cba wealth management business issues management

Liability limited by a scheme approved under Professional Standards Legislation.

Member of Deloitte Touche Tohmatsu Limited

CBA Wealth Management

Business Issues Management Draft 19 July 2012

CONFIDENTIAL TO CBA AND SUBJECT TO LEGAL PRIVILEGE

This is a draft document. As it is a work in progress it may be incomplete, contain preliminary conclusions and may change. You must not rely on, disclose or refer to it in any document. We accept no duty of care or liability to you or any third party for any loss suffered in connection with the use of this document.

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CBA Wealth Management – Business Issues Management CONFIDENTIAL TO CBA AND SUBJECT TO LEGAL PRIVILEGE

Table of Contents

1. Executive Summary 3

2. Findings 6

3. Appendix A: Approach 24

4. Appendix B: Scope - Business Issues Identification 26

5. Appendix C: Scope - Data Analytics 30

6. Appendix D: Findings for provisioning modelling input 34

7. Appendix E: Risk profile assessment 38

Statement of Responsibility We take responsibility for this report, which is prepared on the basis of the limitations set out below. The matters raised in this report are those which came to our attention during the course of our work and are not necessarily a comprehensive statement of all improvements that might be made. Recommendations for improvements should be reviewed by management for their full commercial impact before they are implemented.

Inherent Limitations The Services provided are advisory in nature and have not been conducted in accordance with the standards issued by the Australian Auditing and Assurance Standards Board and consequently no opinions or conclusions under these standards are expressed.

Because of the inherent limitations of any internal control structure, it is possible that errors or irregularities may occur and not be detected. The matters raised in this report are only those which came to our attention during the course of performing our procedures and are not necessarily a comprehensive statement of all the issues and/or weaknesses that exist or improvements that might be made.

Our work is performed on a sample basis; we cannot, in practice, examine every activity and procedure, nor can we be a substitute for management’s responsibility to maintain adequate controls over all levels of operations and their responsibility to prevent and detect irregularities, including fraud.

Any projection of the evaluation of the control procedures to future periods is subject to the risk that the systems may become inadequate because of changes in conditions, or that the degree of compliance with them may deteriorate.

Recommendations and suggestions for improvement should be assessed by management for their full commercial impact before they are implemented. We believe that the statements made in this report are accurate, but no warranty of completeness, accuracy, or reliability is given in relation to the statements and representations made by, and the information and documentation provided by CBA Wealth Management personnel. We have not attempted to verify these sources independently unless otherwise noted within the report.

Limitation of Use This report is intended solely for the information and internal use of CBA in accordance with our letter of engagement signed May 2012, and is not intended to be and should not be used by any other person or entity. No other person or entity is entitled to rely, in any manner, or for any purpose, on this report. We do not accept or assume responsibility to anyone other than CBA for our work, for this report, or for any reliance which may be placed on this report by any party other than CBA.

About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/au/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.

Confidential - this document and the information contained in it are confidential and should not be used or disclosed in any way without our prior consent. © 2012 Deloitte Touche Tohmatsu. All rights reserved.

Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited

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CBA Wealth Management – Business Issues Management CONFIDENTIAL TO CBA AND SUBJECT TO LEGAL PRIVILEGE

1. Executive Summary Introduction

Deloitte were engaged by CBA Legal Services to assist in identifying and assessing potential latent issues within the CBA Wealth Management (CBA WM) financial advice business that have not been the focus of current investigation or remediation programs.

The purpose of this report is to detail the findings of the work performed and to provide recommended actions to address any areas of concern identified.

Scope and objectives The scope of the engagement included all CBA Advice Licensees with the exception of Count Financial, which is to be a subsequent engagement commencing after July 2012.

There are four core objectives of the engagement: Compiling a comprehensive list of potential risks in the financial

advice business and working through the comprehensive list with CBA WM to determine the potential latent issues applicable to your business. From this list determine the scope of assessment activities based on the CBA WM risk appetite

Assessing potential latent issues agreed with CBA WM to identify whether a valid concern exists and applying investigative or analytical techniques to size and inform the provisioning model, being completed by CBA WM Finance, of potential issues

Identifying ‘high risk’ planners (based on a set of risk criteria agreed with CBA WM), within the financial planning network, through the use of advanced data analytics

Proposing recommended actions for improvement.

Approach To assess for potential latent issues within the agreed Licensees, we:

performed a risk assessment across the Licensees considering customer, financial, regulatory or operational impact

discussed the outputs of the risk assessment with CBA WM management

excluded known issues and scope areas that are being addressed as part of existing ongoing initiatives e.g. Project SAM, Regulatory Reform Project.

The assessment resulted in the identification of 13 risk categories agreed with CBA WM as in scope for this engagement. These were as follows:

1. Adviser on-boarding 2. Adviser qualifications, training and accreditation 3. Adviser off-boarding 4. Advice tools, templates and systems 5. Advice quality and delivery 6. Ongoing advice service 7. Advice fees 8. Records management 9. Approved product lists 10. Prohibited conduct 11. Marketing 12. Regulatory compliance 13. Revenue leakage

Work plans for the above categories were developed, discussed with and approved by CBA WM.

The findings in respect of the categories assessed, together with recommendations for improvement, are summarised in Section 2 of this report. The summaries of our data analytics tests to be used as inputs into the CBA WM provisioning model are detailed in Appendix D of this report.

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Executive Summary


This report is intended solely for the information and internal use of CBA and should not be used or relied upon by any other person or entity


Key Findings In analysing the results we have identified the following four findings rated as ‘Very High’ which we believe warrants CBA WM’s close attention. In addition we identified a further 16 findings of which 5 are rated ‘High’. Section 2 of this report contains the summarised details of the specific concerns identified within each of the 13 risk categories.

Key findings Recommendations

Advisers requiring investigation

We identified over 40 advisers demonstrating relatively large similarities to known high risk advisers.

Validate advisers at risk with Licensees and determine appropriate management action.

Overcharging and undercharging of fees

Controls have not been designed to prevent fees being overcharged or undercharged. We identified at least: 180 clients currently being overcharged Ongoing Service (OGS) fees by a total of $35K each

year 5000 OGS clients paying less than the minimum relevant financial services guides (FSG) fees by

$4.3M.

However, if these clients are found to not be receiving OGS due to data quality (see Key Limitations section below for further details), then they appear to have been overcharged for standard service fees.

Starting with sample based analysis, validate whether issues are due to data quality or whether inaccurate fees have been charged.

Enhance controls to reduce the risk of fees being undercharged or overcharged by: Developing a fee schedule for Financial Wisdom; Implementing system controls that prevent fees being under or

overcharged Implementing detective controls (e.g. exception reports) that identify

instances where fees have been over or undercharged Implement financial accounting processes to record and receive fees

due Ineffective provision of ongoing service

Clients in OGS programs are at risk of not receiving contracted services due to a number of observed deficiencies including: Controls have not been designed to ensure that OGS clients are reviewed on an ongoing basis Clients flagged in FMS as OGS clients are not always on OGS programs Clients may be removed from OGS without the client being consulted.

We identified over $700K in OGS fees being charged on an annual basis to over 1050 clients that are allocated in the system to over 50 inactive planners that left before 2012.

Starting with sample based analysis, validate whether issues are due to data quality or whether OGS services have been provided.

Develop and document effective controls for managing an OGS client including initial set-up, ongoing service and removal from the program.

Customer information not effectively managed

There is no effective system in place to manage client information and workflow to enable compliance, effective risk management and client service standards to be met and in a post-FOFA environment, to deliver cost effective advice according to customer needs.

Client details are captured in various systems and not in a consistent or accurate manner.

There is no program which is currently examining the development of a customer information system.

Develop a customer centric system that informs all aspects of the advice operating model and, in the interim, develop temporary solutions to be able to effectively manage compliance with contractual and regulatory obligations.

Address data quality issues including use of consistent naming conventions.

Consider mechanisms to encourage Authorised Representatives (ARs) to convert to one preferred advice software tool.

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Executive Summary




Key limitations As agreed with management, the scope of our work did not include the examination of client files or statements of advice nor did it include operating effectiveness of controls. We did not assess elements of Project SAM or the Regulatory Reform Project to consider risks relating to compliance with the Enforceable Undertaking (EU) and preparedness for FOFA legislation.

There were also constraints with the data which are detailed in Appendix D with the key limitations being:

data integrity issues existing across various systems the lack of insurance data as it was not able to be provided by the

requested timeframes; no data available on products outside FMS (note: FMS accounts for

approximately 90% of investment data)

Acknowledgement We take this opportunity to thank all CBA staff who participated in this engagement for their assistance and the professional manner in which they responded to our inquiries.

Sarah Woodhouse

Partner

Deloitte Touche Tohmatsu

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Findings




2. Findings 2.1 Summary of findings This section provides a summary of all findings detailed in this report for all licensees and risk areas in scope. For the purposes of clarity, any known issues currently being addressed as part of existing initiatives (e.g. Project SAM, Regulatory Reform Project) are not in scope. Our scope is set out in Appendix B.

The finding rating applied is based on the methodology detailed in Section 2.3.

Finding ref Finding Finding

rating

1. Advisers requiring investigation Very High

2. Overcharging and undercharging of fees Very High

3. Ineffective provision of ongoing service Very High

4. Customer information not effectively managed Very High

5. Limited capability to identify where advisers are performing certain high risk activities High

6. Ineffective controls for quality specialist advice High

7. Ineffective recording and reconciliation of revenue High

8. Acquired clients are not risk assessed High

9. Ineffective reallocation of clients High

10. Products on the Approved Product List (APL) are not being reviewed on an ongoing basis and the management of product conflicts is not explicit Medium

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Finding ref Finding Finding

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11. Closer alignment of advice operating models to mitigate risk Medium

12. Unclear accountability and methodology in licensee standards for specific situations Medium

13. Clients not notified of significant events Medium

14. Financial Needs Analysis (FNA) requires enhancements Medium

15. Data integrity and quality issues Medium

16. No effective process in place to continually maintain accurate records of adviser qualifications Low

17. Key documents may be implemented without appropriate due diligence Low

18. Key information is being stored in ad-hoc systems that are not robust Low

19. Conflicts of interest register does not recognise all key activities Low

20. Responsible Managers (RMs) structure may be insufficient Low

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Findings




2.2 Summary of recommendations

Ref Recommendations

R1 Investigate potential high risk advisers

R2 Investigate potential client issues (e.g. OGS, fee overcharging, advice without qualifications)

R3 Enhance controls in relation to advice fees

R4 Develop effective OGS management system

R5 Develop customer centric information system

R6 Enhance systems to better identify high risk activities

R7 Enhance controls pertaining to specialist advice

R8 Improve arrangements for fee reconciliations from product providers

R9 Implement invoicing and reconciliation processes for advisers

R10 Develop centralised processes to assess and manage client acquisition risk

R11 Develop and document off-boarding methodology

R12 Enhance APL processes

R13 Introduce consistency in advice operating models

R14 Enhance licensee standards and communicate changes

R15 Enhance Financial Needs Analysis template

R16 Develop data integrity controls, consistent naming conventions and data field requirements

R17 Formalise qualifications management process

R18 Enhance due diligence processes for key advice documents

R19 Enhance the management of records stored in ad-hoc systems

R20 Update the conflicts of interest register

R21 Restructure RM listing

The chart below illustrates the expected benefit against the estimated amount of time and effort to implement each recommendation. The recommendations listed to the right, may relate to more than one finding.

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Findings




2.3 Rating methodology The finding rating methodology detailed below is derived from the CBA Group and Business Unit Impact Matrix.

Finding rating Description

Client Legal and regulatory Operational

Very High

Finding may lead to significant loss in client numbers or significant client restitution.

Finding may result in systemic and/or significant breaches resulting in loss of major fines or significant regulatory action (i.e. EUs, licence condition changes).

Finding may lead to significant data integrity issues or significantly impact ongoing effectiveness or efficiency.

High

Finding may lead to some loss in client numbers or some client restitution.

Finding may result in major systemic instances of non-compliance resulting in increased regulatory oversight and/or major impact on regulator relationships.

Finding may lead to significant data integrity issues or some impact on ongoing effectiveness or efficiency.

Medium

Finding may lead to minimal loss in client numbers or minimal client restitution.

Finding may result in instances of systemic complaints or compliance incidents or a potential impact on regulator relationships.

Localised minor business impact, which should be able to be remediated as part of BAU.

Low Finding may lead to service standards being impacted but negligible client loss expected.

Finding may result in compliance incidents which are not systemic.

Minimal impact to business operations.

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Findings




2.4 Detailed findings and recommendations This section provides the detailed findings and recommendations of the work performed. The recommendations were developed with consideration of the existing initiatives (e.g. Project SAM, Regulatory Reform Project) currently being undertaken within CBA WM. Recommendations have been rated based on the potential value that could be realised from the recommended actions and the level of effort required.

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1. Advisers requiring investigation

The data analytics tests identified a list of advisers demonstrating relatively large similarities to known high risk planners. The details of advisers by licencee, and reasons for their identification, have been provided in separate reports to management.

VH R1 Investigate potential high risk advisers

Further work should be undertaken by the Licensees to investigate the advisers to validate whether a concern exists.

Options to investigate include establishing projects to specifically look at the advice provided by these advisers; prioritising these advisers for targeted reviews; or prioritising these advisers for Advice Assurance (AA) reviews.

There are existing methodologies that have been developed for assessing advice files (e.g. AA reviews, targeted reviews) and this can be leveraged when investigating advisers.

Where the adviser has been terminated, further analysis may be required to identify if the clients have been reallocated to another adviser.

Depending on the findings of the above actions, consideration should also be given to expanding the investigation to include insurance data.

VH M - VH

2. Overcharging and undercharging of fees

Controls have not been designed to prevent fees being overcharged or undercharged.

There may be over 180 clients currently being overcharged OGS fees by a total of $35K each year.

We also identified over 5,000 clients that appear to be

VH R2 Investigate potential client issues

Starting with sample based analysis, validate through examining advice files on whether the potential issues identified are as a result of data quality issues only or whether clients have been impacted. These issues are

- Finding 2: Overcharging and undercharging of fees

VH H-VH

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receiving OGS but are being undercharged by $4.3M. However, if these clients are found to not be receiving OGS then they may have been overcharged for standard service fees.

Financial Wisdom have not introduced upper or lower limits for fees within the FSG or issued guidance to advisers as to what constitutes an excessive fee.

- Finding 3: OGS not being met for clients attached to inactive planners

- Finding 5: Advice being provided by advisers without appropriate qualifications.

Utilise the results of the validation to determine next steps.

Confirmed issues may require the following action to be taken:

- Re-allocation of the client to an adviser where the client is not attached to an active planner

- Correction of system data

- Consideration of any client remediation required (e.g. refund of fees, review of advice to determine any potential loss)

- Performance management.

Given the potential level of effort required, it may be more suitable to establish a separate program to investigate and validate these potential issues.

R3 Enhance controls in relation to advice fees

Enhance controls in relation to reduce the risk of fees being undercharged or overcharged by:

Developing a fee schedule for Financial Wisdom;

Implementing system controls that prevent fees being under or overcharged

Producing detective controls (e.g. exception reports) that regularly identify instances where fees have been over or undercharged so that appropriate action can be taken.

VH H

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3. Ineffective provision of ongoing service

Clients in OGS programs are at risk of not receiving contracted services due to a number of observed deficiencies including:

Controls have not been designed to ensure that OGS clients are reviewed on an ongoing basis. Advisers are required to manually track their OGS clients (e.g. through personal calendars) which reduces the ability to identify when OGS obligations have been fulfilled.

Clients flagged as OGS clients are not always on OGS programs

No process for managing client requests to be taken off OGS programs leading to data integrity issues and lost opportunities to implement retention strategies

Clients may be taken off OGS without consultation (e.g. OGS program turned off because an adviser has left)

The weakness in the design of OGS controls also increases the risk that advisers may intentionally enter in incorrect data to reach OGS related performance targets.

We identified over $700K in OGS fees being charged on an annual basis to over 1050 clients that are allocated to over 50 inactive planners that left before 2012.

Because of data limitations, there was not a method to identify the number of clients that are not receiving OGS service and are attached to an active planner.

VH R2 Refer to R2 for the recommended actions pertaining to performing additional investigations into the clients that appear to have impacted.

VH M-VH

R4 Develop effective OGS management system

Develop and document effective controls for managing an OGS client including initial set up, ongoing service and removal from the program. The controls should assist in :

Ensuring that clients flagged as receiving OGS are flagged correctly in the system. This may be achieved by limiting the data entry to a centralised team.

Managing client requests to be taken off OGS to capture reasons for dissatisfaction, maintain data integrity and identify opportunities to retain the client.

Notifying advisers when OGS reviews are required and capturing data to confirm that OGS reviews have been conducted.

There have been prior initiatives undertaken on OGS, however, these have been aimed at identifying the extent that OGS fee limits have been exceeded and in cleansing OGS data.

The Regulatory Reform Project considers elements of OGS in the context of FOFA. The project could be expanded to examine the OGS lifecycle or a new initiative developed.

VH H-VH

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4. Customer information is not effectively managed

Controls have not been designed to manage client information and workflow to enable compliance (e.g. Corporations Act, AML/CTF, Spam Act), effective risk management and client service standards to be met and in a post-FOFA environment, to deliver cost effective advice according to customer needs.

There is no customer centric system that allows CBA WM to comprehensively manage customer information (e.g. a Customer Relationship Management (CRM) System). Customer details are captured in various systems.

There is no program which is currently examining the development of a customer information system.

VH R5 Develop customer centric information system

Develop a customer centric system that informs all aspects of the advice operating model.

Where necessary, consider temporary solutions to be able to effectively manage compliance with contractual and regulatory obligations and incentives for Authorised Representatives (ARs) to convert to one preferred advice software tool.

The FOFA reforms will require enhancements on the type of information captured (e.g. type of services provided to clients, OGS status) so there is potential to include the development of a customer information system as part of the strategy to comply with FOFA.

VH VH

5. Limited capability to identify where advisers are performing certain high risk activities

Due to system limitations, there is no effective way to identify instances where an adviser is acting inappropriately or engaging in certain higher risk activities (e.g. advisers not

H R2 Perform additional investigation into the advisers that appear to be providing advice outside of their qualifications to determine if this is a data quality issue or an actual issue.

Refer to R2 for the details of the recommended actions.

VH M-VH

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meeting OGS requirements, advisers accepting cash payments).

Reliance is therefore placed on manual processes (e.g. para-planning, pre-vetting and AA reviews) to identify such instances.

There are, however, high risk activities which appear to be able to be identified through the data. These include:

Advisers providing securities or margin lending advice without the appropriate qualifications or accreditations

Advisers using products available through FMS that have not been approved

From the data tests performed, there appear to be over 70 current advisers providing margin lending or securities advice without the appropriate qualifications. The names of these advisers will be provided separately to management.

R6 Enhance systems to better identify high risk activities

The monitoring and supervision framework should include systems that automatically produce exception reporting when advisers are acting outside of their qualifications (possible for margin lending and securities only) or not complying with the APL. The Licensees need to determine accountability actioning this new information and document accordingly licensee standards and/or policies.

Consideration should be given on whether systems should be enhanced to also capture the type of advice provided to be able to improve oversight of specialist advice provided. This may be able to be developed through the Regulatory Reform Project which will be developing a solution that captures the type of service being provided to a client.

H M

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CBA.0520.0002.6456

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6. Ineffective controls for quality specialist advice

Although there are initial assessments and accreditation requirements for specialist advice types (e.g. SMSF, Aged Care, UK Pension), there were no ongoing assessment requirements for advisers providing specialist advice which may lead to knowledge gaps where key changes occur (e.g. legislative changes).

Due to system limitations, there is no effective way to identify instances where a client has received specialist advice, therefore, the ability to identify such instances for file reviews or to implement automated controls for when advice is provided without required accreditations.

Because of the data limitations, identifying issues within specialist advice is dependent on areas such as para-planning, pre-vet and AA review teams. Members of these teams, however, are not required to undertake the same training and competency assessments as the advisers and, therefore, may not have the capabilities to effectively identify and assess risk, particularly in relation to specialist advice (e.g. aged care, margin lending).

H R7 Enhance controls pertaining to specialist advice

Enhance the training programs for members of Para-Planning, Pre-Vet and the AA review team to ensure the appropriate level of competency exists to be able to identify and assess specialist advice.

Enhance the accreditation process for advisers to include ongoing assessment requirements.

Training programs are currently being enhanced within Advice Licensee Services (ALS) as part of business as usual (BAU). The centralisation of the training programs may be managed by this team given the other potential initiatives (e.g. Regulatory Reform Project) which may lead to required changes.

H H

7. Ineffective recording and reconciliation of revenue

Controls have not been designed to determine whether revenue received from clients or product providers is complete or accurate We identified a number of limitations in relation to the receipt and reconciliation of revenue:

A lack of effective invoicing system for advisers to issue and track client payment of invoices

H R8 Improve arrangements for fee reconciliations from product providers

Consider arrangements for fee payments from product providers to maximise the effectiveness of controls pertaining to the payments to CBA WM.

The Regulatory Reform Project is currently considering how to control the risk of receiving non-compliant volume based payments from product providers once FOFA commences. There may be opportunities to leverage the solution developed to also address the reconciliation matter.

H H-VH

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Due to the complex nature of product fee calculations there is no effective reconciliation of revenue received from products providers against expected receipts

No effective systems are in place for Financial Wisdom to assess reported revenue from ARs or reconcile payments being received

As a result of the above control weaknesses there is an increased risk of fraud, clients not paying for services provided and revenue collections being incomplete.

R9 Implement invoicing and reconciliation processes for advisers

Enhance existing systems or create a new system that advisers can use to create and track invoices and that also allows information to be provided to Finance and licensees to enable reconciliation of payments. This system could be mandated across all licensees.

There is currently no program that is considering implementing an invoicing and payments system, however, the Regulatory Reform Project is considering how to obtain oversight on the fees charged and the services provided to meet FOFA fee disclosure requirements.

There is potential to include the invoice capabilities within the solution developed for FOFA.

H H-VH

8. Acquired clients are not risk assessed

There does not appear to be any robust system to assess and manage the risk of acquired clients.

There is potential for reputational impact if the advice taken on is of poor quality and potential regulatory impact as the clients are not subject to standard Know Your Customer (KYC) processes.

This risk is limited to Financial Wisdom and Pathways.

H R10 Develop centralised processes to assess and manage client acquisition risk

Develop and document a methodology to assess and take on acquired books of business leveraging from the methodologies already used in AA reviews or targeted reviews. There is potential to centralise this process through a combination of the ALS team and targeted review resources to ensure that appropriate administrative are undertaken and risks are properly assessed.

ALS are currently considering whether they have the capability to centralise components of the on-boarding and off-boarding process so the client risk assessment process should be included in this consideration.

The Regulatory Reform Project is considering how to assess acquired clients to recognise whether there may be risks of non-compliance with volume rebates or other FOFA requirements. Given the similarities, the scope for the Regulatory Reform project may be expanded to include the overall risk assessment and treatment of acquired client files.

H M

CBA.102.013.1324

CBA.0520.0002.6458

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9. Ineffective reallocation of clients

Clients that are required to be reallocated (e.g. as a result of an adviser terminating their relationship with a licensee) are not assessed appropriately in all instances to ensure that they are allocated timely (e.g. there are clients attached to advisers that were terminated in 2007) and that advisers they are allocated to are appropriate (i.e. have the right accreditations).

There are also no clear adviser responsibilities for what needs to occur when a client has been allocated.

H R11 Develop and document off-boarding methodology

Develop and document a methodology to ensure that the off-boarding of advisers is carried out consistently and the reallocation of clients considers the management of key risks including:

Ensuring that the adviser has the appropriate accreditation, qualifications and APL approvals to service the clients

System data is updated appropriately

The adviser being notified of all clients requiring ongoing review (i.e. OGS clients and clients receiving specialist advice)

Project SAM is addressing the off-boarding process for advisers, however, does not currently consider the re-allocation processes. ALS are currently considering whether they have the capability to centralise components of off-boarding process so the process for re-allocation of client files could be included in this consideration.

Business Wealth Management has recently implemented an off-boarding checklist to ensure that key activities are performed during the off-boarding process and this information can be leveraged when developing the new process.

H M

10. Products on the APL are not being reviewed on an ongoing basis and the management of product conflicts is not explicit

There were instances identified where sector reviews scheduled for August 2011 were still outstanding. The APL policy, which was in draft at the time of assessment and did not exist prior, did not stipulate any requirements for reviewing products on an ongoing basis.

Although conflicts may be a consideration in the research

M R12 Enhance APL processes

Enhance APL processes through:

approving the draft policy;

developing a review calendar which is approved by the Research Committee and details the products that are to be reviewed in certain periods

updating reports to the Research Committee to include status updates

H M

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process, the records of products assessments and reports to the Research Committee do not explicitly state the conflicts associated to each product and the considerations made.

on the review calendar

updating research assessment and report templates and to capture conflicts considerations

ensuring Research Committee minutes includes discussion of conflicts

in due course the inclusion of an independent party on the Research Committee

The research team are currently undertaking an initiative as part of BAU to enhance their processes and systems and the actions proposed above should be factored into these developments.

11. Closer alignment of advice operating models

There are opportunities to enhance the effectiveness and efficiency of support services and shared systems through closer alignment of advice operating models.

Areas such as Research, Advice Document and Operations and Advice Business Services provide support across all Licensees. Anecdotally, these business processes focus more on Commonwealth Financial Planning and less on smaller Licensees, and may not be cognisant of specific risks arising in each.

Activities which require extensive manual processes (e.g. monitoring and amending over 250 advice templates) are being impacted by the need to customise the service to the various differences in advice operating models across the Licensees. The extent of the customisation combined with the manual processes involved, leads to increased likelihood of process failure.

These differences are also increasing the complexity in

M R13 Increase consistency in advice operating models

Where there are sufficient similarities (e.g. in risk controls, client types, advice types) consider implementing greater consistency in various aspects of the operating models to take advantage of opportunities to implement shared solutions and increase the effectiveness and efficiency of existing resources.

Areas where consistency can may be considered are:

Having shared APLs across Licensees (currently underway);

Consistency in OGS programs offered to clients;

Consistency in fee limits

Where systems are developed that enable better service as a result (e.g. systems that enable OGS commitments to be met), ARs within Financial Wisdom and Pathways may be willing to adopt the same controls into their practices.

Such considerations are currently being made as part of BAU initiatives

H H

CBA.102.013.1326

CBA.0520.0002.6460

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introducing system controls that can be efficiently applied across all Licensees.

being run out of ALS.

12. Unclear accountability and methodology in licensee standards for specific situations

A number of situations have been identified where there is no clear accountability or guidance outlined in licensee standards. These include:

Accreditation requirements for basic deposit products

Qualification requirements for providing margin lending and listed securities advice

Notification to clients of significant events

Additional adviser obligations when using a non-approved product (e.g. ongoing assessment of product)

Estate planning advice

The use of marketing materials and required disclosures.

M R14 Enhance licensee standards and communicate changes

Update licensee standards and provide communications to ensure clarity around adviser responsibilities for the areas noted.

We note that a schedule is currently in place in ALS for planned enhancements and that the areas listed where clarity is required is considered in future changes.

M M

13. Clients are not notified of significant events

Clients may not be notified of key information due to unclear accountability and limitations to data and systems.

There are no licensee standards or policies which indicate

M R14 Enhance Licensee standards to include triggers and requirements for notifying customers.

Refer to R14 for the recommended actions pertaining to the updating of licensee standards.

M M

CBA.102.013.1327

CBA.0520.0002.6461

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when clients are to be notified of critical events (e.g. window for redemptions if client is invested into a frozen fund) and the individuals responsible for notifying them.

Management demonstrated a preference to contact clients of critical events regardless of whether they were an OGS client or not, however, this expectation is not documented in any licensee standards assessed.

Notifying clients of key is also difficult due to the lack of a customer system and data limitations. Client lists are developed primarily on FMS or financial planning software data, however, each has its limitations.

R5 Enhance the information collected on customers to be able to identify a comprehensive list of clients belonging to a client.

Refer to R5 for the recommended actions pertaining to the improved management of customer information.

VH VH

14. Financial Needs Analysis (FNA) requires enhancements

The design of the FNA was found to have design improvement opportunities when comparing to industry peers and academic research in relation to best practice risk profiling.

Recommendations include changing the structure and questions to better explore client investment experience and perspectives risk.

Detailed analysis of the FNA is contained in Appendix E.

M R15 Enhance Financial Needs Analysis template

We note that ALS have plans to enhance the risk profile and recommend that information detailed in Appendix E is considered when enhancing the document.

H M

15. Data integrity and quality issues

There are no consistent naming conventions used across the multiple systems observed. For example, Advisers do not have a common unique identifier with names recorded as different methods (e.g. John Smith, J.Smith).

The COIN system was found to have test data (e.g. names such as ‘Test1’ and ‘Fred Flintstone’) contained within the live

M R16 Develop data integrity controls, consistent naming conventions and data field requirements

Develop data integrity controls, consistent naming conventions and data field requirements which can be adopted in ad-hoc systems and implemented as part of any new systems or considered as part of any system enhancements.

H VH

CBA.102.013.1328

CBA.0520.0002.6462

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system which automatically feeds into CommSee.

Additional information about the data quality issues observed are listed in Appendix D.

16. No effective process in place to continually maintain accurate records of adviser qualifications.

Although adviser qualifications are checked during on-boarding, there does not appear to be any processes to monitor and manage changes to adviser qualifications thereafter.

L R17 Formalise qualifications management process

Document the procedure for Advice Licensee Services to perform in managing and maintaining qualification records and issuing certificates of authority.

We understand that this is currently within the scope of Project SAM.

M M

17. Key documents (i.e. advice templates, licensee standards) may be implemented without appropriate due diligence

Although we identified that approvals were being sought from legal, risk and the licensees, there was no documented due diligence process and records management system for capturing approvals. As it is usually the licensee that provides the final sign-off, there is a risk that content approved by legal or risk is changed prior to implementation.

L R18 Enhance due diligence processes for key advice documents

Develop and document the due diligence processes for creating and amending advice templates and licensee standards. The enhanced process should also clarify the records keeping requirements to ensure that an audit trail is maintained.

There is no existing initiative that is aimed at formalising a due diligence process for the listed activities, however, it has been noted that this has been an existing interest of the teams managing the various processes.

Given the similarities in the approvals required, it may be worthwhile to have a similar due diligence process applied across the various areas and a common approval system used.

M M

CBA.102.013.1329

CBA.0520.0002.6463

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18. Key information is being stored in ad-hoc systems that are not robust

There is reliance on Windows Office applications such as Excel and Access to store key information (e.g. APLs, para-planning information, AA reviews, workbook results). The use of this software has a heightened risk associated with data retention, security, completeness, validity and accuracy as well as analytical usability.

L R19 Enhance the management of records stored in ad-hoc systems

Consider the enhancement of existing systems (e.g. COIN), systems that are currently being developed (e.g. ARM) or create new systems that captures the information currently contained in Excel and Access.

It is noted that there are some initiatives currently that are addressing some aspects (e.g. APL and adviser accreditations to be stored in ARM).

Where there is no business case to enhance or create systems, ensure that appropriate data back-up and recovery processes are in place and that consistent naming conventions (e.g. for adviser names) are used.

M H

19. Conflicts of interest register does not recognise all key activities

The conflicts of interest register does not appear to recognise key activities for managing key conflicts. For example, in relation to the conflicts raised through relationships with related entities, it was noted that such conflicts are only managed through disclosure.

L R20 Update the conflicts of interest register

Update the conflicts of interest register to indicate how conflicts are being managed (e.g. through due diligence processes) and not just disclosed.

L L

20. Responsible Managers (RMs) structure may be insufficient

Within the list of RMs assigned to each Licensee there were some individuals that we were expecting to be assigned an RM role, (e.g. Head of Advice Essentials, Head of Pathways) given their oversight responsibility around relevant Licensees that have not been appointed as RMs. We note that six RMs have been appointed for the four Licensees in scope. Of the six RMs, there were three RMs noted as not completing the CFS Advice Responsible Manager training held in May 2012.

L R21 Re-assess Responsible Managers

Consider appointing additional RMs for each licensee to ensure that the individuals appointed for each licensee have appropriate coverage of the entire business operations. The head of each licensee should, at a minimum, be included.

Ensure that all RMs have completed the required Responsible Manager training.

L L

CBA.102.013.1330

CBA.0520.0002.6464

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We are aware of instances where ASIC have provided feedback to Licensees in relation to the Responsible Managers not having appropriate coverage of all key Licensee areas due to the scope of their responsibilities. There is a risk that ASIC may form this same view with the current RM selection.

CBA.102.013.1331

CBA.0520.0002.6465

Appendix A: Approach




3. Appendix A: Approach

Business issues identification

To assess for potential latent issues within the agreed Licensees, we performed a risk assessment across the Licensees, considering customer, financial, regulatory or operational impact. The risk assessment was informed by:

Deloitte’s issues database which includes the analysis of ASIC concerns listed in enforceable undertakings and known industry issues and insights that have been attained through performing similar risk assessments and experience working with other dealer groups across the industry

Leveraging our knowledge of key compliance obligations applicable to the advice business of CBA WM

Our knowledge of CBA WM through experience from working with Project AARK and Project SAM

Interviewing key senior management within the advice business and reviewing documentation including but not limited to relevant internal audit and risk reports, incident registers, and complaint registers.

The outputs of the risk assessment were discussed with CBA WM management and 13 categories of potential risk categories were agreed to be in scope for this engagement. Another area (revenue leakage) was subsequently included into the scope.

Within each of the risk areas, any known issues that were being addressed as part of any ongoing initiatives were excluded for assessment (e.g. the role of the Financial Planning Manager (FPM), remuneration models, records management of advice files). Upon commencing our work, it was determined that the category relating to IT Technology should be scoped out due to the planned IT internal audit to be performed by CBA in August 2012.

The final 13 risk categories agreed with CBA WM as in scope for this engagement were:

1. Adviser on-boarding 2. Adviser qualifications, training and accreditation 3. Adviser off-boarding 4. Advice tools, templates and systems 5. Advice quality and delivery 6. Ongoing advice service 7. Advice fees 8. Records management 9. Approved product list 10. Prohibited conduct 11. Marketing 12. Regulatory compliance 13. Revenue leakage

Work plans for the above categories were developed and discussed and approved by CBA WM. Activities involved in the work plans included interviews; examination of key documents (e.g. licensee standards, policies); certain design of controls testing and the use of data analytics, to inform and validate the findings, where relevant.

The findings of our assessments across the categories examined are summarised in Section 2 of this report, together with the recommendations. To assist CBA WM in addressing the concerns identified, we have developed recommended actions in consultation with the business and have considered current projects (e.g. Project SAM) to assess the extent that the recommended actions are currently being addressed or whether additional initiatives are required through existing or new change management projects.

CBA.102.013.1332

CBA.0520.0002.6466

Appendix A: Approach




Data Analytics for provision model inputs

To assist with providing inputs into a CBA WM Finance provisioning model for the 2012 financial statements, Deloitte performed a series of data analytics tests which assisted in identifying the following:

The amount by which fees may have exceeded the fee limits disclosed in the relevant Financial Services Guides (FSGs) for each licensee

The amount of Ongoing Service (OGS) fees which may have been paid by clients that do not appear to be receiving ongoing service

Identification of potential high risk planners, and the extent to which their portfolio of clients is invested outside expected ranges

The details of the information provided to the CBA WM Finance team are included in Appendix D. Data Analytics for identifying advisors at risk Deductive analytics and inductive analytics scope to identify advisors at risk, are set out in Appendix C.

CBA.102.013.1333

CBA.0520.0002.6467

Appendix B: Scope - Business Issues Identification




4. Appendix B: Scope - Business Issues

Identification Risk category in scope

Assessment methodology – (as agreed with CBA WM and updated on 15 June 2012)

Priority rating Finding ref Limitations in scope of assessment area

Adviser on-boarding

Assess the appropriateness of Authorised Representative agreements to identify potential issues with the arrangements entered into.

Low No significant findings

Assess the due diligence process for acquiring books of business (i.e. are advisers screened for potential issues) to make recommendations to address any identified weaknesses.

High 8 Only applicable to Financial Wisdom and Pathways, other Licensees do not acquire books of business.

Adviser qualification, training and accreditation

Assess whether issues may still exist with the accuracy of current records on adviser training and qualifications, and the systems in place to ensure on-going accuracy Med 16

Accreditation processes are currently undergoing change and, therefore were not examined. Process and controls assessment scope was reduced to specifically examine the processes for managing qualification records.

Assess the extent that advice has been provided without the appropriate accreditation or outside of the AFSL through data analytics or by advisers who have not met training requirements.

High 16

Assess the effectiveness of training content, policies and procedures specific to specialist advice to ensure training is provided consistently, that non-compliance is able to be detected, and advisers are sufficiently competent.

Med 6

Licensee standards were incomplete in relation to requirements for specialist advice (e.g. Direct Property).

Adviser off-boarding

Assess off-boarding processes to assess whether an effective system exists to notify impacted customers, appropriately reallocate client files and ensure that clients are being serviced appropriately.

Med 9

Assess the extent that clients have not been allocated effectively and have been financially impacted as a result (e.g. ongoing service requirements have not been met).

Med 3, 9

CBA.102.013.1334

CBA.0520.0002.6468





Assess the potential financial impact arising from missing files for advisers that have previously left the network to the extent that complaints may occur which require compensation.

Med 5

Data received could not identify an effective method for assessing potential financial impact.

Advice tools, templates and systems

Assess whether specific templates (e.g. advice templates, FNA, client agreements) have any design issues (e.g. non-compliant in their design) or drive inappropriate outcomes.

High 14

Assess effectiveness of due diligence and change management process for advice tools and templates and related implementation.

Med 17

Assess whether licence standards are adequately designed (i.e. meet compliance requirements, provide sufficient guidance). Low 12

Standards are currently undergoing review and, therefore, we were not able to assess these for all situations.

Assess effectiveness of due diligence and change management process for advice tools and templates and related implementation. Low 11, 17

Due diligence process was formalised in 2011 and as such we have examined only the current process.

Advice quality and delivery

Perform analytics to identify planners that may be providing advice that is non-compliant with regulations or business rules or is of poor quality.

High 1

Ongoing advice service

Assess client agreements to identify licensee obligations and then assess effectiveness of processes and systems to enable and monitor compliance.

High 2, 3, 5

Assess process for ensuring that customers are notified in a timely manner of any critical information which may lead to financial loss (e.g. notification of a frozen fund).

Med 4, 13

Advice fees Assess pricing policies for each licence against processes and systems to identify whether the processes and systems enable compliance and whether instances of non-compliance are able to be detected.

Med 2

Use data analytics to identify the extent that pricing policies/FSGs have been breached and/or where excessive fees have been charged.

Med 2, 7 Fee data is consolidated therefore we were limited in ability to identify specific breaches.

Records management

Assess the potential financial implications CBA WM is exposed to as a result of not having a single customer view

Low 4

Identify the systems used in each licence to store key information (excluding advice files and adviser information stored on ARM) and assess the effectiveness that the key information is stored, secured and destroyed.

Low 15, 18

CBA.102.013.1335

CBA.0520.0002.6469





Assess the processes and systems (e.g. licence standards, roles and responsibilities) in relation to document management and retention and ensure that they effective in design and comply with key obligations.

Med 18

Approved Products Lists (APL)

Assess effectiveness of APL processes (i.e. selection, ongoing due diligence, governance, records keeping, conflicts of interest, monitoring of non-compliance) including one off approvals.

Med 10, 11

Assess effectiveness of communications process to ensure that changes to the APL are notified to key stakeholders and acted upon.

Low 10, 13

Assess the effectiveness of the systems in place to identify adviser non-compliance with APL or one off approvals and use data analytics to identify instances of non-compliance.

High 5

Marketing Assess the effectiveness of the systems in place to identify Authorised Representative non-compliance with marketing requirements.

Low 4, 12

Assess the effectiveness of the due diligence process for creating and issuing marketing material to ensure that compliance obligations are met.

Low No significant findings

Prohibited conduct

Perform data analytics to identify potential cases of fraud or other inappropriate behaviour

High N/A Not performed due to data limitations

Assess the effectiveness of whistleblowing policies and processes Low No significant findings

Regulatory compliance

Perform an assessment of key ACL requirements and assess design of processes and systems to drive compliance with obligations.

Med No significant findings

Perform an assessment of key AFSL obligations (not covered under other scope areas) which are currently a priority for the regulator (e.g. role of Responsible Managers, Conflicts of Interest)

Med 19, 20

IT Identify key systems which apply and perform a risk assessment across each of the key systems (excluding systems managed outside CBA WM) to identify system specific limitations (e.g. monitoring and supervision limitations) and issues in relation to confidentiality, integrity and availability.

High N/A

Group Internal Audit will be conducting procedures during August on systems for CBA WM, and as such Deloitte has not performed procedures in relation to IT.

Revenue leakage

Assesses processes and systems in place that will prevent revenue leakage (e.g. clients failing to pay advice fees, ARs not accurately disclosing revenue). Low 7

CBA.102.013.1336

CBA.0520.0002.6470





Using analytics identify ongoing service clients that appear to be paying less than minimum. Low 2, 3

Areas specifically excluded from scope (included in Project SAM)

Culture

Reporting and governance

Risk and compliance framework

Incident and breach management

Complaints management

Consequence management

Monitoring and Supervision

Para-planning and pre-vetting

Advisor/employee remuneration models

CBA.102.013.1337

CBA.0520.0002.6471

Appendix C: Scope - Data Analytics




5. Appendix C: Scope - Data Analytics Data analytic tests performed

Scope area Test Description Limitation in scope of assessment area Able to be performed

Advice provided without technical accreditation

Finds all products that require accreditation currently held by investors that are managed by an adviser who do not have the necessary qualifications.

Accreditation data had to be matched to investment data based on Adviser Name only as there were no unique identifiers for mapping advisers between systems. Advised that accreditation data may not be up to date. No way identified to determine when specialist advice was provided with the exception of margin lending and listed securities.

Partial

Advice provided without product accreditation

Match products sold by advisers and their accreditations to determine if a product has been sold that they are unaccredited for.

Only accreditations for Hedge Funds were able to be mapped. Advised that accreditation data may not be up to date.

Partial

Technical strategies adviser is not accredited for

Margin Lending: Match investment strategy given by adviser to the level technical accreditation that they have obtained.

No unique identifiers for advisers. Information on advisers accredited for Margin Lending was determined manually, and then matched to investment data based on Adviser name.

Yes

Listed Securities: Match investment strategy given by adviser to the level technical accreditation that they have obtained.

No unique identifiers for advisers. Information on advisers accredited for Direct Securities was determined manually, and then matched to investment data based on Adviser name.

Yes

Approved Product Lists Identify current investments not in the APL or one off approved list.

APL data provided was in a difficult format to manipulate, and required extensive cleansing and re-formatting. Given the time constraints and complexity of the data, only investigated the current APL listings. Products on FMS were not able to be included.

Partial

Identify all Investments that are currently held that have a SELL, SELL or CLOSED status.

As above Partial

Advice fees / Ongoing services

OGS clients that appear to be paying less than minimum.

Minimum amount was manually calculated and compared with how fee structures were currently set-up within FMS data. Does not include fees collected via other systems

Partial

Clients that have been flagged as having ongoing advice obligations but no fees collected.

Data integrity problems known with the use of the OGS flag Yes

CBA.102.013.1338

CBA.0520.0002.6472






Identification of instances where OGS advice limits has been exceeded

As above Yes

Failure to review OGS portfolio. No indicators within the system that identify when advice has been provided. No

Identification of OGS customers not allocated to an active planner.

Data integrity problems known with the use of the OGS flag Yes

Identification of planners with relatively high and low levels of fee versus FUM.

Fee data received from other systems not received. Yes

Adviser off-boarding Identify clients that have not been allocated appropriately, in this case, OGS clients attached to regional centres (i.e. adviser names with regional names in them - NSW), employees (i.e. an employee that is not a financial planner (e.g. financial planning manager) or remaining with inactive planners.

Data integrity problems known with the use of the OGS flag. No date within the system that identified when the file was allocated.

Yes

Advice tools, templates and systems

Identify instances of incomplete documentation by finding instances where an SOA is in COIN with no corresponding FNA.

No Financial Wisdom and BankWest data in COIN extract. Partial

Advice quality and delivery (churn)

Test where adviser fees have increased in 10% or more however there has been no corresponding increase in FUM.

Could only compare commissions within 2009-2011 Yes

FUM/Flow by product type by adviser. Fee data received from other systems (i.e. not FMS) not received. Yes

Identification of planners with relatively high numbers of clients against similar peers.

Exclude insurance clients Yes

Prohibited conduct Fraud - duplication of client details. Originally wanted to compare client bank account details to look for potentially fraudulent activities. As it was not possible to provide this data, client addresses were tested for duplicates instead.

Partial

Advice quality Identifying where advisers may be favouring a strategic bias based on level of FUM in certain asset classes or frequency of gearing within entire portfolio.

No information on products outside of FMS. No insurance data made available.

Yes

CBA.102.013.1339

CBA.0520.0002.6473






Advisers at risk Inductive analytics techniques to assign attributes to past and present advisers and to identify unknown planners with similar attributes to known high risk advisers.

No information on products outside of FMS. No insurance data made available.

Yes

Limitations of the data

Data Domain Source System Assessment Limitation

Approved Product Lists Spreadsheets and PDFs

Data provided was in an inconsistent and difficult format to load and query.

Restricted to entities within scope; Only investigated current APLs.

Accreditation CAD Online Data extract of online accreditation tool for advisers. Contained adviser's username and the name of each course/outcome associated with the adviser.

Data extract contained no unique identifiers for the adviser (only username), and did not specify which accreditations were required for which product. This had to be done manually.

Customer risk assessment

COIN Two datasets were provided: - FactFind: Client's financial needs analysis data; - SOA: Client's statement of advice.

This dataset could only be analysed in isolation due to the fact that there was no reliable method of mapping the advisers across other datasets. Financial Wisdom advisers were excluded from this extract. Data integrity issues were easily apparent.

Investment data FMS Contains quarterly snapshots (going back to 2005) of advisers and their clients' investment allocations. Only contains current advisers.

Does not contain historical information regarding non-current advisers.

FWH Similar to FMS, but only contains one snapshot date (at the end of each calendar year), and contains historical information (i.e. non-current advisers).

Does not contain OGS Flag/Fee. Does not contain BankWest data (had to be included using the FMS extract).

FirstWrap Clients in this domain have access to ASX shares, external funds, and other securities.

Only contained current advisers. Not all clients in FirstWrap can be found in FMS (they need to have an investment in a CFS product for this to be the case).

CBA.102.013.1340

CBA.0520.0002.6474





Commissions RPAY Commissions data for advisers by policy number and date. RPAY was implemented in July 2009, so data only goes back that far. RPAY's predecessor was not in a format that could be reliable mapped, given the time constraints. Were only able to map back to customers in FMS where the policy number matched the account number.

Gearing Empire Data contained details surrounding margin lending for clients and the advisers associated with the loan.

Not sourced directly from Empire (the margin lending system); had to be sourced from AEWS (Early Warning System).

Adviser dealer HR (Adviser)

Extract out of HR system to identify which dealers to which each adviser belongs.

The purpose of this extract was to determine which APL corresponded with which adviser based on the adviser's dealer group. Since this extract adviser names, the matching had to be conducted solely on adviser name.

Terminations HR (Terminations)

HR extract of employee terminations since 2006. No unique identifiers for adviser were included in this extract, so mapping had to be conducted on adviser name.

Adviser mappings Profiler Extract of system that sits alongside adviser HR details. Primary use was to assist with mapping adviser identifiers across various domains using the various aliases provided.

Only contained aliases for current advisers. Any other terminated advisers had to be mapped by name.

CBA.102.013.1341

CBA.0520.0002.6475

Appendix D: Findings for provisioning modelling input




6. Appendix D: Findings for provisioning

modelling input Ongoing Service and Advice fees

As part of the Advice Business Issues Management project, and to assist CBA Wealth Finance in calculating potential provisions as at 30 June 2012, Deloitte performed an analysis of data provided by CBA Wealth Management to identify possible instances where:

Fees charged to certain CBA Wealth Management clients may have exceeded the limits indicated within the Financial Services Guide (FSG) for standard fees and Ongoing Service arrangements (OGS); and

Clients that have paid for OGS may not have received any ongoing service as result of remaining assigned in the CBA Wealth Management system to advisers who have left the CBA network before 2012. (Note: OGS fees may be charged as a percentage of funds under management (FUM) or as a fixed amount)

The analysis performed was limited to the following:

Commonwealth Financial Planning (CFP), including Pathways Financial Wisdom (FW) Advice Essentials (AE) BW Financial Advice Limited (BWFA) Business Wealth Management (BWM)

For the purposes of clarity, the provisioning analysis excluded Whittaker Macnaught and Count Financial.

The work performed identified the following two instances where fees may have been charged in excess of disclosed limits or where services may not have been performed. These are instances where:

Fees in FMS and RPAY appear to be greater than FSG limits OGS fees appear to be have been charged to clients without an active adviser

CBA.102.013.1342

CBA.0520.0002.6476





Limitations

In performing the analysis there were a number of challenges identified which created limitations in the tests performed:

A field in the system to flag OGS customers did not appear to be accurate in all cases One of the systems (RPAY) used in the analysis was implemented in 2009 and historical data for the system it replaced was not possible to map within the

timeframe FMS data reflects the system as at 31 March 2012. While percentage based OGS payments were able to be identified in RPAY, fixed amount OGS payments were not able to clearly identified as they were

consolidated with other fee types Because of the above, fixed fee payments were based on the information in FMS, however, the data obtained from FMS was based on current information only.

Notional fee cap issues

Methodology

For each of the licensees (note: Financial Wisdom was the exception as there are no fee limits disclosed in the FSG), we examined the fee disclosures in the relevant FSG. The FSGs included two categories of fees which imposed limits as to how much could be charged: standard service fees and OGS fees. For all FSGs, the disclosed OGS limits exceeded the limits on the disclosed standard service fees.

As the FMS system does not clearly distinguish between OGS and standard fees we applied the OGS limits across all clients when assessing incidents where fees appear to have exceeded limits. Therefore, the fee incidents identified may be higher depending on the number of OGS clients included in the incidents identified.

Findings

186 policies in FMS were found to have fees set up in FMS which exceeded OGS fee limits as set out in FSGs by a total of $35,376.48 on an annual basis. This amount has been quantified using FUM data as of March 2012 and annual fees by policy as set out in FMS. Given that FSG limits are based on a percentage of FUM, and FUM data is at a point of time, this amount is indicative only and assumes the fees set up in FMS are equivalent to the fees charged.

The following table details the breakdown per licensee of the amounts that exceeded FSG fee limits and pricing policy limits.

CBA.102.013.1343

CBA.0520.0002.6477





Licensee OGS fee cap as described in FSG Indicative fee amounts that exceed FSG caps on an annual basis

OSG fee cap as described in pricing policy Indicative fee amounts that exceed pricing policy caps on an annual basis

Commonwealth Financial Planning

Fee is up to 0.94% of the average balance of the account, subject to a maximum fee of $12,450 per annum.

$34,730.21 across 176 policies

If FUM is between $0-$500,000 then max is 0.94% of FUM. If FUM is between $500,000- $1.5million then max is 0.83% of FUM. If FUM is greater than $1.5M then fee is capped at $12,450 per year


Financial Wisdom No limits disclosed in FSG N/A* No pricing policy exists. N/A

Pathways Up to 1.1% payable by monthly deductions from current balance portfolio

$60.89 across one policy

Up to 1.1% current balance portfolio $60.89 across one policy

Advice Essentials No OGS fee cap, however, a $299 fee for preparing an SOA.

None identified No pricing policy exists N/A

BW Financial Advice

Up to 0.90% per annum up to total portfolio balance None identified Maximum 0.75% of FUM charged per annum $3,979.85 across 34 policies

CBA Business Wealth Management

Up to 1.44%, subject to a maximum of $21,600 per annum, payable by monthly deductions from the current portfolio balance.

An Ongoing Plan Service Fee of up to 0.66% of the member’s account balance may be charged for additional services provided.

$585.38 across 6 policies

Maximum 0.85% of FUM charged per annum up to $12,750


* Assuming a 1.1% OGS fee limit was applied to Financial Wisdom, it is estimated that there would be $331,711.99 in fees exceeding the limit across 1,072 policies.

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OGS fees paid by clients who may not have received OGS

Methodology

We obtained the list of terminated advisers which included the date of termination. We examined all accounts/policies that were still attached to terminated advisers that left before January 2012 and identified the amount of OGS fees that

appear to have been charged to the clients since the advisers left the network. Advisers that have left in 2012 were excluded as there may still be opportunity to meet OGS requirements.

OGS fees that are based on a percentage of FUM are able to be easily identified in RPAY and have been used in this analysis. However, OGS fees that are a fixed amount are not easily identifiable in RPAY and, therefore, is based on the data in FMS and hence indicative only of the client payment.

Findings

For OGS fees based on a percentage of FUM, there appears to have been a total of $971,326.59 in OGS fees charged to clients that are assigned to advisers who left prior to 1 January 2012 and since RPAY was implemented in 1 July 2009. This may be understated due to fees paid prior to 1 July 2009 (no RPAY data). This figure may also be overstated as it only excludes any clients without active advisers for a 3 month period between 1 January 2012 to 31 March 2012.

For OGS fees that are a fixed fee component, there appears to be $723,955.34 being charged on an annual basis to clients that remain assigned to advisers that have left before 2012.

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Appendix E: Risk profile assessment




7. Appendix E: Risk profile assessmentFinancial Needs Analysis assessment

Background

A robust risk profile aims to identify the financial needs of an investor by providing a risk profile that explores the underlying needs and experience of the client’s risk tolerance.

In the current financial needs analysis (FNA) used by advisers, the risk profile questions to address investor risk tolerance are identical across licensees. There are eight questions within the profile which attempt to cover a broad range of key areas such as investment experience and preferences, liquidity requirements and financial objectives. To support the completion of the risk profile, limited guidance is provided within the adviser licensee standards.

Methodology of Assessment

Our assessment of the FNA involved comparing recent academic research and current risk profile questionnaires used by industry peers. Through this process we were able to identify a number of key points that could enhance the output from conducting a FNA.

The FNA was compared with both Australian and International organisations against the following aspects:

The ease of understanding and ability to anchor itself to the clients past experiences or thought processes.

The flow and positioning of questions within the risk profile being able to stimulate points for discussion between the adviser and the client.

The scoring methodology and the potential for answers to be pre-emptive and provide skewed responses by the client.

Key Findings

In general, the scope of the questions in the FNA is adequate to provide a broad scope of investor risk tolerance. However, one question alone in each of the key areas targeted may be insufficient to accurately gauge the client’s attitude to risk, especially where other information gained from the client is inconsistent with this and not considered in identifying their needs. Our assessment of risk profile questionnaires identified a number of improvement opportunities for the FNA based on what is currently used by similar firms. These improvements centre on the delivery and format of the risk profile questions. We noted that industry peers may have risk profiles which contain up to 16 questions. An expanded questionnaire of this type allows a number of benefits including:

Allowing the adviser to cover key aspects of risk tolerance in greater detail.

Allowing a mix of structured basic and more in-depth questions to drive objective responses from the client, which tap into the thought and decision making process.

The implementation of a weighted scoring system to ensure questions with relative importance have a greater contribution to the overall risk tolerance score.

The following table contains some examples of questions that demonstrate industry findings and suggestions for how the FNA can be enhanced.

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Finding Comparison Example related question in risk profile How improvements could be made

In-depth questioning, provoking through processes and past experiences

Questions from similar organisations have shown that client thought processes might be evoked by asking them to respond to a hypothetical profile based on rational data.

How would you react if the value of your portfolio fell by more than 20% in any year?

I would consider redeeming all my assets and transferring them to cash.

I would be concerned and consider changing my investment strategy.

I would be confident that my strategy remains appropriate for my time horizon and would make no changes.

I would consider investing more to take advantage of the lower entry prices.

This question can be improved by giving clients context to base their responses. Allowing this to occur, the client can draw on past experience to form a response whilst also give the adviser an opportunity to understand the thought processes that contribute to the decision.

This could also be done on a scenario basis, where the client is required to give preference to a portfolio amongst a number of investment strategies with varying degrees of risk and return.

Alternatively questions which target past experiences can centre on investment product combinations, allowing the client to measure their risk tolerance to products they know. E.g. options such as: 1. Cash or term deposits, debentures 2. Cash, bonds, trusts, property. 3. International and Australian shares, property, derivatives.

Limiting skew of responses by minimising pre-emptive questions

Some risk portfolios identified have demonstrated this aspect with questions which exhibit minimal distinction between responses.

This would limit the client’s ability to pre-empt a response that would correspond to a designated profile.

How familiar are you with investment markets?

I have no experience at all. I have a basic understanding of

investment markets. I have a strong understanding of

investment markets. I am an experienced investor.

For this question, it is quite easy to see what the model answer would be for each risk profile, as the options are fairly well spread and spaced.

Improvements can be made by creating and grouping responses in pairs or clustering responses so there is little distinction in alluding to a particular risk profile. The question could have responses that provide alternative but plausible opinions revolving around a particular aspect of investment.

Weighted scoring system for responses

Risk questionnaires we have seen in the industry have weighted client responses that contribute differentially to the tolerance score.

Questionnaires which have a weighted system also are longer in length to allow scores to distribute and give an appropriate representation of the clients risk profile.

How important is it to you that the value of your initial investment keeps pace with or exceeds the rate of inflation over your investment time frame?

Not important (1) Important. (3) Extremely important (5)

Apart from question 5 and 8 in the risk profile, no other questions are weighted. Furthermore, as the questionnaire only includes eight questions there is limited ability for scores to distribute.

Consideration should be given to the length of the questionnaire and also the relative importance of each question to the client’s attitude towards investment risk, as each aspect may not be identical. For example, attitudes towards capital loss may be more influential on a client’s attitude to risk than concerns regarding taxation.

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Finding Comparison Example related question in risk profile How improvements could be made

Categorisation of questions

Categorisation allows similar questions to be grouped together. Risk profiles demonstrating this show a logical flow of questions for the client and this can potentially allow an adviser to be alerted to inconsistencies in responses.

We may use the above three questions as examples to see the range of questioning in the risk questionnaire used in the FNA.

The arrangement of the questions is fairly arbitrary and disconnects from one aspect to another. For example, the questionnaire begins with a question on liquidity, whilst the question on investment objectives is half way in to the questionnaire.

Categorisation allows the client to focus his responses in one financial investment aspect at a time- e.g. Time Horizon, Risk Aversion, Investment Objectives. An expanded questionnaire can assist in achieving similar questions logically clustered together.

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