Westpac’s wealth arm BT Financial may be held responsible for the actions of its former financial planners after the Hayne royal commission blamed its remuneration structure for poor advice given to consumers.
Round two of the royal commission heard shocking evidence from nurse Jacqueline McDowall, who together with her truck driver husband, received advice from Westpac senior financial planner Ramakrishnan “Krish” Mahadevan they could borrow enough money to fulfil their dream of buying a bed and breakfast in the Victorian countryside.
On the advice, the couple sold the family home in Melbourne, spent thousands setting up a self managed superannuation fund and agreed to pay more than $30,000 for an insurance policy they would never use.
But their hopes were dashed when they were belatedly told the maximum they could borrow was $200,000, well short of what they needed to buy the B&B which would have cost around $1 million.
It also heard a second Westpac adviser, Andrew Smith, recommended overly risky strategies to clients and made transactions without their authority.
Remuneration system at fault
In an interim report released last week, Commissioner Kenneth Hayne said Westpac may have breached its obligations under section 912A of the Corporations Act to make sure financial services are provided efficiently, honestly and fairly.
In addition, Westpac may have breached section 961L of the Corporations Act to make sure advisers act in clients’ best interests. That section is a civil penalty provision with a maximum penalty of $1 million per breach.
In its submissions, Westpac said commissioner Hayne should not find the bank breached these sections because the commission only focused on a particular case study rather than its conduct over a period of time.
Commissioner Hayne said part of the reason why Mr Mahadevan and Mr Smith provided inappropriate advice was because Westpac’s system rewarded advice that would maximise revenue for Westpac.
It was revealed at the hearings Westpac pocketed $17,600 in upfront commissions for Mr Mahadevan’s advice to Mr and Mrs McDowall.
Commissioner Hayne added Westpac still does not do enough to reward advisers when they tell a customer they are doing the right thing and need to make no changes.
He said that until at least April 2017, Westpac’s disciplinary process was insufficient, and advisers who failed to follow policies were not supervised by regional managers or did not have their bonuses taken away.
No ASIC action taken
The comments from the interim report come as Westpac fights the corporate regulator’s claim the bank is liable for the poor advice given by former financial planner Sudhir Sinha.
In that case, it was revealed Westpac gave “high achievement” performance ratings four years in a row to Mr Sinha.
Meanwhile, the advisers register shows the corporate regulator has taken no action agianst Mr Mahadevan so far.
He left BT in mid-September, months after the royal commission hearing.
Commissioner Hayne said Mr Mahadevan may have breached his obligation under the Corporations Act to act in the best interests of Mr and Mrs McDowall because he pocketed a monthly bonus by telling them their B&B was workable when it wasn’t and sold them new insurance policies.
The regulator has also investigated Mr Smith and decided to take no further action after concluding the potential breaches are not serious.
However, Commissioner Hayne said last week: “Mr Smith provided advice to certain clients that was inappropriate and that in other cases it was not possible to tell whether the advice that Mr Smith had given was appropriate”.
Therefore, he said Mr Smith may have breached his obligation to act in certain clients’ best interests.
Failure to act in a client’s best interest can be grounds for banning a financial adviser.
Mr Smith left Westpac in 2015 to join Dover Financial and in light of the royal commission has blamed Westpac for turning him into a “scapegoat”.