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BFCSA: ASIC probe found huge profits in CBA term deposit rort

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ASIC probe found huge profits in CBA term deposit rort

The Australian 12:00am March 30, 2019

Ben Butler

 

EXCLUSIVE  An Australian Securities & Investments Commission investigation found Commonwealth Bank obtained “hugely inflated profits” by ripping off term-deposit customers in an elaborate strategy that included hiring data analytics firm Quantium, previously secret documents reveal.

A December 2008 ASIC memo, obtained by The Weekend Australian after a 20-month Freedom of Information battle, also reveals the role played in defending CBA by one-time contender for ASIC chairman and current AMP non-executive director John O’Sullivan, who at the time was the bank’s top in-house lawyer.

Mr O’Sullivan told The Weekend Australian his role in the issue was investigated by the Turnbull government in 2017, when he was in the running to succeed Greg Medcraft as ASIC chair, and he was cleared.

In October that year, Mr O’Sullivan, who was Credit Suisse’s Australian chairman at the time, was forced to withdraw from the race after Labor ran a ferocious campaign against his appointment.

As The Weekend Australian has previously reported, ASIC launched an investigation into CBA’s alleged term deposit scam in October 2006, but dropped it in March 2010 despite receiving legal advice it had a solid misleading and deceptive conduct case against the bank.

ASIC was concerned that CBA did not tell customers that if they did nothing when their term deposits expired, their money would be rolled over into a product that paid about half as much in interest.

CBA’s alleged practices spread across the banking industry, costing customers an estimated $200 million a year, but the problem was dramatically reduced after ASIC put out a report castigating financial institutions over term deposit pricing in March 2010.

ASIC’s December 15, 2008 memo, sent by Simon Moran to senior management including David McGuinness, who now leads the regulator’s efforts to crack down on the troubled wealth management industry, Greg Kirk, now in charge of strategy and Michael Saadat, who runs the deposit takers, credit and insurance team, outlined the state of the CBA term deposit investigation at the time.

It reveals that ASIC met with CBA’s general counsel, Mr O’Sullivan, “to discuss CBA’s conduct in relation to the provision of term deposits” in November 2005 — almost a year before the regulator began its formal investigation.

After the 2005 meeting, ASIC received what is described in the memo as “correspondence from Mr O’Sullivan”, but as the section has been redacted, it is not known what the letters contained or whether they were personally written by Mr O’Sullivan or sent by him on behalf of another of CBA’s lawyers.

However, it is believed CBA told ASIC that documents given to term deposit customers — a product disclosure statement and a letter shortly before rollover — gave adequate warning of the lower rate.

The bank is also believed to have told ASIC that hardship provisions meant that customers could break a term deposit open if they were in financial difficulty.

Despite this, Mr Moran told his superiors that “ASIC’s concerns remain”.

“ASIC concluded from the investigation that CBA consciously devised and implemented a strategy that … utilised the ambiguity (at minimum) of its PDS and renewal notices” and “utilised its extensive knowledge of a particular class of depositors who were price inelastic … to lower non-headline rates to levels which were at times below inflation and ensuring that customers automatically rollover into non-headline rates to obtain hugely inflated profits from the price inelastic deposit holders”.

The strategy was “refined through extensive modelling and testing (including briefing external consultants Quantium),” Mr Moran said.

Quantium, which is half-owned by supermarket giant Woolworths, declined to comment.

Mr Moran said that “ASIC remains concerned that CBA’s advertising and disclosure documents are misleading and deceptive”.

He said ASIC “has not sought a response to these findings” but wanted CBA to amend its advertising “so as not to represent that returns are competitive or that term deposits are low maintenance” and change its disclosure documents to warn that the new rate at rollover would be “significantly lower”.

Mr O’Sullivan told The Weekend Australian that he represented CBA “in discussions with ASIC about this matter” in his capacity as the bank’s general counsel.

“I had no involvement in the design or implementation of the term deposit and therefore simply acted on instructions of the bank executives who did design and implement the product,” he said.

“My recollection is that the bank’s perspective was that the disclosures and features of the product, as discussed with ASIC, were such that the product was suitable for use.”

A CBA spokeswoman said the bank was unable to comment on questions about the memo — including how much the bank reaped in “hugely inflated profits” — because it was an internal ASIC document.

 

 

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