ASIC has commenced proceedings in the Federal Court against Commonwealth Bank and its subsidiary Colonial First State Investments over alleged conflicted remuneration.
ASIC’s claim relates to remuneration paid by Colonial to CBA between July 2013 and June 2019. It alleges that more than A$22 million of conflicted remuneration was paid for the distribution of a Colonial superannuation product, Essential Super.
About 390,000 people became members of Essential Super under CBA branch and digital distribution arrangements.
ASIC alleges that the remuneration arrangements could reasonably be expected to influence the choice of financial product recommended by CBA or the financial product advice given by CBA to retail clients. Such remuneration arrangements are banned under the conflicted remuneration provisions of the Corporations Act.
ASIC is seeking civil penalties. The regulator is acting on a referral from the Hayne royal commission, which found that CBA received around 30 per cent of the total net revenue earned by the trustees in relation to the fund.
In a submission to the royal commission, CBA and Colonial argued that the fee arrangement could not be expected to influence either the choice of product recommended by CBA branch staff or the advice given because the branch staff were not directly rewarded for sales of Essential Super.
Commissioner Hayne disagreed, saying: “It is to be remembered that the distribution agreement required CBA to use its branches to distribute Essential Super. In return for that service, and others, CBA was to receive 30 per cent of the revenue earned by the trustee in relation to the fund.
“It follows that the greater the volume of sales of the product, the more revenue CBA would receive. In this way, it could reasonably be expected to influence which product branch staff were trained and told to recommend and the financial product advice given to retail clients.”
“Indeed, it would be surprising if it did not have that effect.”
The royal commission final report spells out other concerns that ASIC had about the sales of Essential Super through CBA branches. In 2017 it told the bank it suspected that branch staff were providing personal advice, as opposed to general advice, in the sale of the product and may be in breach of the Corporations Act.
The claim over Essential Super is the second case coming out of the royal commission that ASIC has brought against the bank this year. Earlier this month the Federal Court ordered CBA to pay a $5 million penalty, after it found that the bank had breached the ASIC Act and the Corporations Act over the failings of its Agri-Advantage Plus Package (AA+ Package).
Between 2005 and 2015, CBA sold the package, promising fee waivers, interest rate discounts on loans and bonus rates on savings, in exchange for the payment of fees on 22 CBA products.
ASIC alleged that CBA did not provide the advertised benefits and that, as a result, customers were overcharged. The bank acknowledged the failings and conceded that it had no systems in place to check whether customers were receiving benefits.