This article is more than 1 year old

This article is more than 1 year old

The chairman of the corporate regulator gave “no reason” for killing off a long-running investigation into allegations Australia’s biggest bank, the Commonwealth, systematically ripped off term deposit customers, documents show.

Documents released by the Australian Securities and Investments Commission under freedom of information laws also reveal the regulator’s senior executives were frustrated at the slow process of the investigation, which began in 2006 and was abandoned in early 2010.

Asic executives were concerned that the bank stopped being “candid” in its internal documents after the investigation began, making it harder to get fresh evidence to support taking it to court over the alleged rort, the documents show.

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The CBA term deposit saga, which involved hundreds of millions of dollars in potential consumer losses, illustrates the difficulties the much-criticised Asic has had in tackling allegations of misconduct against the big banks.

It also raises questions about whether a regulatory system geared towards catching rogues and fraudsters is equipped to deal with what one Asic insider told Guardian Australia was “rotten” conduct by Australia’s biggest bank.

In an effort to address criticism of its apparent lack of enthusiasm for taking the big end of town to court, which reached a peak during last year’s banking royal commission, Asic now says it has adopted a far tougher “why not litigate” approach to breaches of the law.

As part of the term deposit investigation, Asic was considering launching legal action against CBA for civil breaches of laws prohibiting financial institutions misleading and deceiving their customers or acting unconscionably towards them.

The regulator was concerned the bank was breaking the law in its communications with customers who bought term deposits.

CBA told customers that if they did not withdraw their money when their term deposit expired it would be renewed for the same time period “at the rate which applies on the day”, which “may vary from time to time”.

“This statement may lead the customer to believe that the interest rate on their term deposit may, should it renew automatically, vary slightly, just as interest rates on loans such as mortgages vary slightly, from time to time,” Asic said in its final report on the investigation.

“In reality, when a passive rollover occurs, the interest rate is approximately halved.”

While CBA pioneered the allegedly deceptive practice, it spread across the banking industry in the late 2000s, a period when the product was much more attractive to consumers because interest rates were far higher than they are today.

It is estimated customers across the banking industry were ripped off by about $200m a year between 2005, when Asic received its first complaint, and 2010, when the practice largely ceased following a report from the regulator criticising term deposit pricing by Australian financial institutions.

Asic’s final report, known internally as a “no further action report”, shows a formal investigation began in September 2006 and was killed off by the regulator’s then-chairman, Tony D’Aloisio, on 2 March 2010.

“Chairman did not feel commencement of proceedings was appropriate,” the report said.

“No reason specified.”

D’Aloisio, who came to Asic after a stint running the stock exchange, did not answer the Guardian’s detailed questions about the documents but said he accepted responsibility for stopping the investigation.

He defended his record as chairman, saying the “unacceptable industry practices on term deposits” stopped after he wrote to bank chief executives in 2010 following Asic’s review of the product.

“This was a regulatory outcome which did not involve the risk and cost of litigation,” D’Aloisio said.

He contrasted this with Asic’s legal action against CBA and other banks involved with Townsville-based Storm Financial, which collapsed in 2009 leaving behind thousands of clients who had been encouraged to borrow heavily to invest.

“A regulatory outcome on Storm Financial could not be achieved without the risk and cost of litigation and actions were taken against the banks, being CBA, Macquarie and Bank of Queensland,” he said.

Internal Asic emails show the decision to kill the CBA investigation came a year after D’Aloisio complained of slow progress to the then-deputy chairman Jeremy Cooper and other senior executives.

In a 13 February 2009 email, D’Aloisio told Cooper he had heard nothing about a plan to deal with the term deposit issue since a meeting of Asic’s commissioners earlier that month.

He said the CBA investigation “needs to be reviewed and either refreshed or closed off with CBA (probably by me or you)”.

“While I do not wish to be unfair if work is going on but progress seems slow! Could you look into these.”

In response, Asic’s senior executive leader responsible for banks, Greg Kirk, who remains with the regulator, emailed Cooper expressing frustration at the conduct of the investigation.

“I am not sure what Tony wants here,” Kirk said.

“We confronted the CBA with our concerns in November 2005 and they sent a rebuttal.

“Other than seeking documents we have not further confronted them since that time (despite two commission decisions that that should happen and the chairman maintaining that he would do it).”

It is not clear whether the reference to “the chairman” is a reference to D’Aloisio or the man from whom he took over in 2007, Jeffrey Lucy.

“The practice has continued and been magnified in terms of the interest rate differentials,” Kirk said.

“We know the bank has ceased to be so candid in its internal discussion and documentation of its interest rate setting, ie any case we can build now based on a further collection of documents will never be as strong as the case we put together previously and which the commission did not seek to litigate.”

Because of these problems, he recommended against suing the bank.

Cooper and Asic declined to comment.

A CBA spokesman said the bank was “unable to comment on internal Asic communication and internal reports”.

“We have fully cooperated with Asic’s reviews into the term deposit industry in 2010 and 2013 and welcome the move by Asic to consult on the proposed administration of its new product intervention power.”