MELBOURNE: 6 June 2013 - In recent months I have written a number of pieces for the CLMR portal on whistleblowing and the progression towards the establishment of a federal whistleblowing scheme in Australia.  Those pieces have variously examined: the structural potential of whistleblowing to sustain trust relationships between business and consumers; the contested character of whistleblowing as a regulatory mechanism; the increasing use, (especially in the US), of incentives, including bounty payments, to promote the incidence of whistleblowing; and the political context surrounding Australia’s very slow trundle towards a national whistleblower scheme.

Currently the Commonwealth Government’s long-awaited Public Interest Disclosure Bill is before the House of Representatives Standing Committee on Social Policy and Legal Affairs where relevant submissions closed on 19 April 2013. The Bill had its First Reading in Parliament on 21 March 2013, (yes that day of high political drama, the one of the National Apology to victims of forced adoption or removals policies and practices contrasted by the Simon Crean appeal before the Canberra Press Gallery for the Kevin Rudd leadership challenge that never was).

Whistleblowing in all jurisdictions can be contested and highly political.  However it has been intensely so in Australia in recent years, not least because a national whistleblowing scheme has been championed by Independent MPs Andrew Wilkie, Rob Oakeshott and Tony Windsor on whom the Gillard Labor Government has depended for its very survival.  Indeed Independent MPs Rob Oakeshott and Tony Windsor drew a commitment from Prime Minister Julia Gillard in September 2010 to introduce whistleblower protection legisla­tion to the Parliament as part of the agreement that assured her of minority government. 

So, the combination of politics and whistleblowing has been a combustible mix in Australia in recent years and this was clearly evident in acrimonious exchanges in the June 2013 Estimates hearing before the Economics Legislation Committee.

The hearing began serenely enough with Mr Peter Kell, Deputy Chair of the Australian Securities and Investments Commission (ASIC) describing ASIC’s strategies to counter cybercrime especially threats from organised criminal groups.  However, Mr Kell quickly came under sustained and hostile questioning from Senator Williams who was extremely critical of the manner in which ASIC had responded to whistleblowers within Commonwealth Financial Planning (CFP) who had first tipped-off ASIC about alleged wrongdoing within CFP in October 2008.  CFP is a wholly owned subsidiary of Australia’s largest bank the Commonwealth Bank of Australia (CBA), CFP operates under the business advice structure of Colonial First State (CFS) which is also part of CBA. 

Senator Williams argued that ASIC had not responded in a timely or effective manner to whistleblowers at CFP including Mr Jeff Morris who has been prominent in media reports discussing the scandal.  Those reports allege that Mr Morris and six of his colleagues first anonymously blew the whistle to ASIC in October 2008 about Mr Don Nguyen and some of his CFP colleagues, not only that they engaged in systematic misconduct involving substantial numbers of the 1300 clients and up to $300 million in client money for which they had responsibility, but also that files relative to this activity were being ‘cleaned up’ within the bank. 

Some of the alleged misconduct by Mr Nguyen has been reported to include: forging client signatures, creating unauthorised investment accounts and overcharging fees, with some clients losing more than half their life savings. Helping to ensure continuing high-profile media coverage of the scandal is that fact that one of the alleged investor victims has been 77 year old Patricia Babbage, who is the mother-in-law of the Opposition Treasurer spokesman, Mr Joe Hockey.

There was ongoing correspondence over a sustained period from October 2008 between the anonymous whistleblowers and ASIC.  In shades of Wikileaks that ASIC email correspondence and loan application forms have been made available on the internet by a lobby and support group the Banking and Finance Consumer Support Association.

With no enforcement response, forthcoming, Mr Morris in February 2010, frustrated by what he saw as this lack of investigative and enforcement response from ASIC, actually personally went to ASIC’s office to directly report his concerns to an officer of ASIC. That February 2010 meeting did stimulate a significant response from ASIC.  ASIC media release 11-229 MR concerning ASIC’s Enforceable Undertaking (EU) with CFP states that: ‘In August 2010, CFP implemented a client compensation program following an ASIC investigation into the activities of its former adviser, Mr Don Nguyen. In cases where inappropriate advice was given by Mr Nguyen, CFP calculated the investment positions the clients would have held had they received the appropriate advice and compensated them accordingly….[Subsequently] In March 2011, Mr Nguyen was disqualified from providing financial services for 7 years.’  Also: ‘Under the EU, CFP will proceed to develop an implementation plan to address any unresolved deficiencies identified by the assessment of its risk management framework.  The implementation of the plan will be the subject of review and ongoing reporting to ASIC over the next 2 years by an independent expert (whose engagement is to be approved by ASIC).  Colonial First State has indicated to ASIC that it will seek to implement the benefits of its review of CFP’s risk management framework across all of its advice businesses.’

ASIC is satisfied with this regulatory response as is clear from the evidence that Mr Kell provided to the Estimates Committee: ‘What we achieved here was an enforceable undertaking that completely change the way the Commonwealth Financial Planning operated. Its leadership was changed whole scale. We obtained the formal removal of seven of the advisers from the industry. In relation to just one adviser, Don Nguyen, we have obtained through our actions more than $23 million in compensation to date for 202 investors. There are another nine compensation claims in relation to that that are yet to be finalised. We are working with the bank to ensure that that happens as soon as possible.  It has been a landmark achievement that has completely changed the way that firm conducts its operations.  It has set a new benchmark for raising the standard of financial advice and has meant tens of millions of dollars in compensation for hundreds of investors.'

Senator Williams did not find Deputy Chair Kell’s interpretation persuasive: ‘I disagree with you because it took you 16 months to actually act on this.  The point I am making, Mr Kell, is that you were told of wrongdoings and 16 months later when the whistleblower actually went to your office then you acted.’

Deputy Chair Kell defended ASIC’s position on whistleblowers: ‘Our whistleblower policy is very clear.  We do not discuss whistleblowers in relation to any particular matter. We do not deny and we do not confirm that whistleblowers have been involved in any particular matter.  It would, for fairly obvious reasons, undermine the integrity of our whistleblower policy.  There are also protections in the law for whistleblower confidentiality.  I am not going to go into that sort of territory; it would be deeply irresponsible for me to do so.’

ASIC’s whistleblower policy confirms Deputy Chair Kell’s statement. 

In addition to the anger regarding the harmful behaviour of Mr Nguyen and associates, allegations of ‘cleaning up’ systematically the relevant files and the perception in some quarters that there was a sixteen month delay before ASIC took meaningful regulatory action, a contentious issue in the CFP scandal is the view that the whistleblowers involved and others who might end up in their situation receive insufficient support and protection. 

Anonymous reports are not protected under Part 9.4AAA of the Corporations Act 2001 and it remains to be seen whether these protections would be strengthened under any future Commonwealth legislation in the area of whistleblowing, it is an issue that is highly charged politically.

Following Senator Williams’ criticism of ASIC, in that same Estimates hearing Senator Cameron revealed that he too was not convinced by the adequacy of ASIC’s response.  He proceeded to put on formal notice to Mr Kell a series of questions not only about Mr Nguyen, but also about the procedures of ASIC in these contexts and how financial institutions like CBA value integrity in their operational cultures and workplaces:

‘Could you take that on notice and advise the Senate of the losses that took place between when you were advised in October 2008 and when Mr Nguyen finally resigned on 6 July 2009.  That is an important issue for the Senate. Could you also advice on notice what the problems were with the CBA procedures when in 2008 Mr Nguyen was investigated by CBA. What were the weaknesses in the CBA procedures in that investigation and why after that investigation did the Commonwealth Bank promote him on 15 October 2008 to senior planner, even after those issues had been raised?  I cannot understand why that would happen.  If there is a reason why it happened, the regulator is entitled to know and you should advise us as to why that weakness is in the Commonwealth Bank's processes.  Could you also advise us why Mr Nguyen was allowed to resign on 6 July, citing illness, when it was clear that that was not the case.  What are the implications if financial planners can resign on the basis of illness when they have been engaged in illegal activities and can then walk away to another financial planning agency?  What checks and balances can you use to ensure banks and financial organisations put in place to stop this happening in the future? Take that on notice.

Could you also take on notice why you are saying that you have done—in the colloquial; it is not what you said, but this is what you basically indicate to Senator Williams—a good job and that you have resolved this issue.  Why, then, do you see simply returning some financial losses to individuals as you doing a good job when they suffered humiliation and depression? One client had a stent put in his heart and had cirrhosis?  There are these other areas of loss to individuals.  Is it simply that your position?  Is the legislation limited to financial recompense, with there being nothing for pain and suffering?  Take that on notice and advise us if that is a weakness in the legislative process that the government should take a look at.  Is it appropriate for the Commonwealth Bank or any agency, when they know that their officer has acted illegally, to first of all offer a pittance to resolve the losses of the individuals and then progressively up the offer and put these individuals through more stress?  Why is that a culture or a process in financial organisations and what can ASIC to do to resolve that?  You can take that on notice.

You can also take on notice the issue of your submissions to the AAT.  I want to quote from the Sydney Morning Herald.  It says: 'tribunal member Geri Ettinger said: "I am mindful that there is no allegation that Mr Nguyen engaged in dishonest conduct."  Why did ASIC make a submission the tribunal of dishonest conduct against this individual?  Take that on notice. That is a very serious issue, in my view, that we need an answer on.  Could you outline on notice why ASIC put a penalty of seven years on an individual who, on the basis of what I have read here—and you must know more about it—was engaging in illegal activity.  Why should this individual be free to act as a financial planner in seven years time.  Take that on notice and give us the details and the arguments that you went through to deliver a seven-year ban and why you did not seek a ban for life for this individual, who was destroying the lives of ordinary Australian citizens.  I might put more questions on notice in writing to you.’

Senator Cameron has been quoted as saying that ASIC is doing a ‘crap job’ in dealing with the CFP scandal. This may or may not be a fair assessment of the situation but the concerns expressed by Senator Cameron do relate to the very real damage and hardships endured by individuals as a result of the business practices employed by Mr Nguyen and his former colleagues at CFP.  However, they also ask important questions about the core operational cultures of financial institutions, not only what value they place on prioritising the well-being and best interests of their clients, but also the integrity of the people whom they employ and the extent to which they promote integrity within the workplace environments that they control. 

Mr Cameron’s questions are also important, and uncomfortable, for ASIC to answer, because they highlight whether the requirements that it demands through its enforceable undertakings regime place sufficiently stringent conditions on financial professionals whose business strategies are damaging to their clients’ best interests.  Similarly, ASIC is being asked to evaluate whether increased legislative oversight and demands should be imposed in its operational space regarding how the interests of consumers who suffer harm might be compensated.

These are difficult, emotive and complex issues, but as financial scandals seem to continually roll in like the tide, such as Westpoint, Trio, Banksia and CFP, watchdogs such as ASIC, and financial institutions such as CBA, will face scrutiny and hostile questioning from parliamentary committees, the media, disgruntled investors and the general community.  Whether parliamentary and public expectations about the levels of consumer protection that regulatory watchdogs such as ASIC are expected to deliver are realistic given the funding levels such regulatory actors actually receive is a moot point. 

ASIC has been very open about what it is able to achieve in terms of its enforcement outcomes given its operating budget and its extensive administrative remit. 

In an interview related to that report ASIC Chair Mr Greg Medcraft emphasised that: ‘You get what you pay for.’ He went on to stress that: ASIC had only 26 staff to cover 25 investment banks; the 135 insurers are reviewed only once every seven years; although the big four audit firms are reviewed once every 1.5 years the remaining 72 audit firms are reviewed less than once a decade; and that although the top 20 financial planners are reviewed once every 1.7 years, for the next 30 largest it is only once every 3.8 years.

This is the actuarial reality of contemporary Australian financial regulation. 

Nevertheless, it is inevitable that there will be pressure to see if specific concerted regulatory initiatives do emerge that do seem to improve both standards of operational behaviour within financial services and markets and how regulatory and industry actors respond to actual and/or possible wrongdoing. 

It will be interesting to see whether the events surrounding CFP have stimulated any noticeable change in the proposed federal whistleblower regime, especially regarding increased protections and support for whistleblowers, both known and anonymous, if/when the Public Interest Disclosure Bill receives a Second Reading before Parliament rises for the forthcoming.