Commonwealth Bank is investigating another compliance breach at its online stockbroking arm, Commonwealth Securities.
Threadbare details of the investigation were revealed in the notes to the subsidiary’s 2023 financial accounts lodged with regulators in the last week of September.
Commonwealth Securities disclosed in note 16 of the accounts that it had launched an investigation to determine whether it had “failed to pass on to clients an opportunity to participate in corporate actions.
“There is a contingent liability with respect to potential future costs associated with this matter,” the CommSec board stated in the note.
Banking Day yesterday emailed questions to CBA to learn more about the investigation, the substance of the compliance breakdown and the potential size of the contingent exposure.
A spokesperson responded late last night, indicating that the breach was not likely to crystallise as a material event for the subsidiary and the group.
“The matter to which you refer in the CommSec accounts relates to remediation work that we are doing for less than 300 advised customers who were holding shares through certain wrap platform products,” the CBA spokesperson said.
“These activities were part of the CommSec Advisory business that we exited in 2019.
“CommSec identified the issue and is working to ensure that any potentially impacted customers are remediated.”
While CommSec did not indicate the size of the potential exposure in its financial accounts, Australian accounting rules require public companies to disclose a contingent liability if directors form a view that it is likely crystalise in the future.
Banking Day understands that CommSec has identified notification breaches dating back to 2014 mostly relating to customers who subscribed to a wrap account product.
In recent years other major financial services providers have been forced to pay heavy fines and undertake large remediation programs for failing to pass on information to investors and advice clients about opportunities to participate in corporate actions such as hybrid security redemptions, share buybacks and rights issues.
In July 2021 Westpac coughed up A$56 million to compensate thousands of advice clients who held ASX-listed securities through its investment platforms.
Westpac undertook the remediation program after it identified 320,000 missed corporate action notifications impacting almost 31,000 customer accounts.
The notification failures occurred over a 14-year period between 2005 and 2019.
ASIC has stepped up its monitoring of notification requirements of investment advisers since the Westpac case by warning all advice licensees to ensure their customer reporting systems are compliant.
The latest internal probe at CommSec adds to the remediation workload of the business, which is still working through several remediation programs for underpaying CommSec staff and overcharging and misleading customers.
In April this year the bank and CommSec admitted to knowingly underpaying more than 7000 staff $16 million over six years to 2021.
Victoria’s Wages Inspectorate has also initiated criminal proceedings against CommSec, alleging underpayment of long service leave entitlements
In October last year the Federal Court fined CommSec $20 million for overcharging clients and an associated business Ausiex (formerly known as CommSec Adviser Services) $7.12 million for breaches of market integrity rules.
The full financial impact of these compliance breaches is yet to be determined as the company continues to investigate issues or wait for independent reviews to be completed.
The compliance challenges are occurring at an awkward moment for CommSec as its core broking operations come under financial pressure.
According to the accounts lodged with ASIC, CommSec suffered large falls in brokerage revenue and bottom line profitability in the 12 months to the end of June 2023.
Brokerage revenue plummeted by $123 million or 36 per cent to $217 million, while fee income more than halved to under $10 million.
The net profit came in at $128.2 million, which was 35 per cent below the 2022 result of $198.5 million.