So far so good. The two journalists report that on 22 December 2009 Mr Nguyen was notified that his advice to clients would no longer need to be vetted before being sent to clients. Is that correct?

Mr Cohen : Could you just repeat that date—the 22nd of?

CHAIR: The two journalists assert that, on 22 December 2009, Mr Nguyen was notified that his advice to clients would no longer need to be vetted before being sent to clients.

Mr Cohen : That is a bit curious. He resigned in July 2009.

CHAIR: And left the bank?

Mr Cohen : Yes; 6 July 2009.

CHAIR: It should be 2008. I am advised that the journalists' report was on 22 December 2008.

Mr Cohen : That makes sense. I just want to make sure we are all on the same footing.

CHAIR: Now we are. Was he advised that his advice to clients would no longer need to be vetted before being sent to clients?

Ms Perkovic : He was at the time. We have described that the processes and systems in the business at the time are not what they are today. We do regret decisions that were made like that were not the right ones. In learning from this process there has been a total revamp of how advisers are supervised and monitored. In this situation what was looked at was not the advice but actually the process that he was undergoing. It was not the right decision at the time and we acknowledge that.

CHAIR: Fair enough. In her submission, Mrs Swan suggested that the Commonwealth Bank is being misleading in claiming that the CBA board only recently became aware of the activities within Commonwealth Financial Planning, referring specifically to comments made by Mr Turner to this effect. Can you respond to this claim and clarify when the board first became aware of misconduct at Commonwealth Financial Planning?

Mr Cohen : Certainly. I am not too sure which period Mrs Swan is specifically referring to there, but I can take you generally through the process.

CHAIR: Have you provided that in your submission?

Mr Cohen : The process involving our board?


Mr Cohen : Not in detail. I can happily give that to you now.

CHAIR: Do you sit on the board or do you attend board meetings?

Mr Cohen : I attend board meetings.

CHAIR: To give our advice of a legal nature?

Mr Cohen : That is right.

CHAIR: Can you give us a history of from when the board was first alerted to this issue until it was resolved?

Mr Cohen : Certainly. When the second investigation into Mr Nguyen commenced, in late May 2009, there was publicity, as you have alluded to earlier. The issue became more generally known in the group but not at this stage at the board level. An investigation was carried out. As the investigation was carried out and we became more aware of the extent of the activity and the number of customers impacted, a special project was set up. That special project you might have heard referred to as Project Hartnett. That project specifically looked at remediating those impacted customers. It was at that point, through legal reports to the board that we raised the fact that that project had been established, that the project was looking at the extent of misbehaviour and poor advice and that we were looking at a remediation process. Legal reports are given to the board on a two to three monthly basis. The project was referred to in those reports.

Subsequently—and this is perhaps at a stage when the board received much more detailed knowledge—as we moved through that initial project and then moved into a much wider scale review of planners in the business, not just of Mr Nguyen and Mr Awkar, who were the subject of Project Hartnett, the board had regular presentations to it about what we called our supervision and monitoring program. That was a project that not only sought to improve the business through stages that we can take you through but it also reported on the remediation process across all of the advisers. Those reports were both written and in-person reports. In fact, my colleagues reported to the board on those issues and they occurred quarterly.

CHAIR: The first brief went up to the board in May, June, July 2009?

Mr Cohen : No, it would not have been that early. Project Hartnett commenced in 2010. It got underway at the point we had a firmer handle on the extent of the poor advice and also customer harm. As that got underway, from approximately March 2010 onwards, reporting around the project started. Then the broader project started, including the improvement program and the broader remediation program, through 2010 and 2011.

CHAIR: So from May 2009, when you commenced the second investigation, until March or April 2010 the board was not alerted to the issue formally by way of agenda items?

Mr Cohen : Not specifically, no. There was no specific agenda item on that issue in that period that I can recall.

CHAIR: Were there unspecific agenda items?

Mr Cohen : When I report to the board on legal matters, for example, there is a formal written report but we have a more discursive discussion, naturally, about other issues. I cannot—

CHAIR: Those men and women are very, very senior. I presume they get the agenda items well before the board meeting.

Mr Cohen : Yes.

CHAIR: I presume they have all been read beforehand. If I were a board member, I would be saying: 'What's this about? What's going on? How serious is it and why are we being told?' Were those sorts of questions asked after May 2009 and prior to March 2010?

Mr Cohen : All I can recall is a discussion about the fact that we had discovered the potential for bad behaviour and advice, that we were looking into it. I can recall speaking to the board about the fact that we were setting up an investigation and a remediation program. I cannot tell you exactly when that was. I think it was in the lead-up, though—it was around the point of time when Project Hartnett was formally established. So it would have been after May 2009 and probably before March 2010.

CHAIR: This sequential reporting would all be minuted. It would all be clear on the minutes of the board meetings, would it not?

Mr Cohen : Individual items would only be minuted if they were substantive in nature and there was substantial discussion. Not every single item that is discussed is minuted.

CHAIR: But the minutes would record the full details of the agenda item?

Mr Cohen : The minutes would record the fact, for example, that the legal risk report was discussed and, if there were specific issues arising out of the legal risk report that were felt worthy of mention in the minutes, they would be included.

CHAIR: I hear that. When was the first time one of the directors said to you words to the effect, 'Mr Cohen, what's going on here? What's this about?'

Mr Cohen : I do not know the answer to that off the top of my head. I can certainly take it on notice and come back to you.

CHAIR: Do you mind taking that on notice and letting us know when it was first raised? It is one thing for the legal risk report to go to the board; it is another thing for someone to say, 'This might be serious. What's going on?' If you could give us the full detail of that, it would be appreciated.

Mr Cohen : Certainly.

CHAIR: On the continuous improvement compliance program that Commonwealth Financial Planning implemented in April 2008, what was the sign-off process for that within the bank? Is that an executive decision or would that go to the board to be approved?

Ms Spring : That would have been an executive decision.

CHAIR: So it would not necessarily have been highlighted to the board?

Mr Cohen : Not necessarily.

CHAIR: Was it?

Mr Cohen : I am trying to recall. I cannot recall it specifically going to the board, but again I can take that on notice.

CHAIR: Take it on notice, because I suspect it may not have been thought sufficiently important to go for board attention. I take it from that that the implementation of the continuous improvement compliance program within the bank would be a function of line management and not the responsibility of the board or a nominated director to oversight?

Mr Cohen : That is correct.

CHAIR: Let's turn to the Commonwealth financial planning compensation process that followed the enforceable undertaking of 21 July 2010. Mrs Swan claimed in her submission:

… there is no facility in the compensation process for clients or their advisors to review the documents being used for the compensation calculation.

Was and is that assertion correct?

Ms Spring : Before we say anything on that, I have one comment in response to your opening remarks on the remediation process. I did just want to echo David's comments that we deeply regret the financial losses that resulted to our customers with respect to inappropriate advice. The principle that we used was to put the customers in the position they would have been in had they received appropriate advice. Everything that we did was couched around that. That is the envelope in which these operations took place. Marianne will talk about the details of exactly that particular circumstance.

CHAIR: I understand that you were trying to return the clients to the status quo at the beginning of the process. So I understand that. We are going to come to the detail of that in due course. Do I need to repeat my question?

Ms Perkovic : No, I am okay. We do acknowledge the lack of documentation that the business did have in reviewing customer information. We relied on a lot of information from current systems and processes that we did have. In some case where we were not clear on the information that was recorded in the file, we contacted the customer and asked them if they had documentation, and we relied on that documentation. So through the Blanches, through Merilyn Swan, we did work with the group that was representing her for two years and did actually ask for a copy of the original documentation that would have assisted us in deciding or discussing the remediation process that we had. So we did use the information that was to light across what was in the file at the time but also the information from systems and processes and the investments that had already been made.

CHAIR: So you reviewed the material from them extant files—

Ms Perkovic : Correct.

CHAIR: and you reviewed material that became available through review of systems and processes and you incorporated material that clients provided to you after you requested the provision of such material.

Ms Perkovic : That is right.

CHAIR: But my question went to the assertion of Ms Swan that there was and is no facility in the compensation process for clients or their advisers to review the documents being used for the compensation calculation.

Ms Perkovic : If that was requested from the customer we actually did work with—

CHAIR: Yes, if you requested it. But I am going the other way, that there was no provision in the review system for clients to provide additional material absent you asking for the material.

Ms Perkovic : That is right. What we described to customers was that we would pay for them to have that reviewed by an independent—

CHAIR: We will come to that as well. We have been alerted to—

Ms Perkovic : That is the process—correct.

CHAIR: You have confirmed that is the process. Absent the documents emerging from the $5,000 review process or absent documents being provided to you subsequent to a request from you by the clients, it is not fair to describe the process as totally transparent, is it?

Mr Cohen : There is one third category that we should perhaps add to the two that you have mentioned, and that is that following an offer of compensation being made to a customer, the customer had the opportunity—and we talk about getting the advice, I am sure—to come back to us if they were dissatisfied in any way. So, if a customer did come back at the time and said they were dissatisfied with the offer or they were dissatisfied with the way theie offer might have been constructed or the basis on which the offer was made, we were very open to have discussions. We also gave customers the opportunity to either come through the business and raise those issues or, if they did not want to deal with the business, they had the opportunity to go through our group customer relations team. Alternatively, if they did not want to do that, they could go to FOS. Naturally, we would prefer that we try to reach an arrangement with the customer to their satisfaction without them having to go to the trouble of FOS. So I am just adding that there is that third possibility for them to raise it.

CHAIR: I hear that, and it is good to have that on the record, Mr Cohen. But what I am really hearing you say conceptually is that, to a significant extent, customer involvement in the review process was, on the part of the bank, reactive and not proactive. That is the complaint—that they had to make you aware of deficiencies in the review process; that you did not come to that of your own volition.

Mr Cohen : We do not consider that the remediation process was deficient. So perhaps there is the mismatch.

CHAIR: I am responding to the allegations.

Mr Cohen : Yes, I understand. But we do not consider that the remediation process was deficient.

CHAIR: I get that. That is a fair point. How can the remediation process, the review process, be characterised as fully transparent and fully accountable when the heart of the allegation is that files were incomplete because documents were not placed on the files, that documents were effectively doctored, or documents were fraudulently signed but those complaints are not clear from the face of the documents?

Mr Cohen : It might help if we take you through how we dealt with a circumstance, for example, where there were insufficient documents on the file. Can we take you through that?

CHAIR: Before you go there, if you do not consult with the clients at the beginning of the process how do you know that the files are ever complete?

Mr Cohen : That is why I think it might help if we go through an example. If we take an example of how we actually did involve clients where there incomplete documents, I think that will give you a sense of how clients were involved.

Ms Perkovic : Each of the cases that we reviewed had a case manager—so there was contact with customers. We spoke to them directly or they had a representative acting on their behalf. Through that engagement and through the process we established an amount that we thought was the compensation amount had they had appropriate advice. We did actually explain the process around the information that led to that, the allocation of the client's risk profile and the observations that we made about the investments that that client had with us and other investments that they had. It was in those initial conversations that it came to light that it was not correct or that there was other information that the customer may have had and those were the records that we then relied on going through that process.

With the 7,000 client cases that we looked at through this whole remediation process of Heartnet plus through the enforceable undertaking, a lot of those cases were remediated and we had very good communication between the customer or their legal representative. There was a selection of customers where it did take a longer time, because on multiple requests of information we did not receive it and we had to act on the information that we received—albeit continuing to ask for other information that would help us clarify and help us determine any differences in what the framework was giving us.

CHAIR: You reviewed 7,000 files?

Ms Perkovic : The total remediation process, which included advisers in the enforceable undertaking plus Heartnet, did lead to that amount.

CHAIR: Is 7,000 files 7,000 customers?

Ms Perkovic : It is cases. Cases would include a customer if they had an investment in their name and also as a joint name.

CHAIR: How many individual cases were there? What is the total of cases that were reviewed?

Ms Perkovic : We looked at it per investment. So the number is the files that we reviewed as per the legal owners of those investments.

Ms Spring : With respect to clients reviewed the number is 7,038.

CHAIR: So 7,038 clients were reviewed.

Ms Spring : With respect to the remediation project—just to be precise. We reviewed many files in addition to that but those were the files that were reviewed for remediation.

CHAIR: We are talking at this time about the remediation process.

Ms Spring : I just wanted to be clear, as there was a lot of work done in addition to that.

CHAIR: I've got you. Thank you, Ms Spring. Of those 7,038 clients, how many were either provided with a full copy of the file that you based your decisions on or, alternatively, written to and requested to provide additional material information?

Ms Perkovic : In respect of the process, all of those clients would have been told that they were in the process of remediation or compensation. As I mentioned before, we did not issue a file and ask a customer to check it. We actually—

CHAIR: So the answer to both parts of my question is none?

Ms Perkovic : In some situations, customers did come in to verify—

CHAIR: No, that is not my question.

Ms Perkovic : So there was a selection of customers that did—

CHAIR: Mr Cohen, is the answer to both of my questions no?

Mr Cohen : No, Senator. The answer—

CHAIR: Okay. What is the answer to both of my questions?

Mr Cohen : I think the answer to your question is: there were a number—which we cannot be precise about today but we can come back to you on that—of customers who were provided with documents, albeit not necessarily the whole files, so we might need to break that into two for you.

Ms Perkovic : That is right.

CHAIR: Okay. I want you to take this on notice: firstly, of the 7,038 clients in the remediation project, how many were contacted by the bank and asked to review the bank's file in toto; secondly, how many were contacted by the bank and asked to provide supplementary information; and, thirdly, how many did provide that supplementary information? What I am driving at here is the adequacy of the review process from beginning to end, in light of the fact that allegations—I put it no higher than that—have been made to us that the files were necessarily deficient because of past fraud and forgery.

Mr Cohen : We understand.

CHAIR: And I would ask you to do that with a fair degree of urgency, Mr Cohen.

Mr Cohen : We will.

Senator FAWCETT: Mr Cohen, I would like to take a step back from the Commonwealth Bank's actions to look at your interaction with ASIC, going right back to 2008 and, in fact, even prior to that. Could you describe for the committee the interaction between ASIC and the Commonwealth Bank and its various subsidiaries in terms of their normal, regular oversight of your operations before any of this was flagged to them? If you could give a relatively short answer but describe the nature of the interactions: if there were audits or oversight activities, how did they occur, how deeply did they probe, was it at a systems level, did they investigate down to individual files et cetera?

Mr Cohen : I understand. Given the breadth of our financial services activities, we have lots of interactions with ASIC. I think you are talking about the period up to 2008 and during 2008?

Senator FAWCETT: Yes.

Mr Cohen : I joined the organisation in mid-2008, so I am able to speak about the last six months of that period. But I would characterise our interactions with ASIC at all times as being relatively detailed in certain areas where ASIC had a particular interest. That interaction was often prompted by a market issue generally. To take an example that was relevant at the time, short-selling was a very big issue in the GFC, as you may recall. That was an industry issue. ASIC interacted in quite a lot of detail on that. Those interactions could also be triggered by specific customer complaints, in which case the interaction was quite detailed.

To your question about whether there were detailed audits and did those audits go down to a file-by-file level or a customer-by-customer level, I would say, generally speaking, that occurs where there is information that suggests there is more of a systemic or widespread issue as opposed to a single customer event. That is the way I would describe the extent of the interaction and the detail that ASIC would go into.

The third part of our interaction with ASIC is more general—not to do with a specific incident and not to do with a market or industry issue but perhaps to do with providing ASIC with information about how the industry works, how a particular business product works or, alternatively, ASIC's desire to shift market practice in a certain direction. ASIC would consult with participants in order to achieve that.

Senator FAWCETT: Can I take you to the continuous improvement compliance program started in April 2008. Can you describe ASIC's involvement in terms of how that program was put together, the depth to which they inquired forensically into your processes and then the follow-up to ensure that there were material changes in process, culture and competence amongst your staff in response to that.

Mr Cohen : You may be aware that ASIC commenced some review activities. I think it was in late 2007. That led to discussions between ASIC and Commonwealth Financial Planning, which in turn led to the CICP. In terms of the extent of involvement, ASIC raised a number of concerns. Marianne might be able to take you through each of them so you can get a sense of the depth to which ASIC went into them.

ASIC raised a number of concerns that, in ASIC's view, showed that the business was not operating the way it should have been. It raised those concerns with the business. The business then came up with a proposal, in negotiations or discussions with ASIC, as to how we would look into improving our processes so as to meet ASIC's requirements.

Ms Perkovic : At the time, the continuous improvement program looked across the risky compliance and processes plus the activities of the advisors. There was a framework that was put across seven different streams. It ranged from breach reporting to systems, operating structure, people and culture and also the compliance and supervision of that. Our understanding at the time of our conversations with ASIC and the discussions were at frequent meetings between the business and ASIC. The business was expected to report the outcomes and give ASIC updates around those processes. It is probably fair to say that, leading on through the CICP program, ASIC was not satisfied with the outcomes of that program and the way that the business was handling those matters at the time. That led to more serious discussions with ASIC that then led to the discussions around an enforceable undertaking.

Senator FAWCETT: At the start of that process was there any attempt to analyse—essentially take a snapshot of—the state of files for individual consumers as well as looking at the systemic issues? Or did the bank attempt, during that period, to reconstitute or change the files and bring them up to what they felt would be a suitable standard?

Ms Perkovic : At the time of the remediation process—which is the Project Hartnett—files were looked at. It was at that time that it was known that there were files, particularly across Don Nguyen's customers, that were not in the right order. So in terms of the files themselves, and the customers that those files belonged to, we started to work through what other information the bank had that could be contributed, which we could put into those files. I am talking about things like application forms on their investment that we had access to. Those were the pieces of information that we put on the client. It was known as a client file through the Hartnett process, not the original file.

Senator FAWCETT: I am interested to understand the extent to which ASIC imposed requirements on the bank for transparency, such that when you first went to a file—whether it was a file of Mr Nguyen or one of the other advisors who, I am led to believe, were operating in a similar manner—to make sure that the raw state of those files, when you first opened the cabinet and pulled them out, was captured for further review. Or were they modified within the bank's own processes before any independent party had the opportunity to review those files?

Ms Perkovic : Those files were not reviewed in their raw state. They were placed actually where the program of work had happened. The business did alert ASIC to the number of missing files and the state of the files. A process was then agreed because we did have to work on the most important factor which was remediating the customers. So a process was agreed with ASIC as to how we could get enough information from the other information that we had to determine the appropriate level of compensation the customer would be receiving.

Senator FAWCETT: You have indicated that at a number of points there was agreement with ASIC, that you had meetings and you agreed things with ASIC. You then made the comment that ASIC was not satisfied with how the Commonwealth was responding to the agreements. What process did ASIC have in place that allowed them to make that judgement that you were not responding satisfactorily?

Ms Perkovic : I can only comment on at the time that I came into the business. The time that I came into the business was in 2011. The discussions that we had with ASIC were around the time that it did take to get information across and that the changes the business had committed to were not happening at the time that ASIC wanted. So I can only comment on the period time from when I came to the business.

Senator FAWCETT: Can I come to that point. Was that assessment by ASIC based on their own oversight or on self-reporting by the bank?

Ms Perkovic : A combination of both. So self-reporting by the bank and also we had a number of meetings with ASIC where we did have to explain and go through the processes.

Senator FAWCETT: What step event in your mind led to ASIC in 2010 deciding to take the far more stringent action and the raids et cetera? What led to that if all along there had been this dialogue and agreement, albeit with some dissatisfaction on ASIC's part? Clearly, there was an event that led them to say enough is enough. What was that?

Ms Perkovic : As I mentioned before, at the meeting I had which was the first one with ASIC we did try to describe a process to improve the systems of the business and identify issues that had happened. I cannot obviously talk for ASIC. From ASIC's perspective, the communication that came back to us was on the slowness of some of those issues and the commitment from the business to making the changes. They felt in their mind that the enforceable undertaking was the appropriate stage. From there, as we know, ASIC would have had conversations with customers at that time.

Senator FAWCETT: I would like to come to the enforceable undertaking in a minute. Mr Cohen, you were there since 2008.

Mr Cohen : Yes.

Senator FAWCETT: Do you have any additional comments to make about the degree of ASIC's oversight and the extent to which they interrogated and made those assessments about the lack of Commonwealth progress and why there was a step change in 2010?

Mr Cohen : My impression, and it is an impression I have I suppose from my observations as opposed to direct discussions with ASIC, so I am qualify it to that extent, was that initially when the CICP was initiated, ASIC believed that it was going to lead to appropriate outcomes and appropriate improvements. In particular, that program was designed to ensure that future advice was of the right quality and that supervision and risk management was of the right quality. My impression is that, as that program progressed, ASIC increasingly felt uncomfortable around the business's ability to actually achieve the desired outcomes. That was my impression, that it was a gradual sense that came upon ASIC. I think, in fairness to ASIC and with the benefit of hindsight, that they had grounds for that concern. I do think that the CICP did not achieve what it was designed to achieve as quickly as it was designed to be achieved. That, I think, dawned upon ASIC as the matter progressed.

In terms of what might have been the trigger, if you like, or what might have actually caused ASIC to decide that an enforceable undertaking was the appropriate outcome, I think, again, it was a combination of the building dissatisfaction with the progress of the CICP coupled with a number of additional issues. We had been reporting a number of advisers whose advice was poor. There had been some publicity. I think it was a build-up of factors where ASIC gradually formed the view that a substantial regulatory outcome was needed and that an enforceable undertaking was the way to do that.

Senator FAWCETT: It has been put to the committee on a number of occasions that the publicity in 2010, which stood to do great reputational damage to the Commonwealth as well as to ASIC, was actually the trigger for both organisations to recognise that the approach they were taking was a) ineffective and b) leaving both organisations looking pretty shabby in the view of the world. That leads me to the enforceable undertaking. The transparency and shining of a light on what was occurring and the tardiness with which rectifications were recurring were enabled by the fact that it was not public. With an enforceable undertaking, whilst the terms of that are transparent, there does not appear to be a great deal of transparency around the independent experts reporting to ASIC on progress that is being made. Would you talk from the Commonwealth's perspective about the degree of transparency of the content of those reports that the Commonwealth would be happy to put on the public record.

Mr Cohen : As you probably know, enforceable undertakings often require the involvement of an independent party. That independent party assists ASIC in order to monitor the activities of the party that is subject to the undertaking. It is a process which is designed to ensure, firstly, that the party that is subject to the EU properly does what is required under the EU. Secondly, it gives ASIC, I suppose, a relatively resource-light method of having some direct involvement through somebody independent who is constantly watching the activities that are meant to be undertaken. It does lead to very frank discussions, in our experience, between the independent expert and ASIC around, in our case, how CFP was responding to its requirements.

To your point about the actual content of the reports themselves, those reports are between PWC and ASIC. They are reports that we, obviously, are privy to because we then have discussions with ASIC about the independent expert's views and if we are lagging or on target. Those are reports that we do not shy away from at all. We see it as a very necessary process.

Senator FAWCETT: My question is: would the bank have concerns if a recommendation of this committee was that those reports should be publicly available?

Mr Cohen : No, we would not. From our point of view, an enforceable undertaking is a very public process. I understand the point that you are making about the reports themselves perhaps not being as public as the EU itself and the terms of the EU. At the point where, as a group, we are party to an enforceable undertaking, we are taking that very seriously. We take it very seriously beforehand, but, if we have got it wrong and then are subject to an EU, the seriousness with which we take it, I think, is appropriately reflected in the full transparency of daylight. If that were a recommendation that this committee came up with, I do not see that we as a group would have a problem with that.

Ms Spring : Would it help to go through the headlines of those reports with respect to the areas that they covered?

Senator FAWCETT: No, I do not particularly wish to go into the reports. My concern is more about the fact that effective action often only appears to be taken when the harsh glare of public scrutiny comes upon the actions of the regulator and the people that they are working with.

The question I want to go to now concerns the appointment of the independent expert. Clearly, the bank has a role; ASIC have a role in approving that. We have just seen, in a separate inquiry, into the pink batts scheme, that a risk assessor, who was agreed by the appropriate government department, clearly was not competent to assess the risks of that program. So my question goes to the appointment of the independent expert in this case. Do you, in your professional opinion, consider that ASIC have the required competencies and skills to assess the suitability of an independent expert to make those judgements and to hold that person to account for the judgements that they are making, or are there areas where ASIC actually needs to upskill its people in order to assess the suitability and efficacy of that independent expert?

Mr Cohen : From my experience, I think ASIC does have the skills in order to properly appoint and be able to assess whether an independent expert is the appropriate expert. Our discussions with ASIC on a number of fronts in relation to independent experts have shown that ASIC is fully aware of the skill set of the people who are under consideration. In our experience, normally the firms that are under consideration are the major accounting firms, who have a wide skill set. ASIC, in our experience, is well skilled in order to make that assessment.

Senator FAWCETT: We have had some evidence to the committee that there are large firms—I will not name the firms—where an enforceable undertaking has been imposed, where, at a systems level, at a management level, progress is being made and reported against the enforceable undertaking, but at the desk level, at the line operating level, there is no material change. My question is: is it the terms of reference that the bank, or whichever organisation, is giving the independent expert or is it a lack of appropriate rigour from ASIC that allows a situation where an enforceable undertaking is in place, is being reported as having satisfactory progress and yet we are getting evidence that, at the working level, there is no material change? How can that happen if, in your case, you think the bank is competent and ASIC is competent and the independent expert is competent? What is failing in the system if there is no material change at the working level?

Mr Cohen : It is interesting. That has certainly not been the experience that we have had with ASIC. I am not just speaking about the enforceable undertaking in relation to Commonwealth Financial Planning. As you probably know, we have had other enforceable undertakings. Our experience in each case has been that the scope of the independent expert's role is very detailed, it is very clear what that role is, and the independent expert is a party to those discussions, because the independent expert obviously has to be satisfied that it can perform that scope. In terms of the actual implementation, the independent experts that we have dealt with, being major accounting firms, have their own reputation to consider. It would be risky for them in the extreme to allow business at the line management level to remain as it was and yet to report to ASIC that things had changed. We have never experienced that. I am surprised to hear that it exists, but it is certainly not reflective of the expense we have had at all. We have found that our independent experts involved in the process have been very active, have been quite prepared to speak out whenever things have not been proceeding according to plan and have been quite open with ASIC about that. We have encouraged that. I would find it curious if an independent experience were prepared to run the risk of allowing things not to change and yet report to ASIC that things have changed.

CHAIR: I want to follow on from this point that Senator Fawcett has raised, because it is quite critical in a range of submissions. How are aggrieved clients, and how are we, to be satisfied that the undertakings that are made in the enforceable undertakings to resolve all this business are carried out at line level? A number of the submissions to us have made the point repeatedly that, at what Senator Fawcett referred to as line level, the enforceable undertakings are neither understood nor carried out. That is the first question: how are we to be satisfied? Secondly, should it be part of enforceable undertakings that ASIC has the capacity to do ad hoc investigations as to the degree of compliance, on an ongoing basis, with enforceable undertakings?

Mr Cohen : Maybe I could answer your second question first: is it appropriate for ASIC to be able to carry out ad hoc inspections, for example? Where an independent expert is involved, provided the independent expert is reputable, and provided the independent expert has a clear brief, I would have thought that ASIC should be able to rely on the views and the reports of the independent expert.

In terms of whether it would be appropriate for ASIC itself to carry out those inspections, ASIC currently is able to do that if it wishes to. There is no further legislative power that it needs, as far as I am aware, for it presently to be able to do that. It may be a question of resourcing for ASIC, and I know that is a separate subject. It may be that, although ASIC may have the desire to do that, it simply does not have the resources to do it, given its scope. Per se, I think the ability of ASIC to inspect exactly what is going on exists today.

Senator FAWCETT: I just want to clarify one point on that. Between February 2007 and 2008, ASIC undertook surveillance and, they claim, reviewed 496 pieces of advice provided by 51 different advisers, which led to that initial program. Since that level of auditing, has ASIC or the independent expert reviewed a similar number of pieces of advice or number of advisers at that level as part of assessing the efficacy of that initial improvement program or the enforceable undertaking?

Mr Cohen : Marianne can give you the detail. In terms of the CICP program, no, there has not been a repeat exercise; but in terms of the enforceable undertaking, yes, there has been involvement at the independent expert level of what we have done. Perhaps Marianne can speak to that to give you a sense of it.

Ms Perkovic : Of the two pieces of work there is one around the enforceable undertaking, which I can talk about in a moment; the second component is concern about how much or whether there are other issues in the business. At that time we obviously had a list of advisers that had breached reporting that we were working through. The business then went through to identify a number of other issues or advisers that we had concerns about, either through customer complaints or breach notices, or some of the staff raised some concerns. The second thing we also did—

Senator FAWCETT: Ms Perkovic, I am going to cut you off, sorry, because we are limited for time. My question was: has either ASIC or the independent expert replicated a similar body of work to that 496 pieces of advice by 51 advisers since the 2007-08 time frame?

Ms Perkovic : The short answer is yes—so, in the enforceable undertaking sign-off of the independent expert, and we also got another accounting firm to have a look at all of the files and pieces of advice. So the short answer is yes.

Senator FAWCETT: You engaged another accounting firm?

Ms Perkovic : We used the independent expert and then we also used another external firm to satisfy ourselves that we were confident with the information and the changes that were made.

Senator FAWCETT: Were the reports from that independent firm also provided to either ASIC or the independent expert?

Ms Perkovic : They were provided to the independent expert.

Senator FAWCETT: Thank you.

Senator WHISH-WILSON: In line with that last question, do CBA management or Commonwealth Financial Planning management conduct their own internal audit?

CHAIR: Senator Whish-Wilson, that question was difficult to hear. Could you please repeat it?

Senator WHISH-WILSON: I just wanted to know whether Commonwealth management, either at Commonwealth Financial Planning or outside the division, conduct their own random audit of ongoing advice, or do you do client surveys?

Ms Spring : Perhaps I can take that question. That situation has changed over time. With respect to the period in the CICP, the compliance and risk management was within the Commonwealth Financial Planning business. One of the events as a result of the CICP was moving risk and compliance out of the business into a line that reported directly to the CRO. With respect to the current situation, we have what we call line 1, line 2 and line 3. Line 1 compliance is an enhanced capability of risk management and compliance and file reviews within the business. That is then checked by the risk management function and compliance function that is outside the business and reports directly to the CRO, and then there is internal and external audit, which is line 3.

Senator WHISH-WILSON: Thank you. Earlier you mentioned the word 'culture'—that you changed the culture of the business. What did you mean exactly by 'culture'? I think Mr Cohen mentioned it.

Mr Cohen : At a high level, what we mean by 'culture' is the environment that people operate in within the business and, in particular, the outlook that they have or the approach that they have towards quality advice versus sales, and that might be worth Marianne talking a little bit about to explain how it is very different.

Senator WHISH-WILSON: Could I also ask you then, in line with that response: have the adviser remuneration structure and management structure been revised at Commonwealth Financial Planning since 2010; and to what effect?

Mr Cohen : Yes, we can certainly describe that. Perhaps if Marianne speaks to the way we have addressed the need for cultural change, and Annabel could speak to the issue of remuneration, which is an important element of culture.

Ms Perkovic : The cultural change component was a very big piece of the change process that we made. As Mr Cohen explained, it was to bring the focus onto quality advice. The main driver of changing that culture was restructuring the remuneration and also the KPIs of not just the planners but all of the management within the advice business, up to my level as well. Two of the key changes in that were gate openers across remuneration payment, firstly, for risk culture and, secondly, for adherence to compliance. Each of those needs to be met before any remuneration is paid to the adviser. And then we have moved to a more balanced scorecard approach, where the focus is absolutely on quality advice and quality advice measures for the advisers but also for people across the business—so the managers of advisers as well.

Senator WHISH-WILSON: Fantastic. I asked this question of an earlier witness: were most of the products being sold around that period, 2007 to 2009, internal products or products affiliated with the Commonwealth Bank—in terms of the financial planning network?

Mr Cohen : We understand your question to be: in the period between 2007 and 2009, were most of the products recommended to customers products that were issued by the Commonwealth Bank group?

Senator WHISH-WILSON: Correct—or affiliated with the Commonwealth Bank.

Mr Cohen : Yes. To give you the precise numbers for that, we would have to take that question on notice and come back to you.

Senator WHISH-WILSON: Yes, if you could.

Mr Cohen : We can certainly give you a general level on that. Annabel has some figures here for you.

Ms Spring : Just as context, in terms of the number of products that are on our approved product list for Commonwealth Financial Planning—indeed, for our entire advice business—26 per cent of the products are Commonwealth Bank products, where 'Commonwealth Bank' is defined very broadly and includes Colonial First State, Colonial First State Global Asset Management, CommInsure and CBA products.

Senator WHISH-WILSON: That is now or previously?

Ms Spring : That is now. I would have to take the other question on notice as to what was actually sold during that time period.

Senator WHISH-WILSON: Okay. That would include insurance products and other general advice products?

Ms Spring : Yes, it does—insurance and asset management products, bearing in mind that for Commonwealth financial planners most of the administrative systems used were the Colonial First State platform. The products sold off the platform are the 26 per cent across the advice business that I referred to.

Senator WHISH-WILSON: Fantastic.

CHAIR: Ms Spring, when you give us the response to that question on notice, can you do so in the form of both the number of products as a percentage and the value of the products?

Ms Spring : I will, yes. I will take it that way. We will have to pick a moment in time, obviously, because value is—

CHAIR: Take the midpoint of Senator Whish-Wilson's—

Ms Spring : We will take some appropriate moment in time.

CHAIR: We want to get to a comparison.

Senator WHISH-WILSON: Thanks, Chair. In relation to changing the culture, could you give us a very brief outline of actions taken against any management in place during the period that we have been reviewing—within Commonwealth Financial Planning?

Mr Cohen : Just to clarify, Senator, are you asking if there were actions taken against employees?

Senator WHISH-WILSON: Certainly senior employees, and whether they are still with the organisation.

Mr Cohen : Certainly. Marianne, you can—

Senator WHISH-WILSON: You can take that on notice too if you prefer.

Mr Cohen : No, we can answer that for you. At a high level, I can give you a general answer. If we are going to talk about specific employees, I would request that we go in camera, because we are talking about existing employees. But at a high level a number of people left the business over the period as part of the change that we instituted in the business. Approximately 72 people in total left the business either through resignation because they were not happy with the way we were changing things or as a result of being terminated. A number of those were planners. I think a total of 12 planners were terminated, and another 11 planners resigned of their own accord. There were other staff who also left as a result of that. There were other sanctions, but those are the main ones, and that was part of the process of changing not only the people but also the attitude within the business.

Senator WHISH-WILSON: Okay. I have one big-picture question: how much was the global financial crisis, one of the biggest financial crises we have ever seen, responsible for this whole discussion today and the risk-management procedures that you had in place to deal with these sorts of crises?

Mr Cohen : Again, I will just repeat the question as we understand it. I think you are asking, firstly, to what extent the global financial crisis was responsible for the circumstances that we are discussing today—

Senator WHISH-WILSON: Correct.

Mr Cohen : and, secondly, to what extent our risk and compliance measures were impacted—

Senator WHISH-WILSON: Or reviewed.

Mr Cohen : or reviewed as a result of the global financial crisis.

Senator WHISH-WILSON: Yes.

Mr Cohen : Perhaps we could deal with the second element first, which is the extent to which our risk and compliance processes and procedures were amended and changed as a result of not just the GFC, to be honest, but also the incidents that have brought us here today. Marianne can talk about that, because I think the short answer is that it is a very different situation today from what it was then, and we can give you the detail.

Ms Perkovic : In our submission we talked about an investment in IT and building capability. One of the learnings that we took from the issues that happened in the business was to develop what we all an early warning system. This has factors like concentration risk, risk profiles and generally the activity of the investment that is happening. These systems allow us to immediately be notified if there are issues or concerns across any of the investments of our customers and any behaviours across advisers. So that system is our first point of call and is working; it has worked in the business for coming up to 12 months now.

We also have completely changed the way that we do file reviews and the processes around actions taken on file reviews. So the compliance culture and policies are completely different, and that is as a result of the learnings from these issues.

Senator WHISH-WILSON: Thank you.

Senator WILLIAMS: Thank you, representatives of CBA. Mr Cohen, who actually has independent oversight of the EU? Is it PwC?

Mr Cohen : PricewaterhouseCoopers—that is correct.

Senator WILLIAMS: Does PricewaterhouseCoopers also do a lot of other work for the CBA?

Mr Cohen : They are our auditors, yes.

Senator WILLIAMS: Is that a conflict, do you think? I think it is. When you are talking about independence, the point I am making is that they are your auditors and they obviously do a lot of work for CBA. You obviously pay them a lot of money over a year.

Mr Cohen : Yes.

Senator WILLIAMS: That seems to me to be a conflict if they have the independent oversight of your enforceable undertaking.

Mr Cohen : As auditors, PricewaterhouseCoopers have to be independent of us. You may be aware that Sarbanes-Oxley requirements in the US drove a big change in how auditors must be independent of the companies that they audit. So PricewaterhouseCoopers have to maintain an arm's length from us in order to be our auditors generally. When it comes to the actual EU, they and we and ASIC were comfortable that their independence as auditors allowed them to be the independent expert in the case of the EU.

Senator WILLIAMS: So Commonwealth Bank appointed PwC as the independent oversight? They were not appointed by ASIC; they were appointed by you.

Mr Cohen : No. The actual appointment is made with ASIC's agreement, but the appointment is made by us. We appointed PwC, with ASIC's agreement.

Senator WILLIAMS: It appears to be a conflict. One could view it is a conflict, given that they are your auditors. But in your opening statement you said that almost all of those customers have been remunerated. Have you got many to go? You said 'almost all'.

Mr Cohen : What I said was that almost all of them have been restituted to their satisfaction. We do have a number of cases where the customers are not satisfied with the restitution—not many; it is a handful.

Senator WILLIAMS: One of the financial products that your advisers, your planners, put people into was a Colonial First State managed fund, was it?

Mr Cohen : You might be referring to the mortgage income fund.

Senator WILLIAMS: Yes. Was that frozen after the GFC?

Mr Cohen : Yes, it was.

Senator WILLIAMS: It is not frozen now or is it still frozen?

Mr Cohen : It is selling assets. Annabel?

Ms Spring : It is actually now a little bit over 99 per cent paid out, and we expect that to pay out, by the end of the year, to 100 per cent.

Senator WILLIAMS: During that period it was frozen, it would not be paying any interest or principal to the investors, obviously?

Ms Spring : That is correct.

Senator WILLIAMS: Did it pay commissions each month to the financial planners?

Ms Spring : Yes, it did—different funds, but, in that bucket, one or two of the funds did overleaf. I will check the exact details. It was not all of them, but some of them did.

Senator WILLIAMS: I find this quite ironic—that a financial planner would advise a client to put their money in this fund of Colonial Mutual, it is frozen, the investor's flow of interest or payments then stops, but the financial planner still gets their commissions. Perhaps that is something we need to look at as far as regulations go with ASIC.

Ms Spring : I understand and appreciate your concern on that matter.

Senator WILLIAMS: It just sounds wrong, doesn't it? The planner says, 'Invest in this financial product of ours here,' it is frozen, the people who have put their money in do not get a thing for so long, but the planner gets a siphoned-off commission each month.

Mr Cohen, I want to take you to Mr Ricky Gillespie. He has been banned for life as a financial planner by ASIC, for forgery and fraud. That is what the report is. When did you report Mr Gillespie to ASIC?

Mr Cohen : We reported that on 11 June 2009.

Senator WILLIAMS: What was the response from ASIC when you reported Mr Gillespie?

Mr Cohen : The initial report to ASIC in June 2009 was followed by a more formal report in August 2010. I do not know the precise response. Marianne might be able to tell us the precise response of ASIC to the very first—

Senator WILLIAMS: Let me take you to the August 2010 one. When you took that to ASIC, what was their response, when the more precise report was given? Did they say, 'We have not got your previous report?'

Mr Cohen : There was at one stage a lack of awareness on ASIC's part as to the initial report that we made, yes.

Senator WILLIAMS: Did they tell you they never, ever got the initial report?

Mr Cohen : I cannot recall if they said they never got it. I do recall that there was a statement to the effect that they were unable to find a record of that.

Senator WILLIAMS: But you had a record of giving that report?

Mr Cohen : Yes.

Senator WILLIAMS: I want to take you to the issue that seven of your planners were suspended. Their AFS licences were suspended. They were scrubbed out of the industry, banned.

Mr Cohen : Banned by ASIC? It is eight now.

Senator WILLIAMS: Eight now. There was one last week, wasn't there?

Mr Cohen : That is right.

Senator WILLIAMS: Was the one last week still working for you at the time?

Mr Cohen : Back then? No.

Senator WILLIAMS: Roughly how many customers did those eight planners have in total? Was that about the 7,000 that you talked about that you reviewed their files?

Mr Cohen : As we mentioned earlier, for the seven planners we reviewed just over 7,000 files. The actual number of customers was just over 1,800.

Senator WILLIAMS: How many planners did you have in CFP during 2008-09? Roughly how many were working as financial planners?

Ms Perkovic : At that time we would have had 700 advisers.

Senator WILLIAMS: With the culture wrong and the advice wrong, as your chairman has said, could one be a little bit suspicious you might have had more than seven or eight bad eggs in the nest?

Ms Perkovic : I think the earlier question that I did answer, which did talk about, once issues were known and we did have a list of advisers, the business actually did go back and review all of the advisers, and that came up with a number of advisers that we did have concerns about. We then used an independent accounting firm to help us determine any patterns and they used some forensic techniques. That led to the total number of advisers that we did have concerns about which was 19 and that included Nguyen and Awkar.

Senator WILLIAMS: Some are still under review?

Ms Perkovic : Some we are still reviewing, correct.

Senator WILLIAMS: Back to Mr Ricky Gillespie. Did you have compliance officers inside your institution investigating?

Mr Cohen : He was investigated as part of the process of investigating planners.

Senator WILLIAMS: There are allegations of forged signatures. Are you aware of that?

Mr Cohen : Yes, I am aware of that.

Senator WILLIAMS: Did you employ an independent assessor to see if the signatures were forged, an expert in that field?

Mr Cohen : We have not employed a handwriting expert, for example, if that is what you are talking about.

Senator WILLIAMS: I believe a quote for a handwriting expert to do it was around $6,000 and management thought $1,000 to $2,000 might be enough to pay a handwriting expert. Do you know if that was the situation?

Mr Cohen : I do not actually, no. We can look into that if you would like us to.

Senator WILLIAMS: I am very concerned. I have some documents here and I will give you an example. One says, 'Although no controlled signatures are available for comparison, what is suspicious is the variation in signatures over a relatively short period of time.' Another one says, 'Our concern is a wide variation between signatures on documents dated 17/6/08 and 18/6/08. Overall variations can be noted also which are difficult to explain as all documents were signed within a short period of time.' It goes on, 'Significant variations between client signatures of both Wilders over a three-month period are quite noticeable. What however stands out is the fact that FSG client receipt dated 14/3/08 is shown as being signed by a Selena Wilda, W-i-l-d-a not W-i-l-d-e-r.' This is the person who is going through the signatures. Then he says, 'The signatures on the above documents are so obviously inconsistent that comment is not required.'

In summary they say, 'For that reason the only sensible way forward is to engage the services of a handwriting expert to provide a reasonably definitive answer. Even a handwriting export will not provide a 100 per cent answer. Whilst taking no action could be an alternative strategy, the obvious difficulty with that approach is that if some way down the track someone external to the organisation takes issue with the veracity of the signatures on our documents, the cost to the organisation if those circumstances arise both financial and reputational may far exceed the cost of engaging a handwriting expert or the income the adviser's question is generating for the business.' Can you perhaps do more research to see whether those signatures were forged by Ricky Gillespie? I believe those documents were forged and I believe forgery is a criminal activity.

Mr Cohen : It is. We are more than happy to make documents available to the police. We have in the past referred advisers to the police where we have found evidence of forgery. In this particular case, we did have allegations of forgery. We did not have the hard evidence that led us to go to the police but we are more than happy to do that. I think you are asking us to look at that more closely because of these concerns. We are more than happy to do that.

Senator WILLIAMS: Even employ the expert. Pay the $6,000 and get an expert to look at the signatures with Mr Nguyen and Mr Gillespie. To have forged signatures in the position they were in is a terrible thing to do. I have little doubt that they have forged signatures.

Mr Cohen : We have nothing to hide about this. If there was forgery perpetrated then we have nothing to hide. There is no gain. It is a criminal offence. It should be reported to the police, as we have done in the past and we would be prepared to do so in the future.

Senator WILLIAMS: Exactly. I will ask ASIC this afternoon to work with you, Mr Cohen, on this very issue and if necessary do a brief to the DPP. If you do the crime, you do the time. That is how our country is. I will certainly be putting that to ASIC to work closely with you on this issue of forged signatures for financial gain by both Mr Gillespie and Mr Nguyen.

To some other issues. Clearly things were wrong in Commonwealth Financial Planning. In brief, give this committee the evidence that things from now on will be right. What have you done to make it right?

Mr Cohen : Annabel, do you want to lead off.

Ms Spring : We have undertaken three broad categories of changes: (1) we have changed our systems and processes, (2) we have changed our structure and management and, as we said before, (3) we have changed the culture. With regard to the systems and processes, there has been considerable investment. I would like to break them down. With respect to document management as a large part of this discussion has been about files, it is very important to be able to have access to files and we have spent $25 million putting in a document management system so that we will be able to have online access to our files and file retention.

The other system we have put in is an adviser early warning system. This is a systematic review of those files, along with themes of the concerns that we have come to understand about the causes and the root causes of inappropriate advice throughout all of these issues. We have gone to each of those root causes, looked to triggers and have a system to follow that acts as an early warning system for investigation and compliance.

Finally, we have put in a system called Connect, which gives us a single view of the adviser, consolidated information around that adviser—including their qualifications, their actions, their clients and, importantly, particularly their customer complaints—so that we are able, with the click of a button, to see all of that with regard to individual advisers. That has been $25 million worth of technology invested across those three.

In respect of changes in structure and management, with regard to structure, as I discussed before, risk and compliance is now outside of the business, as well as there being enhanced risk and compliance inside the business, with an enhanced adviser insurance team operating risk and advice solutions teams inside the business as well as an enhanced focus on risk and compliance from outside the business, and an independent organisation reporting to the CRO. In terms of the broader structure, we have also split the business into two parts. Formerly advice was under Colonial First State. Advice is now a stand-alone business reporting directly to me. This reflects the scale and importance of the business, and also addresses any conflict or perception of conflict of interest with regard to Colonial First State, so advice now is a stand-alone business.

Also with regard to management change, there is no-one in the wealth management advice leadership team who was on that team prior to 2010, and that is particularly important. Also with regard to the advisers who were found to have had issues, none of those advisers are currently employed in the business. One of the things that most disappoints me, firstly, and most importantly, is the customer outcome and, secondly, that we have a set of great advisers in the business who are incredibly angry that this occurred. That has helped us on the cultural journey that this business has had to go on.

With regard to culture, I think we have addressed the training and the remuneration, but there is also a real focus on speaking up. That culture has been on a continual process of being audited by PwC as part of one of the follow-ups to the enforceable undertaking. We did an audit of the culture independently, through PwC, at the beginning of the enforceable undertaking, and also now at the end, and we continue to take engagement scores around topics like speaking up throughout the business, and we do that on an annual basis for the business as a whole.

Senator WILLIAMS: How many compliance officers did you have during the bad time of 2007, 2008, 2009?

Ms Spring : The process at the time of—when doing the remediation, we had an extra 50 people on the remediation alone. We also had around 50 people working on the new systems and processes in the business. And with respect to the extra—

Senator WILLIAMS: With respect, Ms Spring, that is people working on it, but I am talking about compliance officers in your organisation CFP. How many were there then, how many are there now?

Ms Spring : With respect to the enhancements in line 1, Marianne, do you want to talk about the additional staff?

Ms Perkovic : I think it is fair to say that it has significantly increased. And the most important—

Senator WILLIAMS: How do you define 'significantly'?

Ms Perkovic : Sorry?

Senator WILLIAMS: Can you give us any numbers? How many compliance officers did you have in, say, 2007 and how many do you have now?

Ms Perkovic : Okay. From what it increased to, we will have to take the actual number on notice. What I do know is there were at least 10 people who were working in that area. That has now increased to a department in line 1 that has 20 people, and then a department in line 2 that has a further eight people through there.

Ms Spring : With respect to the seniority of the staff, we also have a general manager of risk and compliance specific to advice, which is quite a senior level within the bank.

CHAIR: This brings the allocated time for this session to an end. Mr Cohen, the committee secretary will write to you some time next week with some questions on notice that go to matters relating to Mr Gillespie and ASIC, Project Hartnett, Group Security and Mr Nguyen, independent experts and the offers to clients of $5,000. I would appreciate a relatively quick response because we have to go fairly soon to drafting. We have other constraints on our time, otherwise we would not insist.

Senator WILLIAMS: You do not need an in camera session?

CHAIR: What was that about?

Senator WILLIAMS: Mr Cohen suggested an in camera session at the end of our interview. Mr Cohen, what was it about?

Mr Cohen : It was in response to a question that you asked, Chair, to do with specific client details. You asked about behaviour by Mrs Braund. You asked about patterns of behaviour in relation to Mrs Braund's signatures prior to events in 2008 and 2009.

CHAIR: Could you take the question on notice and provide us a confidential response?

Mr Cohen : Certainly.

CHAIR: If we need to respond to that again we will do so in a confidential manner as well so that there are no names disclosed.

Mr Cohen : Certainly.

CHAIR: Gentleman and ladies, thank you very much for your attendance and your assistance today.

Mr Cohen : Thank you.