Colonial First State executive general manager Linda Elkins has admitted to the Hayne royal commission that the organisation wrote misleading communications to its membership while scrambling to resolve breaches of superannuation laws that affected 15,000 members.

Despite knowing for more than two years that super amendments beginning on January 1, 2014, would require all new default contributions to be paid into a MySuper product, CFS – wholly owned by Commonwealth Bank – discovered about 13,000 members of FirstChoice Personal Super had made default contributions into the fund after January 1, 2014, and they had not been paid into a MySuper product. This number later rose to 15,000 members.

Potentially facing a reported $157 million penalty for breaching section 29WA of the Superannuation Industry Supervision Act, and without a suitable MySuper product to transfer the contributions into, CFS scrambled to get in touch with these members to record a valid investment direction, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry heard.

But in contacting these members, CFS implied the legislation required them to make an investment decision; in fact, the only requirement under the legislation was that if there was no investment direction, new default contributions would have to be paid into a MySuper product.

Counsel assisting, Michael Hodge, displayed as evidence a script given to phone staff contacting these members that read: “From January 1, 2014, legislation changed regarding investment directions for contributions. We must have on record a direction from each member as to how they would like their contributions invested.”

“Do you agree the statement as written is not true?” Hodge asked Elkins.

“Standing on its own, you’re right,” she replied.

Hodge also displayed a letter to members that stated CFS needed an investment direction for future contributions paid into FirstChoice Personal Super. At the bottom, the letter stated that if the member didn’t reply by May 10, 2014, it would commence the process to transfer the account to a MySuper product, and also stated “this may result in costs to you and the loss of any insurance cover you may currently have in FirstChoice Personal Super”.

Hodge said the obvious intent of this statement was to cause members to be apprehensive about their accounts being moved to a MySuper product. It would also allow CFS to continue charging commissions, which would cease if funds were transferred.

“The purpose of this letter was to assist CFS to stop committing an offence?” Hodge asked.

Replied Elkins: “That wasn’t, you know, our focus. Yes, we – yes, we were focused, of course, on stopping the breach, but we had genuine concern…that these members would turn their mind to their investments and their insurance.”

It emerged the Australian Prudential Regulation Authority had seen the communications and expressed no problem with them. The last tranche of 7000 default accounts was scheduled to be completed by May 2017.

Hodge asked: “Were you surprised at the end of this three-and-a-half year period that APRA never took any enforcement action with respect to Colonial First State for its many admitted contraventions?”

“No,” Elkins replied.

“Why not?” Hodge asked.

“We felt we had worked through the contraventions and resolved them satisfactorily.”

Later Peter Chun, CFS’ general manager of distribution, was questioned about events in the years that led up to an enforceable undertaking this year where CBA agreed to stop selling superannuation products together with “financial health checks” at its branches. This amounted to staff giving unauthorised personal advice, ASIC found.

Hodge asked Chun about a “revenue sharing model” where CBA would take a 30 per cent cut in return for CBA branch advisers selling Essential Super products, under a “general advice” model that supposedly did not offer personal financial advice.

CFS had commissioned KPMG to conduct “mystery shopping” in various branches in 2013 and 2014 to identify potential problems, and found a high decree of compliance exceptions, including that 85 per cent of customers were not given a general advice warning.

Hodge summarised some of his concerns with this question: “Does it seem strange to you that it would be impossible under the Future of Finacial Advice laws for a superannuation fund to enter into an agreement with a financial adviser where they will agree to pay 30 per cent of their revenue to the financial adviser if the financial adviser provides personal financial advice to a member of the public and that leads to the member of the public going into the fund, but it’s apparently fine for a fund to pay 30 per cent of this net revenue to a bank to recommend to a member of the public or attempt to suggest to a member of the public that they should join the fund?”

The arrangement was determined based on “an approximation of cost”, Chun said.

“Because it was…offering a new distribution model, the trustee felt this was the fairest and most equitable way to strike a…fee arrangement with the bank, Chun said.

Hodge asked if this distribution model envisaged that engagement with customers in the branch would lead to members joining the related superannuation fund.

“If it’s appropriate for the member, yes,” Chun replied.

“But the person in the branch isn’t attempting to make any assessment of whether it’s appropriate for the member?”

“That’s exactly the…general advice regime,” Chun replied. “We were not recommending other products to the customer. We were making them aware of this particular superannuation offering.”

Ben Hurley is a journalist and editor with more than a decade of experience in the industry. He has written for The Australian Financial Review, Business Review Weekly, The Guardian and a range of specialised and industry publications.