Summary
A summary of the day:
Mike Wilkins, the acting chief executive of AMP, gave evidence this afternoon. It wouldn’t have filled AMP’s customers with confidence.
- It’s clear that AMP has been pushing back hard against any suggestion that grandfathered commissions for its financial advice ought to be abolished. It’s only recently accepted that the change is inevitable, but it’s still fighting for more time to adapt.
- AMP has only this year realised that it’s remediation program for customers who’ve been charged fees for services they never received - a problem stretching back to 2008 at least - has been woefully slow and inadequate. It is in the process of agreeing to the terms of a proposed remediation program with ASIC which will hopefully see customers receive compensation within the next three years. On its current schedule, some customers will have waited 17 years before being repaid.
- Wilkins claimed that some of AMP’s financial advisers lacked the education to realise that they shouldn’t have been charging fees to customers if they weren’t providing those customers service.
- AMP has the highest ratio of banned advisers to current advisers in the industry (9% versus the next highest, 5% CBA).
- Ken Henry, the chairman of NAB, and former treasury secretary, gave evidence all morning, and he didn’t come out of it particularly well. He said the board has been deeply unhappy with the way NAB has been run by its executive team in recent years, but he couldn’t explain sufficiently why NAB executives continued to receive huge bonuses, despite the scandals.
- Henry joined NAB’s board as a non-executive director in November 2011, and became chairman in December 2015. Many of NAB’s scandals occurred in that time.
- He suggested to commissioner Kenneth Hayne that NAB customers should sue NAB to get a better and faster outcome for remediation, with NAB funding the court case.
That’s it for today. Thank you for following me through the day, and thanks again to the great Guardian team.
See you tomorrow at 10am (AEST).
Updated
The day ends with Hayne asking a number of questions about governance frameworks.
He’s thinking about his final report, and what governance model may prevent the type of scandals that have occurred within AMP from happening again.
Stay with me and I’ll provide a wrap of the day’s proceedings.
Commissioner Hayne asks Wilkins what he thinks should be done about the problem of the so-called “rolling bad apple”- the adviser who is not sufficiently competent or engages in conduct of a kind that the advice licensee condemns, moves from business to business?
Wilkins: “I think that there should be more protocols for that in place. AMP was an early adopter of the Australian Banking Association protocols around recognising that, and I think that that’s an appropriate protocol.”
Hodge has moved to AMP’s risk frameworks.
AMP has recognised that it still has a number of “high residual risks”.
The key driver of those risks is poor, inappropriate or non-compliant advice (historical).
AMP has the highest ratio of banned advisers to current advisers in the industry (9% versus the next highest, 5% CBA).
Updated
Hodge: “The reality is, isn’t it, that a ban on grandfathered commissions would significantly affect AMP’s business?
Wilkins: “There would be an impact on AMP’s business, but that would not be a reason that we would oppose a total ban on grandfathering.
Hodge: “Well, you’re now in favour of removing grandfathering subject to many qualifications?
Wilkins: “Yes, we’re saying there would be a necessary period of consultation with the industry and a period to allow alternative arrangements to be put in place.”
Updated
Hayne jumps in here and asks Wilkins to clarify AMP’s position on grandfathering.
Wilkins: “Commissioner, we’ve reviewed the position of grandfathered commissions and are now saying that we favour a phased approach to remove grandfathered commissions.”
Okay…
Hodge finds that very interesting.
Hodge: “Just to be clear – and we can bring up the submission, if necessary, you’ve still submitted, even in response to the interim report, that there may be constitutional issues associated with banning grandfathered commissions?”
Wilkins: “Yes.”
Hodge: “But you’ve said, ultimately, AMP does not now oppose moving away from grandfathered commissions in light of community sentiment surrounding grandfathered commissions?”
Wilkins: “Yes.”
Hodge: “And AMP has submitted that a reasonable transition period is required to provide sufficient time for industry participants to implement required changes?”
Wilkins: “Yes.”
Hodge: “I just want to understand some aspects of that. The industry was consulted on the FOFA reforms in 2011? AMP had already moved from commissions to fees for service in 2010?”
Wilkins: “For investment products.
Hodge: “The FOFA reforms commenced on 1 July 2012?
Wilkins: “2012, 2013, of that order.”
Hodge: “I think compliance was required by 1 July 2013?”
Wilkins: “Yes.”
Hodge: “ASIC allowed a further period of 12 months where it had adopted a facilitative approach to compliance?”
Wilkins: “My understanding again, Mr Hodge.”
Hodge: “And almost eight years have now passed since the industry was first consulted about the FOFA reforms?”
Wilkins: “Yes.”
Hodge: “How can it really be that more time is needed to implement the required changes?”
Wilkins: “I think that in respect of some grandfathered commissions, services are being provided for that remuneration, and there is a time that will be necessary for advisers to be able to go and make alternative arrangements with their customers to change the basis of their remuneration from their grandfathered commissions to a more contemporary fee-for-service type arrangement.”
Hodge: “That just seems like an extraordinary explanation for deferring it. This is eight years after AMP itself switched over to fees for service. Five years after the ban commenced, four years after the end of the facilitative approach of Asic. Surely by now, those advisers who are actually providing a service in exchange for fees have switched from grandfathered commissions?”
Wilkins: “No, I don’t believe that that’s the case, and certainly that’s not what has shown from some of the work that has been done with the AMP advice network.”
Updated
We move to grandfathering.
“Grandfathering” refers to the practice of exempting something, like commissions, from a new law or regulation.
AMP wanted commissions paid to financial advisers to be grandfathered from the Fofa legislation.
It said the passage of the Fofa legislation was highly contentious and it was doubtful whether the Fofa legislation would have passed at all and become law had the minister not provided reassurances to advisers that commissions would be grandfathered
AMP has questioned Hayne’s statement in his interim report that grandfathering arrangements were temporary and exceptional measures.
AMP has said ending grandfathering would be complicated and difficult to legislate, and that ending grandfathering could negatively impact the viability of some financial adviser practices.
It has also claimed that there may be constitutional issues associated with banning grandfathered commissions.
In short, it has really – really – pushed back against attempts to get rid of grandfathered commissions.
However, Wilkins says AMP has now changed its tune.
Updated
You have to admire the moral flexibility required to convince yourself that, even though you’re now a financial adviser rather than a distributor of financial products, you’ve been finding it incredibly difficult to change your mindset – so it’s not really your fault if you’re charging fees for services you’re not providing.
Updated
Hodge: “The mental shift that many financial advisers seem to find difficult was to understand they were no longer a distribution network for product manufacturers; they were now professionals providing advice and acting in the best interests of clients?
Wilkins: “That was certainly a significant change for a number of people in the advice network, particularly at the introduction of the FOFA reforms.
Hodge: “Well, it must have been a change for AMP pre-FOFA, because AMP had switched to fees-for-service back in 2010?
Wilkins: “Yes.”
Hodge: “What do you think it says about the cultural norms of financial advisers that that doesn’t seem to have, not only not universally been the case, but to such a significant extent not been the case?
Wilkins: “I think that the financial advice industry is improving. I think where it was coming from was a transaction-by-transaction type arrangement where commissions, including trail commissions, continued, and there was, in the case of that environment, no expectation that services would be delivered for those trail commissions.
Hodge: “If we sort of cut to the heart of it, until the switch to fees for service, financial advisers were, effectively, a distribution network or channel for wealth products and insurance products?”
Wilkins: “Yes.”
Hodge: “And they were paid commissions by the manufacturers of the wealth products or the insurance products in order to distribute the products to consumers?”
Wilkins: “Yes.”
Hodge: “And they were paid trail commissions, ordinarily as part of that?”
Wilkins: “Yes.”
Hodge: “And they didn’t need to provide a service to the consumer in exchange for the trail commission?”
Wilkins: “The commission was being paid by the product manufacturer. That’s right. It was a payment by the product manufacturer.”
Hodge: “It didn’t require them to provide any service to the consumer?”
Wilkins: “No.”
Updated
So, people who work in the financial advice industry are so uneducated they don’t understand basic norms.
I guess we already knew that.
Hodge: “Do you wonder, though, why it is that you would need to tell your advisers that if they’re charging a fee for a service, they have to provide the service?
Wilkins: “It would be a normal expectation that people would understand that.”
Hodge: “Outside of financial advisers, it’s hard to think of any profession or group of people that think if they charge money for a service, it’s okay not to provide the service?”
Wilkins: “You would think that where a fee has been agreed, the service would be delivered.”
Hodge: “That’s certainly what most professions are used to?”
Wilkins: “Yes.”
AMP advisers didn't realise they couldn't charge for services that weren't provided – boss
AMP’s advisers lacked the education to realise that they couldn’t charge fees for services they didn’t provide
Hodge has pointed out that AMP tried to “get the jump” on the Future of Financial Advice laws - which were introduced in 2012 - by getting rid of commissions and switching to fees-for-service in mid-2010.
Hodge says he finds it odd that, given AMP was clearly on top of the laws, that it took another five years for AMP’s advisers to realise that they needed to provide services in exchange for the fees.
Wilkins: “I think that a number of them did understand that, but also a number did not, and as the educational standards have improved, as the policies and procedures that AMP has put in place have tightened up, we’ve seen an improvement in that.”
(What level of education do you need before you know that you can’t charge fees for services you don’t provide?)
Updated
At any rate, AMP and ASIC have yet to agree on some final policy issues about the remediation program, so AMP is still remediating customers according to its original approach, which will take nine years to remediate everyone, rather than three years.
Hodge: “Do you regard that as a satisfactory situation?
Wilkins: “I would like to finalise the agreement with ASIC.”
Hodge: “What was the reason that AMP had initially sought to exclude them?”
Wilkins: “We believe that at less than $500 in terms of the total fee, that it was more likely to be general advice rather than personal advice, and could be excluded from the process.”
AMP tried to exclude some customers from remediation
Despite realising how poorly it has treated customers, with its go-slow approach to remediation, AMP has still been trying this year to exclude some customers from the program.
As at September, AMP was trying to exclude customers who paid under $500 per annum for financial advice from the review and remediation program.
The total amount of fees relating to those contracts, from the period 1 July 2008 to 31 December 2017, was $158m, affecting about 271,000 customers.
However, Asic said those customers shouldn’t be excluded.
AMP has now agreed to include those customers.
Updated
I guess that means the customers who would’ve had to wait 17 years to be remediated will now only have to wait 13 years?
So, a “fix and rebuild team” was created in May 2018, and AMP committed to ASIC that customers would be remediated within three years.
AMP expects to be able to complete the remediation within three years of 1 July 2018.
It has 150 staff working on remediation, and the revised total estimate of the cost of the program is now $778 million.
That includes the cost of carrying out the program within three years.
Updated
Therefore, in June this year, the board was told that AMP required a significant reset of its review and remediation program.
(I wonder how much that advice cost?)
AMP clients
Hodge is asking Wilkins about the inordinately-slow time it’s taking for AMP to remediate customers.
Part of the problem, from AMP’s perspective, is that it’s incredibly difficult to track down all the customers who have been charged fees for no service.
AMP’s systems are too poor.
It leads to this incredible fact.
Since AMP has been taking so long to get its act together, AMP realised there could be some customers who might have been charged fees but not had services provided at the beginning of 2008 facing the prospect that it could take up to 17 years after they had been charged those fees for them to be remediated.
Updated
Remediation costs blow out to $440m, AMP chief says
On 27 July 2018, AMP announced that it expected to provision $290 million in post-tax dollars for remediation for both inappropriate advice and fees for no service.
But that has grown.
As of 31 October 2018, the total amount estimated to be remediated is $440.4 million (comprising $80.7 million for inappropriate advice, and $359.7 million for fees for no service).
Updated
Hodge wants to know about AMP’s remediation program.
AMP is currently in the process of remediating customers, or attempting to remediate customers, for two issues: inappropriate advice, and fees-for-no-service.
A reminder - AMP has had a shocker this year at the royal commission.
We heard earlier this year that AMP had lost count of the number of times it had lied to the regulator.
That evidence proved a turning point in the royal commission. It was the moment when it finally dawned on the Turnbull government how bad things had become in the financial industry.
It also led to a number of high profile sackings at AMP, and a few months later, with the stench of the lying scandal still in the air, the company lost 25% of its shareholder value in a single bloody day on the stock market.
AMP was founded in 1849. It was a once-proud institution.
But it has been one of the worst-behaved institutions in recent years and apologised to shareholders earlier in the year.
Updated
Senior counsel assisting Michael Hodge QC is taking over for this afternoon’s evidence.
Up now, Mike Wilkins, acting chief executive, AMP Limited.
Summary
That was a solid morning. What did we learn?
Henry joined NAB’s board as a non-executive director in November 2011, and became chairman in December 2015. Many of NAB’s scandals occurred in that time.
- Henry says the board has been deeply unhappy with the way NAB has been run by its executive team in recent years.
- But he couldn’t explain sufficiently why NAB executives continued to receive huge bonuses, despite the scandals.
- He expressed frustration with the way in which banks have to negotiate with ASIC when a breach has occurred and remediation is needed for customers, suggesting customers are being needlessly hurt by existing processes.
- He asked commissioner Kenneth Hayne to consider the way in which the commissioner of the Australian Tax Office can fund court cases against the ATO to
And with that, Henry is finally excused.
We break for lunch.
What were the eventual remuneration consequences for bank staff and executives?
The bonus pool was funded at 90% in 2017, rather than 100%. Andrew Hagger’s variable remuneration by 5 percentage points.
The group short-term bonus pool would have reduced to 84.7% after adjusting for a potential conduct provision of $300 million.
It leads to a long discussion about the benefits of long-term remuneration and the need for risk-controls and risk-rewards to be set properly.
Orr takes Henry back to NAB’s foot-dragging approach to its negotiations with ASIC about its remediation of customers for its adviser service fees issue.
In April this year, ASIC sent a letter to NAB saying:
For a significant period of time, NAB has suggested various remediation methodologies that ASIC has consistently rejected as unacceptable and the latest proposal retreats even further from what we would expect NAB to consider to be in the interests of its customers.
Orr: “What was your reaction when you read this letter, Dr Henry?
Henry: “I was appalled.
Henry says he was appalled that NAB had now been in negotiations with ASIC for three years on this matter, and it remained unresolved. He said the board was very upset and wanted the matter dealt with.
But he evades personal responsibility.
Orr: “Do you accept that the board should have stepped in earlier?
Henry: “I wish we had, let me put it that way. I wish we had.
Orr: “I would like you to answer my question, Dr Henry. Do you accept that the board should have stepped in earlier?
Henry: “I have answered the question how I can answer the question.
Orr: “I’m sorry, is it a yes or a no, Dr Henry?
Henry: “I’ve answered the question the way I choose to answer the question.
Orr: “Well, I would like you to answer my question. Do you accept that the board should have stepped in earlier?
Henry: “I wish we had.”
Henry is in an antagonistic mood today.
Orr: “You said yesterday, Dr Henry, when I asked you about the right culture in a financial services entity that it was a culture that is all about the customer, which puts the customer front and centre and which is intolerant of practices which are not in the customer interest?
Henry: “Yes.
Orr: “What better way to demonstrate intolerance of practices which are not in the customer’s interest than to reduce the bonus pool as a result of risk?
Henry: “Well, we could have fired everybody, I suppose.”
Anyway, Thorburn argued to the board that NAB’s staff shouldn’t have to accept a reduction in their bonus pool because it would be unfair.
He said staff had already seen their bonuses cut in 2014, thanks to the mis-selling of payment protection insurance by NAB’s businesses in the UK, the remediation of which meant NAB’s cash earnings hadn’t been achieved.
He said that was entirely out of control of the about 30,000 staff working in NAB because they had absolutely nothing to do with the UK.
However, he didn’t mention some of the scandals afflicting NAB in Australia at the time, including adviser service fees, plan service fees, the bank bills swap rate, the foreign exchange breaches.
Orr: “Did it concern you that Mr Thorburn’s email to you did not mention any of those matters?
Henry: “No.”
Orr: “Well, Dr Henry, given the very significant compliance breaches and other breaches in that financial year, do you think that you made the right decision in deciding that there should be no risk related reduction to the bonus pool?”
Henry: “Yes, bearing in mind that there was a requirement that the chief executive communicate to the organisation right through the organisation that the board expected to see a substantial uplift in performance.”
It provides a springboard for Henry to talk about the dynamics of capitalism.
Henry: “Your question was whether it was the case that businesses in financial services, including banks, were not locating themselves too close to the shareholder at the expense of the customer. In the ensuing period there has been a lot of discussion about that matter in Australia, and it’s a rather important discussion. It goes to the behaviour of businesses, obviously. It goes to what it is that motivates businesses. It goes to the things for which boards hold themselves accountable in the conduct of the business. It actually goes to – there’s a much deeper level of importance to this question because it goes to the state of capitalism. The capitalist model is that businesses have no responsibility other than to maximise profits for shareholders.”
Updated
Henry’s body language is fascinating.
He’s slouching in his chair, chewing on a lozenge of some kind, sometimes deigning to answer questions and other times being mulish.
But he does like the sound of his own written word.
Ken Henry adopting increasingly interesting postures and poses in the stand at the #BankingRC https://t.co/D7WtgNXp2N pic.twitter.com/gMeVncFcLQ
— Michael Janda (@mikejanda) November 27, 2018
Orr repeats a quote to him, from a speech he gave this year about the philosophy of remuneration, in which he said:
“We would have to admit that even several years of strong performance for shareholders does not necessarily mean that customers are being treated fairly, depositors protected and banks made safe from the risk of failure.”
Henry’s response?
“I think they’re very wise words.”
Updated
Orr: “Do you accept that even relatively junior staff in your organisation should have enough knowledge to speak up about risk issues?
Henry: “Yes, I do.
Orr: “And, therefore, influence risk outcomes?
Henry: “Yes, I do. And more the point, as you know, in some cases, quite junior staff have been dismissed for inappropriate risk behaviour.”
NAB boss said staff should not be punished for problems at bank
Orr notes that Thorburn had done his best to convince the remuneration and risk committees that a lot of work had been done to resolve the issues inside NAB at the time, so staff didn’t need to have their bonuses cut.
He warned that cuts to bonuses would affect staff morale, and individual staff should not be held responsible for problems inside the bank.
Orr: “Does that reflect your views, Dr Henry, that ordinary staff have limited influence over risk outcomes?
Henry: “No. Not in retrospect, no.”
Updated
There was some ‘pushback’ from NAB’s remuneration and risk committees. They wanted staff and executive pay to better reflect the “issues” that had occurred inside NAB.
They presented NAB’s chief executive, Andrew Thorburn, with two options: the bonus pool could be set at 100%, with a strong message from senior management regarding the board’s requirement that there be further improvements in risk management. The second option was that the pool be set at 95%, with the 5% reduction attributed to concerns regarding further improvements needed in risk management.
The committees then agreed that they would recommend to the board that authority be delegated to Henry and to the then chair of the remuneration committee, Danny Gilbert, to choose which pay option to pursue.
Orr: “To make a decision between those two options?”
Henry: “Yes. That’s correct.
Orr: “And that happened, the board accepted that recommendation and that authority was delegated to the two of you?
Henry: “That’s correct.”
Updated
Orr: “Do you have any observations to make about that recommendation, Dr Henry?
Henry: “Well, as you know, we had trouble with it. The committee had trouble with it, the board had trouble with it.
Staff given 100% bonuses despite board concerns
Against the backdrop of Apra’s report on remuneration in 2016, NAB’s board made a number of decisions about short-term incentive payments and executive remuneration for the 2016 financial year.
Like the other banks, NAB has short-term variable remuneration program for its employees. Its staff are eligible to receive bonuses. That applies to the senior executives, too.
Each year NAB’s remuneration committee makes a number of recommendations to the board about those bonuses.
Orr takes Henry to two recommendations that were made in 2016.
The first recommendation is that the remuneration committee makes a recommendation about the size of the overall bonus pool.
Henry says it was a simple arithmetic calculation at the time. If the business, as a whole, meets its financial targets, the bonus pool will form at 100% or it might format 105% or 110% or 95%, depending on the calculation.
The second recommendation was about short-term variable remuneration for NAB’s executives.
At a joint meeting of the remuneration and risk committees on 5 October 2016, a report from the CEO did not suggest any risk-related adjustments to the short-term variable remuneration of NAB executives.
The chief risk officer did not think there should be any adjustments either:
“Overall, whilst there have been a number of events and breaches identified during the year, they have been subject to appropriate and timely reporting, remediation and consequence management. On balance, given the current and forward looking risk profile relative to overall risk appetite, Risk’s recommendation is that there is no discretionary risk-related adjustment to the group’s pool for FY16.”
Updated
Orr is obviously laying the ground work to criticise how the NAB board signs off on large pay packets for its executives
Apra was critical of NAB’s remuneration regime.
Apra: “Overall, there is significant scope for NAB to more effectively factor risk into remuneration arrangements, to drive a stronger risk culture and clearer accountabilities and expectations within the bank.
“APRA’s expectations on remuneration arrangements are set out in CPS 510. This standard states that performance-based components of remuneration must be designed to align remuneration with prudent risk-taking. To achieve this, financial performance metrics should be adequately adjusted for risk, risk management should have sufficient weighting in scorecards, and risk management expectations should be clear and measurable.
“In Apra’s view, NAB’s current approach does not yet adequately meet this standard and lags peers in some respects.
“Effective remuneration arrangements should include adjustments for risk. For NAB senior executives, performance is measured primarily by reference to cash earnings, return on equity and net promotor score, with an overlay for leadership criteria. Long-term incentive plans are based on relative total shareholder return. There is, therefore, a heavy emphasis on profitability measures in individual performance assessments, and unlike peers, there are no risk-adjusted measures of profitability.”
Orr: “You accept that that was an accurate characterisation of your remuneration framework at that time?
Henry: “Well, yes, I mean, that’s what we told Apra. Yes, of course.
Orr: “So Apra’s view, in summary, was that NAB’s remuneration arrangements weren’t operating as they should to support the prudent management of risk at NAB?”
Henry: “That was their view, yes.
Orr: “And that NAB’s compliance arrangements fell short of the standard that Apra would expect of an advanced bank?
Henry: “That was their view. Certainly.”
Orr: “All right. Now, could I tender that document, Commissioner.”
Updated
APRA summarised its findings this way:
“The findings indicate that compliance controls need to be tightened to meet the standard that APRA would expect of an advanced bank.”
Orr: “What was your reaction to receiving these findings from APRA about compliance and NABs failings to meet the standards that APRA expected of an advanced bank?”
Henry: “Well, it was no surprise. The findings came out of a piece of work that APRA conducted inside NAB and by talking to people inside NAB about the effectiveness of NABs own controls. So it was no surprise. Concerning. Absolutely concerning, but not a surprise.”
Orr says Apra conducted a series of prudential reviews of NAB in the first half of 2016.
Remember, Henry became NAB chairman in December 2015, with Armstrong taking over his role as chair of the risk committee.
A letter from Apra to NAB dated 28 April 2016 regarding its prudential review into risk governance matters at NAB.
Apra explained why it was conducting the review:
For some time now Apra has had a view that NAB has been more vulnerable to breaches and prudential issues than peers. Apra recognises and acknowledges the positive steps that NAB has taken in recent years to strengthen its risk governance. However, we are of the view that there is further to go. This has led to our focus on NAB’s risk governance framework this year.
In the report annexed to the letter, Apra noted it was requiring NAB to make a number of changes as a result of this risk governance review.
Orr: What changes did NAB introduce to address these issues?
Henry: “A lot. There was a huge program of work that was implemented. We called it project cornerstone or management called it Project Cornerstone. The quality of the reports coming to the board risk committee contained a lot more detail, considerably more granularity showing where various parts of the business were operating with respect to risk boundaries, where the gaps were. Clearer definition of responsibilities.”
The second review that Apra completed in that first half of 2016 was a compliance and remuneration review.
Apra explained why it was conducting the review:
Over the past few years, Apra has observed a significantly higher number of breaches of prudential standards for NAB relative to peers. NAB internal audit has also identified material concerns with the bank’s management of compliance and a number of compliance controls appear to be ineffective. This impacts the confidence that we can place in NAB’s ability to control its risk profile. More to the point, it also impacts the bank’s ability to consistently meet Apra’s standards.
Updated
Orr tenders the minutes of the risk committee meeting on 5 August 2015.
Commissioner Kenneth Hayne jumps in here.
It looks like Henry’s idea appeals to him intellectually. But he wants to bring it back to the law.
Hayne: “Well, can I just tease that a little. The triplet which I never get in the right order in 912A is honest, efficient, fair?
Henry: “Yes.
Hayne: “Those ideas are ideas of disarming simplicity. The board, above all else, will have its view, will it not, about efficient, fair and honest?
Henry: “Yes.
Hayne: “And if what has happened contravenes that standard, does it not follow inexorably, that something needs to be done about it?
Hayne: “It seems simple when you say it. Pretty challenging, really, for boards. It is pretty challenging.”
Updated
Orr: “Why should it come to that, Dr Henry, if management and the board are doing their job, why should you need someone to sue NAB so you can sort these things out?
Henry: “Okay.
Orr: “So the question is, is the law sufficiently clear that anybody can come to that view?
Henry: “That’s the question. Who knows?”
Updated
NAB could pay its customers to sue the bank, says Henry
Henry then presents another novel idea to the commission.
He says customers may be able get a better and faster outcome by taking NAB to court – and NAB could fund their case.
Okay.
Here’s the exchange.
Henry: “I think our habit of going to Asic and seeking to negotiate an outcome with Asic, I think that has led to elements of dysfunction, and it has certainly contributed to an insufficient pace of remediation for customers. It has. And I’m not happy with it. And the board is not happy with it. And we do have to find a different mode of behaviour.
Orr: “But it also leads to the mindset, “Well, what’s the best deal we can do with Asic?”
Henry: “Exactly.”
Orr: “It’s a deal because it’s a negotiation.”
Henry: “It is not right. It is not right ... I have wondered whether in this case NAB should not have, years ago, funded some of our customers to take us to this place, to this federal court and get an outcome.
Orr: “To sue NAB?
Henry: “Yes. It happens in other cases. As you know, I was for 10 years treasury portfolio secretary, the commissioner of taxation behaves in this way quite a lot. He has a budget to fund law suits against himself, in that case to provide law clarification, clarification of the law without having to, you know – anyway. And I have wondered whether - I don’t know, but it’s something that I have wondered whether, in retrospect, we shouldn’t have done that.”
Orr wants to know if the type of information presented to NAB’s board and risk committee about problems inside the bank is sufficient.
She wants to know if the form of information ought to change in the future.
This is all grist for the mill for the final recommendations.
Henry gives his typical “on the one hand yes, on the other hand no, it’s complicated” kind of response.
He says NAB has worked very hard over the last couple of years to improve the information that is being presented to the board.
Updated
Orr says it’s really not that difficult.
She says NAB’s board and risk committee should have asked for more information about the fees-for-no-service issues when they were brought to their attention, and asked what was being done to fix them.
Henry: “Fine.”
Updated
Henry seems to be saying that it’s too difficult negotiating with Asic, because you come to them with a proposal for remediating customers and they knock it back without telling you good reasons why.
“It’s almost like that game that children play. You’re getting colder, you’re getting warmer,” he says.
Again, Orr doesn’t buy it.
Orr: “Well, I want to suggest to you, from the documents that I will take you to, that Asic was very clear in relation to adviser service fees that the proposals that were being put by NAB were not adequate to address customer detriment?
Henry: “Yes.”
Updated
Orr wants to know why Henry is so concerned about future Asic action.
“What about proposing a customer-centric remediation program?” she says.
Henry: “This is what we’re doing. To Asic.”
Orr doesn’t buy it.
She says that’s not what happened with the adviser service fees. It’s far from what happened.
Henry agrees.
Orr: “If you propose a remediation program that is focused on customer outcomes and putting customers back in the position that they ought to have been in but for the misconduct of your organisation, is there really a threat of Asic action that you need to worry about?”
Henry: “But not in that case, but you’ve just described what we were doing. You’ve just described a negotiation process I’m talking about.”
Orr calls BS.
Orr: “I suggest to you very strongly that that is far from what you were doing, Dr Henry?”
Henry: “Yes.”
Orr: “This was not a customer centric remediation program. This was a remediation program that did not prioritise customer outcomes.”
Henry: “No, I agree - I do agree with that. But nevertheless, supposing that that had been our intention - supposing it had - it may have taken years, nevertheless, to negotiate with Asic. That’s not good enough. It is not good enough that we submit our customers to that process, where it may take years to negotiate with Aisc.”
Updated
Henry has now asked the royal commission for help.
He wants commissioner Kenneth Hayne to devise some way of allowing banks to move faster to remediate customers without having to get regulators involved.
Henry: “I reckon the commission can help us with this - the risk with that is that, you know, we could undertake of our own volition a customer remediation program only to find in 10 years’ time Asic come along and says, “Well, we don’t think you did a good enough job.” And we find ourselves going through another remediation program, or find ourselves in court.
“I would like to find a way of us being able to secure remediation without having to negotiate with Asic but to be able to do it in a way where we are protected from future Asic action. And if the Commission can help with that, I think you would do us all a great service.”
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NAB could have handled fees-for-no-service issue much better, says Henry
Henry says he regrets how NAB handled the fees-for-no-service issue, because it should have remediated customers much earlier.
He says it should have just got on fixing it, rather than trying to negotiation with ASIC.
Orr: “Looking back on that experience ... what do you say NAB should have done?
Henry: “I’ve asked myself that question many times. And in particular, I’ve asked myself the question what should the board risk committee have done, what should the board have done. Of course a board cannot and should not manage the business. That’s almost axiomatic. But the board does have to be accountable, as I was saying yesterday, for the impact of the business, and including impact with regulators and with the community generally.
“And the board has to take responsibility for the reputation of the business.
“And there’s absolutely no doubt that the reputation of NAB has been tarnished considerably by these matters and the way in which they’ve been handled by management. There’s no doubt about that.
“And so I have asked myself the question – and the board has discussed this on a number of occasions – what should we have done differently. We all agree we should have done something differently. Honestly, I’m not sure exactly what and when.
“My feeling is, though, like, I wish that we had – that we had said to management – well, certainly two years ago, perhaps even earlier –that we had said, ‘Enough is enough. Forget about negotiating with Asic. Just do it.’”
Orr: “Do what, before you continue, Dr Henry?
Henry: “Remediate customers. Do what’s in the best interests of the customers, as I was saying yesterday.”
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Orr asks Henry if he thinks NAB’s risk committee should be advised of these matters at an earlier point in time before notifying Asic.
Henry agrees.
But then he says this: “Indeed, I wonder whether it’s necessary, in all occasions, to negotiate with Asic at all, rather than simply notify and get on and fix it.”
Orr is a little baffled. “You wonder whether it’s necessary to negotiate with Asic at all? Are you jumping ahead to the negotiations that ran for many years between NAB and Asic in relation to adviser service fees and querying whether those ...?”
Henry: “I’m including that but I’m making a general point about behaviour.
“And the general point about behaviour, as I indicated earlier, is that when a compliance breach is suspected or it’s discovered so somebody is certain there has been a compliance breach, and it’s significant, the practice has been to notify Asic, and this commission has drawn attention to the fact that on numerous occasions the breach notification hasn’t been provided in a sufficiently timely fashion. That’s one issue.
“The other issue, though, is which I’m referring to, is that the practice has been to make the notification to Asic, and then, effectively, negotiate with Asic what the outcome should be.
“And what I’m suggesting is that on reflection, and the board has been – the board has been quite reflective about these matters ... that doesn’t appear to be, and certainly would not always be, the most sensible way to operate.”
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By the way..
Dr Ken Henry earned just over $300,000 as chairman of NAB’s risk committee in 2015.
Former chairman Michael Chaney said this about Henry in a 2015 message to shareholders:
“Since joining our board, Ken has demonstrated an exceptionally strong understanding of the financial and regulatory environments and of the issues and challenges facing financial institutions in this fast changing world.”
Henry then switched to chair of NAB in 2016, where he earned $690,000 (including super).
He then got a 100k pay rise in 2017, to $790,000 (including 20k in super).
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Orr: “There was no reference in this report, Dr Henry, to the possible penalties for this conduct?”
Henry: “No.”
Orr: “There was nothing about any measures that were being taken within the business to stop the problem from continuing to occur?”
Henry: “That is true.”
Orr: “There’s nothing about how advanced NAB was in its investigation of these issues?”
Henry: “No.”
Orr: “And there was nothing about whether the 12,000 customers and the $2m in overcharging appeared to represent the full extent of the problem or just the beginning?”
Henry: “Indeed.”
Orr: “And as we know, it wasn’t known at the time. It was just the beginning, wasn’t it?”
Henry: “It really was just the beginning.”
Orr: “Were all those things that I’ve just taken you through root causes, the businesses it related to, possible contraventions of the law, possible penalties, what we’re doing to fix this, how far our investigation has advanced - are they all things that the risk committee should have been told by the chief risk officer?
Henry: “I do think so, but can I – can I go back to a point I made earlier. It’s typically been the case that those matters -– or work on those matters – has taken place after discussions with Asic rather than before discussions with Asic.
Orr: “Well, should that practice change, Dr Henry?
Henry: “I think it should. Yes, I do. I really do.
Orr: “So the risk committee should be advised of these matters at an earlier point in time before the Asic notification. Do you agree with that?
Henry: “I do.”
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Orr asks Henry about how NAB decides that a breach ought to be reported to ASIC.
NAB needs to have formed the view that there has been or may have been a contravention of particular provisions of the law.
Henry says it’s complicated. He’s hard to pin down on this point.
Orr takes him back to the adviser service fees issue.
Orr: “Surely someone within your business at that point was thinking about whether this conduct contravened the law, and, if so, how it contravened the law?
Henry: “Yes.”
Orr: “And, surely, those were matters that the chief risk officer should have reported to the risk committee?”
Henry: “Perhaps.”
Orr: “Perhaps, Dr Henry?”
Henry: “Yes, perhaps.”
Orr: “And I’m afraid I still don’t understand the reason for your hesitation?”
Henry: “I probably can’t explain it to you.”
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NAB failed to flag Asic inquiry into overcharging
On the same day as that board meeting, the adviser service fees issue was also reported to the risk committee as part of a regular report by the chief risk officer.
The chief risk officer said to the risk committee:
The high volume of regulatory inquiry and intensive resourcing required to deal to ASIC’s investigations into NAB’s Wealth advice business continues with NAB Wealth responding to multiple notices. These relate to (1) current and former advisers in relation to whom the licensees have had serious or other compliance concerns; (2) overcharging of ongoing advice service fees.
And there were some other matters listed there, including:
Vertical integration and misconduct of various former advisers that had been notified to ASIC.
Orr then takes Henry to a Regulatory Risk Update where the adviser service fees matter was listed as the last item on that page:
NAB Wealth continues to respond to ASIC’s investigation of overcharging of ongoing adviser service fees. In regard to the breaches by the product issuing licensees, ongoing analysis in response to ASIC notices has estimated that approximately 12,000 customers were overcharged $2 million in aggregate between 2007 and 2014. We expect ASIC will monitor communication and compensation payments to customers and issue a media release on the matter. In response to a separate request by ASIC, NAB is investigating licensee revenue, compliance audit and complaint data to identify where there has been misconduct by any of the group’s advice licensees in regard to charging service fees where there has not been provision of service.
Orr: “So, again, there was no indication this time for the risk committee that this was a new item?”
Henry: “No, that’s correct.
Orr: “No explanation of the background to the issue?
Henry: “That’s correct.
Orr: “No explanation of the root causes of the issue?
Henry: “Indeed.
Orr: “Not even an explanation of the businesses that it related to?
Henry: “True.
Orr: “Nor the possible contraventions of the law that were involved?
Henry: “Well, that’s true. Yes. That’s, perhaps, not so unusual but that is true.”
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Orr says NAB’s board considered the regulatory report in 2015, and there was a discussion about other matters contained in the report, such as compliance with Austrac requirements.
But there was no mention in the minutes for that meeting of the adviser service fee issues.
Orr: “Do you recall there being any discussion at that meeting of the adviser service fee issue?”
Henry: “Well, no, I don’t recall it. That’s not to say it didn’t happen but I really don’t recall it.”
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Orr: “In your view did this document sufficiently impress on the board the seriousness of these events relating to adviser service fees and the engagement with Asic?”
Henry: “I would say not.”
Updated
So...
NAB received the letter from Asic in June 2015 asking for a broader investigation at the bank.
Asic wanted to know if there were issues surrounding incorrect charging of advice fees.
Coincidentally, the adviser service fees issue was reported to NAB’s board for the first time in August 2015, in an internal bank paper called “Summary of Material Regulatory Engagement”.
The paper had a heading, Conduct Investigations and Surveillance, which referenced the bank bills swap rate matter, Asic’s foreign exchange investigation, the customer response initiative dealing with inappropriate advice, and the issue of adviser service fees.
Asic has escalated to enforcement its investigation of NAB Wealth breaches regarding overcharging of ongoing adviser service fees. The breaches relate to situations where clients requested the removal of advisers from their accounts, but where ongoing service fees continued to be charged and held within head office accounts. Asic is not yet satisfied that the control failures are limited to operational processes of the issuing entities. They have requested that NAB scrutinise the operations of all AFSL entities within the group that provide personal advice to retail clients, to ascertain whether there has been adviser or advice licensee misconduct. Internal investigations are under way with a final response due to ASIC on 24 July 2015.
Orr: “Now, this was the first time that this matter had appeared in a regulatory engagement report for the board?”
Henry: “I believe so.”
Orr: “But the report did not make it clear to the board that this was an issue that was being reported to the board for the first time. Do you agree with that?”
Henry: “Yes, I would agree with that, yes.”
Orr: “And should it have done so, Dr Henry?”
Henry: “Yes, I think it should.”
Orr: “I will tender that document.”
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Orr: “And as the chair of the risk committee at this time, did you regard that as acceptable, that the compliance risk had been rated as red, bearing in mind that that means no agreed plan to remediate these problems for the period of time that you’ve referred to?”
Henry: “Well, you know the answer to that question. No. You know I didn’t regard it as acceptable and it’s reflected in the minutes.”
Orr: “If we look at the status update towards the bottom of the page, and the reference to the red rating over FY14 and the first quarter of FY15, we see that the memorandum goes on to record that the red rating was the result of a number of matters?”
Henry: “Mmm.”
Orr: “Ongoing regulatory breaches in Wealth?”
Henry: “Mmm.”
Orr: “Was that a reference to the inappropriate advice issues that NAB was investigating through its customer response initiative (CRI)?”
Henry: “I think so, yes.”
Orr: “Yes?”
Henry: “The CRI, yes.”
Orr: “And conduct issues and associated remediation in the UK?”
Henry: “Yes.”
Orr: “Was that a reference to the mis-selling of the payment protection insurance by NABs UK business?
Henry: “I believe so, yes.”
Orr: “And we see it was also due to: Investigations connected with market practices in relation to the bank bill swap rate and the foreign exchange rate?”
Henry: “Yes.”
Orr: “And each of those matters ultimately resulted in NAB entering into enforceable undertakings with ASIC, and in the case of the bank bill swap rate matter, paying penalties of $10 million?”
Henry: “That’s correct.”
Orr: “And there are also references to the red rating being due to issues in relation to NABs compliance with its anti-money laundering and counter terrorism financing requirements?”
Henry: “Yes.
Orr: “So this was a set of serious compliance risk issues for the bank?”
Henry: “Well, yes.”
Orr: “Which were appropriately reflected in a red rating for compliance risk performance?”
Henry: “Yes.”
Orr: “So NAB had been operating outside its risk appetite for compliance with no agreed plan to remediate that position for approximately three years, apart from the one month when this went into the amber rating. Is that right?”
Henry: “I think that’s correct, yes.”
NAB operated outside risk appetite for three years
This exchange does not look good for Henry.
Orr pulls up another memorandum for the risk committee and the remuneration committee entitled “assessing risk management performance in FY16”.
It was prepared in December 2015.
Orr: “Could I ask you to look at the third appendix to this document ... which sets out rating guidance under the heading Compliance Settings. Do you see this?”
Henry: “Yes.”
Orr: “And this document records that compliance risk will be rated red when we have breached appetite and do not have an agreed plan to remediate the position?”
Henry: “Yes”
Orr: “Now, is that what a red rating meant throughout the period that you’ve been referred to?”
Henry: “Yes, I believe so, yes.”
Orr: “So it wasn’t just about the fact of a breach; it was about appetite being breached and there being no agreed plan to remediate the position?”
Henry: “That’s correct, yes.”
Orr: “I will tender that document, commissioner.”
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Orr: “When will it be amber then? If you say a single compliance breach takes you to red, your system, as I understand it, has three categories, green, amber and red, how does that work when you say a single breach would take you into red?”
Henry: “It would have to be a breach that’s regarded as material, and the materiality threshold depends upon the category of the compliance risk that you’re talking about.”
“I think it’s the case that in all the time since, and despite the fact that the board, particularly through the board risk committee, has been talking to management about the importance of improving compliance risk management. I think it’s the case that the rating has been amber in one month, I think, in that entire – what is it – four-year period, or three-year period, anyway.”
Updated
Henry then explains why a red rating for compliance risk was quite common.
“The board risk committee spent some time during the course of 2015, and it’s reflected in a risk committee minute late in 2015, if I recall, considering whether it was realistic to imagine that an organisation with thousands of individual compliance obligations could ever realistically not be in compliance risk. And it’s extraordinarily unlikely. And that there would not be a red risk rating against compliance.
“I think in our so-called Apra self-assessment document – which I know you’ve read – you will see that we’re identifying more than 14,000 individual compliance obligations in the bank.
“It would be quite extraordinary if there was any point in time in which at least one of those compliance obligations was not being complied with.
“So that means that the compliance risk rating would normally be red. That doesn’t – one of the challenges we have, and we made this clear to management in 2015, through the risk committee, is the fact that the compliance risk rating is always red should not be dulling anybody to the importance of these matters.”
Updated
Orr: “So a red rating for compliance risk performance is a very concerning matter. Do you agree?”
Henry: “Yes, it is.”
Orr then talks about a memorandum prepared by the bank’s general manager for group operational irsk and compliance, for a meeting of the risk committee in May 2015.
The purpose of the memorandum was to highlight where the group had been operating with respect to “compliance risk appetite”.
Compliance risk is defined as the risk of failing to understand and comply with the laws, regulations, licence conditions, supervisory requirements, self-regulatory industry codes of conduct, as well as related internal requirements such as policies, procedures, organisational frameworks and standards.
The memorandum had this statement:
The group has no appetite for noncompliance with legislation in the jurisdictions in which it operates or the voluntary codes it subscribes to as articulated in the FY15 group risk statement.
The group’s compliance risk performance has been rated red over FY14 and first quarter of FY15.
Orr wants to know what a “red” rating means.
Henry says a red rating refers to a breach of one of the bank’s compliance obligations.
Updated
Orr asks Henry if he’s read the letter from Asic to NAB in 2015.
Henry says he can’t remember.
“I’ve read, as you would imagine, some thousands of documents, or re-read some thousands of documents over the past few days. This may well be among them, I – but it doesn’t matter, really, I’m – does it? Maybe it does.”
Henry thinks he may have seen the letter for the first time last week.
Orr says the letter was sent from Asic in June 2015, and she wants to know what was happening in NAB at that time.
Henry wasn’t yet chair of NAB’s board, but he was the chair of the board’s risk committee.
Updated
Senior counsel assisting, Rowena Orr QC, asks Henry about a memorandum to NAB’s board entitled “Culture”, dated 5 November 2018.
Orr also asks Henry about NAB’s charging of adviser service fees and plan service fees in NAB’s Wealth business.
NAB subsidiaries started charging plan service fees in about 2012, but adviser service fees had been charged from much earlier around 2008 or 2009.
Around the middle of 2014, NAB’s subsidiaries started identifying a number of issues in connection with the charging of both adviser service fees and plan service fees, and in December 2014, one of NAB’s subsidiaries, MLC Nominees, reported a significant breach about these matters to Apra.
There was also a significant breach report to Asic.
Towards the middle of the following year, in June 2015, Louise Macauley from Asic wrote to Andrew Hagger from NAB.
At the time that letter was received, Mr Hagger was the group executive for NAB’s Wealth business. Macauley referred to Asic recently having commenced investigations into Australian financial services licensees charging advice fees without providing advice. She also referred to the breach that had been reported to Asic on 23 December 2014.
She asked Hagger to scrutinise the operation of all of the AFS licensees that form part of the NAB Group which provide personal financial advice to retail clients to ascertain whether there are issues relating to incorrect charging of advice fees.
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Good morning everyone,
Welcome back to the royal commission blog. This morning we’re hearing more from Ken Henry, the chairman of NAB and former treasury secretary.
Yesterday, Henry said he believed it could take 10 years to turn around the culture within NAB and its boardroom.
Let’s see how we go today.
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