Paul Resnik

Australian investors have inferior protection from poor investment advice compared to their peers around the world. That situation won’t change any time soon, despite the findings of a Senate report into the performance of the ASIC, according to Paul Resnik, co-founder of FinaMetrica.

“Of the 61 recommendations made by the Senate Economic References Committee, not one goes to quality of advice and the suitability of recommendations to the needs and circumstances of clients,” Mr Resnik said.

“While there are several references to work undertaken by the Financial Conduct Authority (FCA) in the UK, none were related to investment suitability. The UK regulator has very clear suitability guidelines, virtually none of which can be found in Australian regulations,” said Mr Resnik.

“Investment suitability involves the matching of products and services to meet the specific needs of clients.  This requires advisers to thoroughly understand the needs of investors, their risk tolerance, circumstances, capacity for loss and the investment products available.

“The application of FinaMetrica’s Five Suitability Proofs, which is the generic summary of world’s best practice, would have diminished the likelihood of Commonwealth Financial Planning (CFP) malpractices considerably,” said Mr Resnik.

The Five Proofs are steps advisers should go through to produce good financial advice. They are:

1.   Prove you know the clients’ circumstances, needs and aspirations

2.   Prove you have explored alternative financial behaviours and strategies

3.   Prove you know the products and services being recommended to clients

4.   Prove you have explained to the client the risks in the plan and the products through which the plan will be implemented

5.   Prove you have received the client’s informed consent to the risks in the plan.

“The Australian regulator has an important role in protecting consumers against bad financial advice and taking action against advisers where unsuitable advice is given. ASIC’s attitude to date has been too hands-off, as the Senate enquiry noted. Only as recently as last week, the ASIC Chairman Greg Medcraft said ‘being a free enterprise person, I would rather people sort out the issues between themselves rather than involving ASIC,’ referring to disputes between advisers and consumers.

“He also indicated he was happy for the private sector to take actions against dodgy advisers via litigation funds or class actions, rather than ASIC itself. Such a laissez-faire attitude does little to instill consumers’ confidence that their interests will be protected by the regulator,” said Mr Resnik.

“Nor does it reflect an appreciation of the power imbalance between advisory businesses, which are now largely owned by the big banks, and consumers, many of whom are retirees and more often than not, financially illiterate. Many of these consumers have sustained substantial losses in recent times, as highlighted by the CFP scandal, Storm Financial and others.”

Mr Resnik said what we are seeing today is the result of poor decisions made by successive governments.

“Initially, when the Federal Government began shifting responsibility for retirement from themselves to the community, they created a demand for advice but left it to industry to satisfy that advice. In the early 1990s, ASIC chose to go down a disclosure path rather than a quality of advice route. Hence, amongst other things, the very low entry standards required for financial advisors.

“The Government is ultimately responsible for the legislative and regulatory framework. What we have seen from the industry and the regulator over the last 20 years is only what could have been expected given the framework set,” said Mr Resnik.

Much of FinaMetrica’s business activity is offshore given the push by global regulators to raise the standard of financial advice since the 2007-08 global financial crisis. “We provide an online risk tolerance test which enables financial advisors to measure the financial risk tolerance of their clients and better match investments to investors’ needs. Risk tolerance can be quickly and accurately measured by psychometric questionnaires in as little as 10 to 15 minutes. Such tests are important as financial advisers can often overstate a client’s risk appetite, which is what happened with many CFP planners who put clients into riskier investments than they wanted.

“We hope to attract greater interest in our product from Australian advisory firms given the media focus on CFP and the prevalence of unsuitable financial advice. Our product, and the Five Proofs, are a safeguard for consumers. Our solution is now used by 5,500 advisers in 23 countries and is in seven languages. To date, 700,000 tests have been completed, which is a testament to its utility in the advice process and ensuring best practice,” said Mr Resnik.

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We know this is unacceptable and I unreservedly apologise to all customers affected. Poor advice
provided by some of our advisers between 2003 to 2012 caused financial loss and distress and I am
truly sorry for that.

Today we are announcing our Open Advice Review program. This is a new, far reaching program of
review and remediation with independent oversight, to deliver fair and consistent outcomes for
customers of CFP and FWL. This program demonstrates our commitment to make it right for our
customers.

At no cost to customers, the program will provide an assessment of the advice received, access to an
independent customer advocate and an independent review panel. The program will be fully
transparent to customers. To ensure we reach as many customers as possible there will be an
extensive national advertising campaign.

Before providing further details of the program, I’d like to make some more general comments.

The events considered by the Senate Committee occurred during the Global Financial Crisis, at a
time when most people, even when well advised, were losing money on their investments. The matter
of how to compensate affected customers was complicated. Our principle was to put customers back
in the position they would have been had they received suitable advice. We have already paid $52
million in compensation to more than 1,100 customers of specific advisers who were identified as
having provided poor advice.

We have transformed our CFP and FWL businesses, so that today they can perform the critical role of
providing quality and affordable financial advice to our customers. There have been changes in
management, structure and culture. We have also invested in new systems, implemented new
processes, enhanced adviser supervision and improved training.

However, I acknowledge there are views among some customers, and indeed in the Senate report
released last week, that our approach has not been sufficient for all our customers. We have listened
carefully and this program is a direct response to those concerns.

Open Advice Review program

The key features of the new program will be:

• Any customer who received advice from CFP and FWL between 1 September 2003 and 1
  July 2012 and has concerns regarding that advice will be able to call a dedicated number and
  request an assessment of any advice received in the review period;
• The review of the past advice will be conducted by a specialist Commonwealth Bank team;
  In conducting a review, the specialist team will share the information it has available with the customer and will invite the customer to provide information that the customer has available;
• Once the review is complete the customer will receive an assessment and the offer of an independent customer advocate funded by the Commonwealth Bank;
• A customer who does not agree or is concerned with the assessment will have the option of a further review by an independent panel, determining whether compensation is payable and, if so, how much;
• The Commonwealth Bank will be bound by the outcome of the panel’s determination. However, the customer will not be bound and will still have the option of taking the matter to the Financial Ombudsman Service or pursuing a claim in respect of the matter; and
• We will also have the process overseen by an independent expert who will make their periodic reports public.

The comprehensive nature of this Open Advice Review program demonstrates our commitment to delivering a fair and consistent outcome for customers. This program is in addition to the licence conditions previously announced by the Commonwealth Bank and the Australian Securities and Investments Commission.

In order to improve public confidence in the broader financial planning industry, we will advocate for improved adviser education and training, transparency in adviser quality such as the public adviser register and measures that improve the financial literacy of customers.

The way in which we have transformed our CFP and FWL businesses over the past three years shows our commitment to ensuring that the best interests of our customers are always our first and foremost consideration. This transformation brings CFP and FWL in line with our other businesses at the Commonwealth Bank.

I also want to acknowledge that there are 50,000 people who take pride in working for the Commonwealth Bank who also have felt let down by these events. Their focus on customers over many years has delivered excellent outcomes for over 10 million customers, the 800,000 Australian households who own our shares directly and the millions more who own them through their retirement funds, and the broader community around us.

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