‘The conduct of this bank is anything but ethical.’

Lawyer Michael Bates says the CommInsure claims are ‘certainly the biggest thing I’ve heard as a litigation lawyer.’

Commonwealth Bank’s life insurance scandal is predicted to inflict further brand damage on the country’s biggest bank after its previous problems with financial planning, and could even cause clients of other insurers to question the value of their insurance policies.

As the government pledged a swift investigation into the life insurance sector on Tuesday, analysts said the latest incident would hurt the bank’s reputation, which has already been damaged by significant wrongdoing in its financial planning arm.

A joint investigation between BusinessDay’s Adele Ferguson and ABC’s 4 Corners this week revealed doctors in the bank being pressured to change their assessments of customers to avoid payouts; delaying payouts to terminally ill customers; and a refusal to honour claims to former staff who were medically retired.

Analysts said CommInsure accounts for a small share of CBA’s total profits, but highlighted that it was the second major scandal involving CBA mistreating customers, which could point to wider cultural problems.

With regulators set to probe the problems at CBA more deeply, analysts said this would tie up resources and act as a “distraction” for the bank’s management, as it comes under pressure to improve culture in parts of the bank.

“The one thing we can be sure of is this has the potential to distract management and certainly tarnish the brand,” CLSA analyst Brian Johnson said.

CommInsure is part of CBA’s wealth arm, which also includes Colonial First State and a financial advice arm. In its most recent December half, CommInsure’s profits were $191 million, according to the bank’s half year accounts. That is about 4 per cent of total profits across the CBA group.

Financial planning fiasco part 2

Bell Potter analyst TS Lim said the scandal came at a time when profits in life insurance were being squeezed by tougher regulation.

“It’s like the financial planning fiasco part 2,” Mr Lim said. “At the same time as competition is tough in banking, the last thing you need is distractions in a business that is not making particularly good returns to start with.”

Tim Mackay, principal at Quantum Financial, said two clients of his firm had already raised questions about CBA-owned Colonial products they held, after Monday night’s program.

Mr Mackay said the latest revelations may have an added impact because they came after previous mistreatment of clients in its financial planning business.

“I think there’s probably a cumulative effect there with clients,” he said.

He said “a large number” of clients would probably question their cover, and there were probably more customers, including some outside CBA, feeling “squeamish” about their life insurance products.

“The reputational hit to that brand, coming on the back of a series of other issues that they haven’t perhaps dealt with as they could have, it highlights a cultural issue that seems to keep popping up with regards to this brand,” Mr MacKay said.

Commonwealth Bank chief executive Ian Narev conceded on ABC radio the bank had let customers down and he would contact the affected customers individually. “I am very saddened and very disappointed by the experience of those customers, “ Mr Narev said on Tuesday.

As well as hurting the CBA brand, scandals such as this raise the prospect of banks being forced to set aside more capital for handling what is known as “operational risk”.

A 2014 report by Credit Suisse analysts Jarrod Martin and James Ellis said Australian banks were holding less capital than global lenders to cover this type of risk, which includes costs from failed internal processes and legal battle.

Originally published SMH March 9, 2016

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