RCD.0001.0003.0004 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Submission 29 January 2018 I L\325360228.1 RCD.0001 .0003.0005 Table of Contents Executive Summary ............. ............................. ..... ... ..................... ........ ............. ........ .................... ......... ..... 3 1. Introduction ... .... ..................... ........ ........ ........ ......... .... ........ ................. ............. ................ ............. .... .... ..... 5 1. 1 Overview of approach .. ..... ................................ ..... .... .... ................ ............. ........ ........ ............. ..... 5 1.2 Overview of the Group ...... .... .... ................ ........ ..... ........ ........ ........ .... ................. ................ ..... ..... 6 1.3 APRA inquiry into governance, culture and accountability ..... ........ ........ .... ................. .................. 6 2. Misconduct and related issues since 1 January 2008 .. ........ ..... .... .... ..................... ..... ........................ ..... 8 2.1 Financial Advice: review of poor advice ................................. ............ ......... ........ ........ .................. 8 2.2 Financial Advice: ongoing service review ......... ..................... ................ ............. ........ ................ 11 2.3 Storm Financial. ............ ..... ........ ................ ..... ................ ........ ..................... .................... ............ 13 2.4 Wealth Package customer remediation ..... ..................... .... .... ................ ......... ............................ 16 2.5 IT procurement ..... ........ ..... ........ ................. ..................... ........ ............. ................. ........ ............. ... 17 2.6 Foreign Exchange trading ................. ........ ........ ......... .... ................ ............. .... .... ........ ........ ........ 18 2.7 AML/CTF ........... ... ..... ............ ..... ....... ........ ......... .... ..... ... ..................... ............ ................ ......... ... 19 2.8 Customer remediation activities ................ ..... ... .......... ... ............ .... ........ ..... ................ ................ 20 2.9 Employee misconduct .. ..................................... ..... ........ ................ ...... ........... .... ........ ............. ... 21 2.10 Customer cases ............ ............. ................ .................................................. ........ ........ ................ 22 2.11 Regulatory actions and findings ........ ........ ..................... ........................ ..... ................ ................ 22 3. Community standards and expectations and other conduct related issues since 1 January 2008 ........ 25 3.1 Definition of community standards and expectations .......................................... ................ ........ 25 3.2 Home insurance: flood definition ... .... ................ ......... .... .... .... .................. ... ................ ............. ... 26 3.3 Consumer credit insurance: credit card and loan protection .. ........ ................ .... ......... ..... ;.. ........ 27 3.4 Commlnsure: heart attack definition & related allegations ..... ..................................................... 28 3.5 Unpaid superannuation .............................. ........ ..... ........ ........ ........ ............. ........ ........ ................ 30 3.6 Aussie Home Loans ..... ..................... ........ ............. ........ ........ ........ ..................... ........ ............. ... 31 3.7 Other issues of community interest or concern ..... ......... .... .... ............................. ..................... ... 32 3.8 Enhancements to our business practices to meet community standards and expectations ....... 36 4. Evolving our business to prevent, identify and remediate misconduct and other conduct related issues ... .... .... ................ ..... .... .... ........................ .... ..... .... ................ ..... ... ..................... .... .... ..................... ... 40 4.1 Introduction ............... ......... ......... ........ .... .... ..... ......... .... ............ .......... .... ................ ..... ... ............. ... 40 4.2 Culture .. ........ ..................... ............................. ........................ ... .................. ........ ..................... ... 40 4.3 Governance (including risk management, recruitment and remuneration) ............ ..................... 43 4.4 Group Customer Advocacy ....................... ........ ............. ........ ..................... ................................ 49 5. Industry and regulatory reforms to better meet community standards and expectations .. ......... ............ 52 5.1 Industry reform ............. ....................................................................... ........ ........ ..................... ... 52 5.2 Enhanced regulation .................. ........ ............ .... ..... ........ ........ ........ ............. .... .... .............. ....... ... 53 6. RSE licensees .. ........ ........ ............. .... .................... ..... ........................ ..................... ........ ........ ..... ........... 58 6.1 Use of members' funds ...... ........................ ..................... .... .... ..................... .... .... ........................ 58 6.2 Use of funds in the best interests of members .. .... ................. ........ ............................. ................ 59 6.3 Cost centres ......... ........ ..... ................ ........ ..................... ........ ........ .......... ................................... 60 6.4 Amounts applied ........... ..... ........ ..... ... ........ ............. ..................... ........ ..................................., . ... 61 Annexure A - Timeline of issues, responses, reforms and inquiries ............................. ...................... ....... 63 Annexure B - ASIC Banning Orders and Enforceable Undertakings ..... ........ ..................... ........ ................ 64 Annexure C - Adverse findings made against the Group ............... .... ......................................................... 66 Annexure D - Glossary ................. ......... .... ............ ............. .... ................ ..................... ........ ........................ 70 2 Commonwealth Bank ot Auslrali& L\325360228.1 RCD .0001.0003.0006 / Executive Summary The Commonwealth Bank of Australia Group welcomes the opportunity to provide this submission to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The Letters Patent recognise that "Australia has one of the strongest and most stable banking, superannuation and financial services industries in the world, which performs a critical role in underpinning the Australian economy". Indeed the strength of our financial system was a major reason for Australia avoiding the worst of the global financial crisis. Policymakers, regulators and banks worked collaboratively to ensure that our community and global funders retained confidence in the banking system, and continued to provide the funding critical to Australia's prosperity. Austra!ian businesses and families, in turn, recognised the safety and stability of the banking system. That stability has strengthened over recent years. At the same time, levels of innovation are among the highest of any developed market's banking system, and overall levels of customer satisfaction are high. However, we recognise that instances of poor conduct within financial institutions, including within the Group, have weakened public trust in the financial services sector. Trust is fundamental to the ability of the sector to continue to perform its critical role in the economy. A Royal Commission will ensure that the reasons that trust has been weakened, and the steps required to strengthen trust, can be examined in a balanced and fact-based manner. We support this goal. We have endeavoured through this submission to respond to the Commissioner's request for information in a thorough and transparent manner. We accept fully that there have been instances over the last 10 years where our conduct has been unacceptable, and other instances where we have fallen short of expectations. We address each of those instances in this submission. In doing so, we make a humber of distinctions, which we summarise below. Nature of conduct The Commissioner's request draws a distinction between misconduct and conduct which falls below community standards and expectations. The definition of "misconduct" in the Letters Patent encompasses conduct that is an offence under Commonwealth, State or Territory laws, is misleading or deceptive, is a breach of trust, breach of duty or unconscionable conduct, breaches a professional standard or widely accepted benchmark for conduct. The definition refers to "offences" against relevant laws. In the interests of transparency we have not sought to draw a strict distinction between offences and contraventions of laws. As a result, most of the instances of misconduct identified in this submission involve some degree of non-compliance with financial services laws but not necessarily offences against those laws. The conduct also varies in terms of customer impact, severity and financial consequence. When considering community