Perth’s Sudhir Sinha is set to go down as the most expensive financial adviser in Australian history, costing Westpac about $23 million in fines, legal fees and remediation costs on top of whatever he was paid to push Westpac and BT products.
And by the time the dust settles, Mr Sinha could well end up being the most expensive financial adviser anywhere.
That will depend on how the Australian Securities and Investments Commission uses the Westpac/Sinha test case as a precedent in dealing with the advice history of all the banks, AMP and other financial planning outfits.
On Thursday in the Federal Court, Justice Michael Wigney found against Westpac on most of the claims brought by ASIC over Mr Sinha’s advice and whacked Westpac with a $9.15 million fine.
One is left to wonder how large the fine might have been if ASIC had succeeded on all counts.
The $9.15 million comes on top of $12.7 million Westpac says it has paid to compensate Mr Sinha’s clients for bad advice.
Throw in a conservative estimate of legal fees and the Sinha meter would be ticking over $23 million for Australia’s oldest bank.
The core issue in the Sinha decision – advisers rolling clients out of more suitable products into less suitable products that happen to pay better commission and/or are in-house – was common place until Labor’s FoFA (Future of Financial Advice) legislation began to clean up the industry, a process accelerated by the Hayne Royal Commission.
It’s foolish for journalists to comment on court cases they haven’t sat through. With that caveat, from reports, ASIC’s statement of claim, and the Commission’s summary, it’s possible to see two key elements that will be rattling every financial institution that has employed a potentially conflicted financial adviser – and pretty much the entire vertically-integrated wealth management industry was structurally conflicted.
ASIC used four cases of the sort of “advice” Mr Sinha gave clients between 2010 and 2014, when Westpac finally sacked him.
Typical of the examples was advice to roll people out of their existing superannuation funds’ group insurance policies into more expensive and inferior BT products – whereby BT/Westpac picked up premiums and Mr Sinha received fat commission.
Clients also were rolled out of non-BT/Westpac super funds into house products, against what might be reasonably considered the clients’ best interests.
(With acknowledgement of the owner of this publication’s links to industry super funds, it would be interesting to hear a commission-earning adviser explain how it could be in the client’s best interests to quit one of the successful industry funds for a less successful retail fund.)
Selling the in-house product, not necessarily the product in the client’s best interest, was commonplace. Hence the tremors now running through the institutions already knee-deep in compensation claims.
The second key element of the case is ASIC’s contention that Westpac knew Mr Sinha as a dud but let him rip anyway.
The statement of claim delivers a rich paper trail of less-than-satisfactory compliance audits from 2004 that went nowhere.
Of particular interest, Westpac carried out an investigation in 2010 after a whistle-blower complaint about Mr Sinha.
The subsequent examination of sample files found all of them had the “summary of costs table” removed from the document, 42 per cent disclosed no reasonable basis for the advice, 12.5 per cent contained under-disclosure, 28 per cent contained blank forms signed by clients and 8 per cent contained inappropriate advice.
Westpac increased Mr Sinha’s compliance rating to “high risk” and subjected his advice to pre-vetting – but only for three months. Oh dear.
ASIC states Westpac’s compliance reviews in each of the next three years found Mr Sinha “effective” despite various shortcomings and “high achievement performance review ratings by Westpac in each September for the years 2010-13”.
Oh double-dear.
Yet Justice Wigney found ASIC failed to prove Westpac’s senior managers actually knew about the risks posed by Mr Sinha, the ABC reports.
And from looking at the four examples ASIC used, I’d speculate there were quite a few others to get Westpac’s compensation bill up to $12.7 million.
Thus Westpac may have escaped relatively lightly with ‘only’ a $9.15 million fine for contravening the Corporations Act 22 times.
ASIC quotes Justice Wigney as finding:
The relationship between Westpac and Mr Sinha was structured so that Mr Sinha was able to share in the commissions and fees earned or derived when, as a result of his advice or recommendations, clients signed-up for financial products in which Westpac or associated companies had an interest.
As will be seen, that rather cosy arrangement turned out to be fruitful for both Mr Sinha and Westpac, but not always for their clients.
…
Unfortunately for four couples, it was subsequently discovered that the recommendations that Mr Sinha made, and the circumstances in which he made them, were deficient and defective, both as a matter of process and in substance.
That should not have been a complete surprise to Westpac because Mr Sinha’s less than satisfactory conduct as a financial adviser had previously come to the attention of certain senior officers of Westpac as a result of various internal compliance reviews, audits or investigations.’
Westpac also stood to gain from Mr Sinha’s actions. That perhaps explains why Mr Sinha was permitted to continue as Westpac’s representative and partner despite the serious compliance breaches which were exposed by the 2010 investigation.
It is tolerably clear that, at least prior to the commencement of the FoFA reforms, some officers or employees at Westpac were either unable or unwilling to terminate the services of a representative who achieved high achievement ratings and was plainly proficient and successful at promoting the financial products of Westpac and its associates.
It may readily be inferred that Westpac’s compliance systems and practices were less than rigorously applied, at least in Mr Sinha’s case.’
How many financial advisers employed by Westpac and the other institutions rolled clients into inferior in-house products?
If four cases by one particularly bad adviser yielded 22 contraventions worth $9.15 million, X cases by Y number of less-than-perfect advisers could yield Z contraventions with a very large number indeed.
I feel another mass settlement coming on. Justice Wigney will have shoes dropping all over the CBD.
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