What have we learned today?
Ken Henry, NAB chairman and former Treasury secretary, says culture is one of the hardest things to change about an organisation like a bank. He predicts it could take a decade to overhaul NAB’s culture.
Henry says it’s extremely hard to measure customer outcomes. The best measurement he knows of is customer complaints.
He believes regulators have a role to play in changing board cultures, but it’s a difficult thing to do. He says regulators can do so by encouraging banks to focus on particular values. He thinks bank boards should be accountable to the community, not just shareholders.
NAB’s chief executive Andrew Thorburn did not have a great day in the chair. He spent the day offering weak mea culpas about the bank’s mishandling of its remediation program for customers who had been charged fees for services that were never provided.
Thorburn was also accused of trying to redirect blame for NAB’s fee-for-no-service scandal to Andrew Hagger, NAB’s former head of wealth who departed the bank recently.
Thorburn agreed that the banks’ move into wealth management had been a failure.
Thorburn appreciated why banks must overhaul their remuneration regimes so staff are no longer incentivised to focus on short-term profits at the expense of customers. He also conceded that the way banks have been behaving in recent years hasn’t been sustainable.
Okay. That’s it from me today. Thank you for joining me. And thanks again to the great Guardian Australia team who have been helping me.
Join me back here at 9.45am (AEDT).
Updated
Henry’s thoughtful but academic and ponderous way of answering questions is starting to wear Orr down.
She asks Commissioner Hayne if this is an appropriate time to stop.
Hayne says we should meet back here tomorrow at 9.45am.
But ...
Just as Hayne is wrapping up, someone from the public gallery starts speaking loudly to Hayne. Another protester?
Hayne sighs.
The protester, who introduces himself as Mr Scargetter, asks Hayne loudly: “With respect, commissioner, in the public interest, do you or an associate hold a vested interest in any of these major banks. [I’m a] 40 years tax practitioner.”
Hayne: “The short answer, Mr Scargetter, is no I do not, and we will adjourn until 9.45.”
Exeunt.
Updated
Henry says it’s incredibly hard to measure customer outcomes, rather than customer experience.
Orr: “How do you measure customer outcomes?”
Henry: “Mainly through complaints from customers, to be honest. Mainly. When something goes wrong.”
Orr: “So you rely on the customer to come forward and tell you about the poor experience that they have had?”
Henry: “That is usually the case, yes.”
“And it’s probably impossible to replace that with anything else, but we do try other things. So, for example, the other things we try is to have more rigour around the development of products, and there are – if I can use these somewhat – this somewhat crude phrase but release of products into the market. And truly assess them from a customer perspective before the products are rolled out. This is something we need to get better at. Obviously, if we were much better at that, then we would get fewer customer complaints.”
Updated
Ten years to change NAB culture, Henry says
Right.
Henry reckons it could take 10 years (!) to change the culture within NAB.
A decade.
We’ve just endured a lost decade for energy policy in Australian federal politics. Ready for a grinding 10 years to turn NAB around?
Updated
Henry’s answers, by the way, will help to inform Commissioner Hayne’s recommendations on the structure of Australia’s financial industry.
Will Hayne recommend a radical overhaul of the designated roles for Asic and Apra?
He wants to stop the scandals. But how should he do it?
Updated
Can regulators fix culture?
Orr asks Henry if he thinks there’s a role for regulators to play in ensuring that financial services entities have a culture which promotes proper values.
Henry wholeheartedly agrees. “Yes, I do. Yes, I do. Yes.”
Orr: “And what does that role look like, in your view?
Henry: “I think it’s a role in the financial – sorry, in banking, anyway – let me stick to banking – I think in banking it’s a role best played by Apra rather than Asic, for example, although even under Asic’s current legislation, for example, if you look at section two of the Asic Act, and you look at the principal purpose of Asic, I think it’s arguable that Asic should be taking an interest in the culture of corporations in Australia. That would be in section 2A, if I recall correctly. I think that’s arguable. But in respect of banking and superannuation and insurance, Apra certainly should be taking an interest in the culture of the organisations that it supervises, and I think it is.”
Updated
Henry is very comfortable talking about the animating ideas of capitalism.
What are incentives? How do they work? What role does risk play in an organisation’s profit-seeking?
Orr asks him if he thinks it’s appropriate or possible to prescribe particular culture for financial services entities.
Henry says it’s not possible.
I wish it were but I don’t think it is. It’s not something that can be legislated.
“I don’t think it’s something that can be even legislated in principles and left to regulators to either seek to enforce, or even seek to have implemented in a supervisory capacity with particular institutions.
“Nevertheless, it is something which regulators – at least in Australia, no, it’s beyond Australia’s shores – regulators in the financial services industries have been taking a keen interest in.
“As you know, Apra has, for example, been taking a keen interest in risk culture matters since, I would say, about 2015. I remember we had – the NAB board had an – had a discussion with the Apra commissioners, I think it was in 2015, about the importance of risk culture and APRA and we then started on a journey on risk culture. That journey is ongoing. It’s quite a long journey. We’ve done a lot more work on it recently.
“I think we have a better feel for the dimensions of risk culture that really matter for a financial services entity. I think Apra does too. But I don’t think we’re ever going to be able to write on a sheet of paper exactly what it is.”
Updated
Orr: “So you believe boards should be accountable to our community now and our future community?”
Henry: “I do, indeed.”
Orr: “And how should boards achieve that accountability, Dr Henry?”
Henry: “Well, through their governance of the organisation.”
Orr: “And what are the concrete things boards should do to ensure that the decisions that they make are made against that backdrop of an awareness of their accountability to the broader community and the future broader community?”
Henry: “I think the first thing they should do is not seek to avoid accountability, on the basis of an argument that provided we are looking after the interests of shareholders, we’re doing everything that we could possibly be expected to do, or reasonably be expected to do.”
Updated
Orr: “I want to make sure I understand your answer to my question?
Henry: “Mmm.”
Orr: “Which was your question – to whom should boards ultimately be accountable? Do I understand that answer to be that they should not only be accountable to shareholders, but they must also be accountable to customers, to those who, in your words, are most adversely affected by the operations of the entity?
Henry: “Indeed, customers, but beyond customers.”
Orr: “Beyond to who? To future generations? Is that what you ...”
Henry: “Indeed, why not.”
Orr: “Well, it’s a question for you, Dr Henry, as the chair of NAB’s board.”
Henry: “I think it’s a question for you as well. Right? I think it’s a question for this commission. Seriously, I do. It’s a very important question.”
Orr: “Future generations of customers? Is that who you [mean]?”
Henry: “The community. Yes, indeed.”
Updated
An interesting dynamic has already developed between Orr and Henry.
Orr is trying to figure out how to get Henry to answer questions in a way that will suit the commission.
Henry has a tendency to philosophise, to answer questions with rhetorical questions, to stress the absolute seriousness of certain ideas but to leave questions hanging in the air.
At one point he takes Orr’s question and recasts it, then answers it. It prompts Orr to encourage him to answer his own question again.
Updated
Orr takes Henry to a speech he gave to the Australian shareholders association conference in May this year.
A quote from Henry’s speech:
“When historians of finance look back on this period, they will identify an unusual level of corporate complacency driven by relatively benign macro economic conditions, and a long period of impressive return on equity performance.
“They will suggest that corporate leaders fell into believing that a sector capable of generating return on equities in the mid-teens for so many years couldn’t be doing a lot wrong.”
Orr asks: “And is that what you think has led to the misconduct examined by thiscommission, complacency?”
Henry: “I don’t know if that’s what has produced it, but had there been less complacency, I do believe that we would have seen less misconduct, indeed.”
Updated
Orr: “What about the opening of fraudulent bank accounts by Wells Fargo in the US?
Henry: “Yes, I am familiar with that.
Orr: “What about all the misconduct reported to this commission by financial institutions in Australia earlier this year?
Henry “Yes, indeed.
Orr: “Why do you think that the measures taken to address the global financial crisis didn’t address this sort of conduct as well?
Henry: “That’s a really good question. Speaking from the Australian perspective, the issues that confronted Australia in the global financial crisis had to do principally with balance sheet risks facing the Australian banks. And in particular, funding and liquidity risk, and when I joined the board of National Australia Bank at the end of 2011, those were the issues that were principally the focus of both Apra and – and National Australia Bank. It was principally to do with balance sheet risk, for obvious reasons. Matters relating to conduct came to the consideration of bank boards later in the piece in Australia, I think.”
Updated
NAB chairman Ken Henry begins his session
Orr is straight into it with an interesting line of questioning.
She wants to know how Henry, who was deeply involved with Australia’s governmental response to the global financial crisis, how he feels about the behaviour of the big banks since the GFC.
Orr: “Before you joined NAB’s board you were secretary of the Department of the Treasury?
Henry: “Yes, I was, yes.
Orr: “You held that role from 2001 to 2011?
Henry: “Early 2011, yes, that’s correct, yes.”
Orr: “And so you were in that role during the global financial crisis?
Henry: “Among other things, yes, I was, yes.”
Orr: “In the wake of that crisis, Dr Henry, governments and financial institutions around the world devoted considerable attention to measures designed to promote financial stability. Do you agree?”
Henry: “Well, yes, indeed. I was very closely involved in those matters.”
Orr: “And to discourage excessive risk-taking by financial institutions?”
Henry: “Yes, that’s true, yes.”
Orr: “But in the decade that followed, all over the world we’ve seen financial institutions continue to engage in serious misconduct, such as the mis-selling of payment protection insurance in the UK?
Henry: “Well, yes, although the matters in the UK and PPI go back well beyond the global financial crisis.”
Orr: “What about the manipulation of interbank interest rates and foreign exchange rates in the UK, in Europe, in the US, and in Australia?”
Henry: “Well, so far as I know, nobody has yet established that there has been any manipulation of those rates in Australia.”
Updated
Senior counsel assisting Rowena Orr QC has taken over.
That last part gets heavy going, so I’ll spare you.
Thorburn has been excused.
Next up, Ken Henry, the chairman of NAB and former Treasury secretary.
Updated
Hodge: “And Asic has said that it thinks you should apply the same methodology to your licensees?
Thorburn: “Yes.
Hodge: “But, as we understand it, you haven’t yet agreed to that?”
Thorburn: “No. I think that is in active discussion with Asic, though, right now, Mr Hodge.
Hodge: “So your first explanation, which was we needed to agree on the methodology for NAB Financial Planning and then we would apply it to the advice licensees, can we put that aside as not being accurate?
Thorburn: “No, I think it’s very accurate.”
Hodge: “You don’t want to just apply the same methodology that you’ve agreed for NAB Financial Planning to your advice licensees?
Thorburn: “Well we wanted to agree the methodology of NAB Financial Planning and put it into advice partnerships. And that process of discussing that with Asic and getting agreement is under way.”
Hodge: “Isn’t the real nub of this the second point, which is there is a problem, and the problem is you don’t have records for your advice licensees, which makes it financially very difficult for you to agree to apply the same methodology for NAB Financial Planning to your advice licensees?”
Thorburn: “Well, I’m not conceding the first point. I still believe that is what - that is what we have done. But on this point, this is a material point, that they’re not employees, they’re under our licence.”
Hodge: “And to get access to files and especially going back in time, it’s a bit harder.”
Thorburn: “Yes.”
Updated
Hodge: “You’ve now agreed on your remediation method for NAB Financial Planning?
Thorburn: “Yes, we have.”
Hodge: “But you haven’t agreed on it for the other four – for your four licensees that have authorised representatives under them?”
Thorburn: “Yes, that’s right.
Hodge: “And why is that?”
Thorburn: “Well, I think the primary reason is that we took the view that the methodology would be agreed first on the NAB Financial Planning business and then it would be applied into the advice partnership’s business. So we’d sort of work out how to do it and then we would deploy it – that solution – into advice.”
Updated
Hodge is starting to nail things down.
It’s obvious why NAB didn’t want to quickly recompense customers regardless of whether they signed up with NAB pre-Fofa or post-Fofa.
Revenue was a big concern. But NAB’s systems were also terrible.
[Again, haven’t we all been sold the line that our banks are the best in the world? Best systems. Most professional. Great at managing our money. Yet here we are, hearing that NAB’s internal systems are so poor that they didn’t even know if their advisers were delivering services to customers they were charging].
Updated
Thorburn: “There was a number of people involved, Mr Hodge. It’s not just Andrew Hagger. Sharon Cook was closely involved. And they were the two who had sort of day-to-day responsibility for it. I have ultimate accountability and David Gall as chief risk officer does have some responsibility as well.
“But at the time, I just don’t think we saw it with the clarity we do now. You know, it wasn’t an agenda item on a busy board schedule. It was a matter that had been going for two years.”
Hodge: “You don’t seem to have asked yourself the question why couldn’t we three see that we were not doing the right thing?”
Thorburn: “Well, I think – I see that now.”
Updated
Hodge: “And that you’re not recognising that even if Mr Hagger had been responsible for suggesting this methodology, that at least three senior executives who are still at the bank were aware of it and attended the board risk committee meeting which considered it, and they are you and Ms Cook, who reported on it, and Mr Gall?
Thorburn: “Yes.”
Sharon Cook is the chief commercial and legal officer of the bank. David Gall is the group chief risk officer.
Updated
NAB chief accused of trying to shift blame to departed executive
Hodge also pulls up Thorburn for repeatedly trying to blame Hagger.
Hodge: “What it seems like is that somebody looking at your statement and listening to the evidence that you’ve given today might think that you are, to the maximum extent possible, passing responsibility for this to Mr Hagger, the senior executive who has been made redundant and left the bank. Is that what you are doing?”
Thorburn: “No.”
Updated
Hodge brings up a document.
It’s a memorandum for the NAB board summarising material regulatory engagement for December 2016.
It shows that that strategy, to make a distinction between pre-Fofa and post-Fofa customers, was approved by the board.
Hodge: “We go to the third page of that document. You see it’s proposed by the general manager of regulatory strategy and affairs and supported by the group chief risk officer. Do you see that, Mr Thorburn?”
Thorburn: “Yes, I do.”
Hodge: “And then if we go back to page 2, we see in the middle of the page a section which is Adviser Service Fees?”
Thorburn: “Yes.”
Hodge: “And you see NAB is considering its position and the potentially significant implications, including potential revenue at risk and compensation payable under various scenarios”?
Thorburn: “Mmm.”
Hodge: “And was that ultimately the thing that was the real problem, that to agree to an acceptable methodology with Asic was just going to cost the business more than it wanted to pay?”
Thorburn: “I actually don’t think that was the reason. I don’t think that was a sort of conscious or openly discussed matter, Mr Hodge, through this.”
Updated
Thorburn:
I think when you look back on it, Mr Hodge, I acknowledge we got this wrong. I think we were trying to – we had the right intent, but it – you know, we were looking at it too narrowly and too technically, and once you look back on it you see it’s a very – it’s obvious – there was a lot of complexity. I think that’s the other thing.
“We were dealing with 85,000 customers. We’re back to 2009. You know, it was – it was a pre-Fofa post-Fofa world. Leaving that argument aside. It was one of the most complex things we’ve had to face into.
“But I think, when you look back on it now, we could have resolved it a lot quicker.”
Commissioner Kenneth Hayne doesn’t like that answer.
Hayne: “Why was it so complex? What was it about it that you say was complex?”
Thorburn: “Well, Commissioner, there was 85,000 clients.”
Hayne: “That’s big rather than complex, I think?”
Thorburn:
Well, the files would have – were complex. What we’re talking about here is financial advice on complex matters for people. It went back to 2009. We had had a number of leaders involved in the business over that time. By the time we came to really face into this, it was – a lot of those had left. We didn’t have very good systems, Commissioner.
“We couldn’t – you know, we didn’t have digitisation like we do now, we had to go back to hardcopy files and couldn’t always find them and the advisers had moved on or the NAB financial planners had moved on and we couldn’t always find the file. So it was big and messy and complex. And I’m sorry about that, because that’s not good enough on our part.”
Hodge: “The other fundamental issue with it was that there was a revenue issue, wasn’t there?”
Thorburn: “Yes.”
Updated
Thorburn says it was Hagger’s advice to try to make the distinction between pre-Fofa and post-Fofa customers.
Hagger was trying to justify treating pre-Fofa customers differently on the basis that NAB could have just kept them on commission-paying arrangements.
Hodge: “And can I suggest this to you: it’s beyond simply unacceptable, it’s absurd for NAB to be suggesting that it would not simply refund the fees that it had charged for services where it had no evidence of having provided those services, on the basis that had it just stuck with commissions, it could have kept the money without having to provide a service?”
Thorburn: “Well, absurd – absurd is the word you’ve used.”
Updated
Thorburn is talking about who in NAB had responsibility for the bank’s remediation program.
He throws Andrew Hagger, NAB’s former head of wealth, under the bus.
This is helpful because Hagger recently departed the bank.
You may remember Hagger received singular criticism from the royal commission in September for the evidence he provided about NAB’s fee-for-no-service scandal.
“Mr Hagger’s evidence that he ‘left the door open’ for Asic to ask the question reveals both a disrespect for the role of the regulator and a disregard for the gravity of the events in question,” the commission was told in September.
Updated
Just before the lunch break, Thorburn had told Hodge that in April this year, he had had a meeting with Asic’s new chairman, James Shipton.
Shipton had impressed upon Thorburn that he was deeply unhappy with NAB’s attitude towards remediation.
Thorburn said that meeting with Shipton had made an impact.
Updated
And we’re back.
Senior counsel assisting Michael Hodge QC is asking NAB’s Andrew Thorburn about the NAB board’s consideration of an angry letter from ASIC in April this year.
ASIC wanted NAB to lift its act when it comes to remediating customers after charging them fees for no service.
A quick primer on Fofa
In preparation for the afternoon session, here’s some info about Fofa: the future of financial advice laws.
That acronym may be chucked around this afternoon. I posted this info in last week’s blog but it may serve our interests again.
The Fofa laws were introduced by the former Labor government in 2012, and the financial industry hated them.
Why? Because they introduced a duty for financial planners and advisers to put their customers’ interests first, and ban the payment of sales and trail commissions, among other things.
The Abbott government worked incredibly hard to water them down.
After inheriting the Future of Financial Advice Act, which was legislated in 2012 and which came into effect in July 2013 but didn’t take proper effect until mid-2014 – because that’s when Asic decided to start enforcing it – the Abbott government tried to add significant amendments to the bill.
It didn’t want an overarching requirement for advisers to act in the best interests of their customers, and it didn’t want customers to have to “opt in” to having fees deducted from their accounts regularly.
It argued that the laws placed too many restrictions on financial advisers.
Long story short, the government ultimately failed. It only managed to buy the industry two more years before the laws were introduced.
So when you hear about “pre-Fofa” and “post-Fofa”, we’re talking about two very different financial regimes.
Updated
What have we learned so far?
NAB’s chief executive, Andrew Thorburn, has been doing his best impression of a good banker who understands the hurt Australians are feeling.
He knows bank scandals have been ripping through the economy in recent years, and he puts it down to drift – banks used to focus squarely on customers, but in the last three decades they have drifted towards greed and short-termism.
He agrees the banks’ move into wealth management has been a failure.
He appreciates why banks must overhaul their remuneration regimes so staff are no longer incentivised to focus on short-term profits at the expense of customers.
He knows that the way banks have been behaving in recent years hasn’t been sustainable.
Quite the philosopher.
Anyway, join me back here at 2pm (AEDT)? I’m going to get a quick coffee.
Updated
With that, the commission has broken for lunch.
We can expect Hodge to hammer this issue after the break so I hope Thorburn refreshes his jug of water.
Despite all of that, NAB then tried it on again.
Five months later, in a letter dated 13 April 2018 – that’s this year people, just seven months ago – NAB sent another proposal to Asic in relation to remediation.
Thorburn said he wished the letter had never been sent.
Hodge: “The particular issue is in relation to how pre-Fofa clients were to be dealt with?”
Thorburn: “That’s right.”
Hodge: “I think you probably don’t have any concern with how post-Fofa clients were to be dealt with and, in fact, Asic, effectively that is the methodology that’s being used now?”
Thorburn: “It is, yes.”
Hodge: “So the issue with pre-Fofa clients was that rather than reviewing whether or not you had actually provided a service to them, they would have to come to you and – after your invitation – and attest to you that they had not received a service?”
Thorburn: “That’s right.”
Hodge: “And then there would be further steps that you would check to see whether you had some evidence that the service had been provided?”
Thorburn: “That’s right.”
Hodge: “And the justification – or a justification that was offered for this was that NAB had moved early to using – moved early away from pure commissions to ongoing fee agreements?”
Thorburn: “That’s right.”
Hodge: “And your view that you explain in your witness statement is that you don’t think that that was an appropriate justification?”
Thorburn: “That’s right.”
However, it turns out that that proposal had gone to NAB’s board and the board had approved it.
Deary me.
Thorburn now says it was a mistake.
Hodge: “It would seem then that this particular justification that you, I think, regard now as inappropriate was something that was specifically brought to the attention of the board risk committee on which you were present on 30 April 2018?”
Thorburn: “Yes.”
Hodge: “And I take it you don’t recall any challenge to that proposition?”
Thorburn: “I don’t recall, Mr Hodge, no.”
Updated
'I don’t think we were wanting to be unethical'
So in other words, NAB was delaying, delaying, delaying.
Asic then sent NAB an outline of suspected offending in October 2017, so NAB got its lawyers involved.
One of the things Asic’s letter pointed out was that NAB’s approach to remediation was out of step with some of its competitors that had reported fees for no service failures, and were close to finalising their customer review and remediation programs for these failures.
Hodge: “Were you aware that NAB’s approach was out of step with its major peers?”
Thorburn: “I wasn’t, Mr Hodge. I wasn’t aware of the detail of it. I mean, I wish I had got a bit more involved to get on top of this quicker. But I delegated this and it was one of the many things that we were working through … if it came out to me in the letter, I didn’t interrogate it to say who and why and how and what should we do. I didn’t do that.”
Hodge: “You will recall the question I asked you earlier this morning about NAB having a culture of being ethical?”
Thorburn: “Yes.”
Hodge: “When you reflect on the fact that the other banks were remediating these fees for no service issues in a way acceptable to Asic but NAB was not, does that tell you anything about NAB’s culture of ethicality?”
Thorburn: “I don’t feel you can draw that conclusion, and that link between the two, because I don’t think we were wanting to be unethical, or we were being unethical in our dealings here. And also, to flip it the other way, I’m not sure our competitors were being more ethical because they had managed to conclude their fees for no services program.”
Updated
This bit’s fascinating.
Heard of the expression “actions speak louder than words”?
Thorburn has spent all morning saying the right things, trying to appear contrite, but here’s how NAB has handled things behind the scenes.
Hodge: “And the time line, as we understand it, is that Asic had made an initial request for NAB to review all of its licensees and NAB Financial Planning for ongoing service fee issues in June of 2015?”
Thorburn: “Yes”
Hodge: “And over time, NAB has put forward various proposals to Asic as to how it might go about doing that?
Thorburn: “Yes.”
Hodge: “And one proposal that was put forward at the end of 2016 was that there be a review and the adviser would be required to point to an offer of service?
Thorburn: “Yes.”
Hodge: “And Asic rejected that proposal?
Thorburn: “Yes.”
Hodge: “And the second proposal put forward in about December of 2016 was that NAB would assess whether there had been a fair exchange of value?”
Thorburn: “Yes.”
Hodge: “And Asic rejected that proposal?”
Thorburn: “Yes.”
Hodge: “And Asic said that it would like NAB to be able to supply direct evidence that each service outlined in the ongoing service plan agreement was provided every year for every customer that was charged?”
Thorburn: “Yes.”
Hodge: “And a third proposal was presented by NAB in July 2017 which was, I think, loosely termed or referred to as the ongoing service principle … still wasn’t in accordance with what Asic wanted?”
Thorburn: “Yes.”
Updated
Hodge moves on to how NAB has handled the remediation for customers who were charged advice service fees (ASFs) for services not provided.
Hodge: “I think you agree that it has taken too long?”
Thorburn: “I do.”
This is a strange exchange between Hodge and Thorburn, if you think about it.
We’re raking over old territory here.
So I assume the point of the conversation is to show commissioner Kenneth Hayne how the boss of NAB is thinking about a major scandal.
Hodge wants to know why NAB’s advice licensees didn’t keep adequate records to be able to determine whether or not the services they were charging clients for were actually being provided.
Hodge: “On its face, one explanation for that would seem to be because, to just take NAB, you weren’t interested in whether the services or advice was provided?”
Thorburn: “I don’t agree with what you’re saying but …
Hodge: “I’m not saying that’s the explanation but that’s one reason why it might have happened is because you just didn’t care?”
Thorburn: “Yes.”
Hodge: “You agree?”
Thorburn: “That’s potential. Yes.”
Hodge: “And is there another potential explanation that you can think of?”
Thorburn: “Well, I think when we started this, we wanted to move to a more transparent fee for service for clients, so that they could choose that. I think we implemented that poorly, Mr Hodge. I don’t think we had proper controls. You know, we didn’t digitise files, we didn’t fully track the advice that was being given, and there was a lot of change and still is between commissions and fees, and in the case of aligned planners, not just MLC products but other products. So it’s a more complex case and platform, and I think that’s probably the other reason, a combination of not digitising, not tracking and reporting, and multiple platforms with commissions and other people’s products in there. And I think those are the other three reasons that I would offer.”
Hodge: “Those reasons don’t really seem to be reasons. They seem to be the things that happened. That is, you didn’t digitise them, you didn’t keep records of advice. You were operating multiple different systems and platforms for the payment of grandfathered commissions and ongoing service fees?”
Thorburn: “Mmm.”
Hodge: “I’m interested in understanding why you think that’s were the things that happened. And I’ve suggested to you one possible explanation, which you’ve agreed is one possible explanation. I’m interested in whether you think there’s another possible explanation?”
Thorburn: “Well, not apart from what I said, I’m sorry, because I see those as things that happened, that if they hadn’t have, the issue would have been – arisen a lot faster, and we could have dealt with it far better.”
Updated
Thorburn denies charging fees for no service was dishonest
Thorburn wants to make the point that these things were not done on purpose.
They were process errors.
Hodge: “Do you accept that to retain fees charged for a service when NAB did not provide that service is dishonest?”
Thorburn:
It’s wrong. It’s absolutely wrong. I think dishonesty goes sort of to intent, is the only distinction I would draw. And I don’t think I’ve seen this case and others – some exceptions – where there was an intention to not do the right thing or maybe even a view, as you’re suggesting, an intention for it to be a problem from the start and someone to ignore it. I don’t think it was that.
“So I think it was wrong that we didn’t pick it up. And I think we got on to it reasonably quickly but it was a process error.
“So I would say it was an unfortunate – it broke trust with our clients and took us too long to find it and to fix it. So there’s a problem for us.
“But the dishonesty would go to why – the intent, and I don’t feel it was dishonest in that respect.”
Updated
Hodge: “And in your statement … you offer some reasons for why you think the two events occurred?”
Thorburn: “Yes.”
Hodge: “For the NAB Financial Planning event concerned with MLC Direct you say there was a breakdown in a manual process by which clients were to be segmented when the adviser data required it?”
Thorburn: “Yes.”
Hodge: “And you explain that due to data limitations that did not always occur?”
Thorburn: “Yes.”
Hodge: “And as we’ve discussed, that then meant the clients were transferred to MLC Direct, which was the section that actually provided general advice?
Thorburn: “Right.”
Hodge: “Rather than personal advice?”
Thorburn: “That’s right.”
Hodge: “And the fees were, nevertheless, retained. And presumably, there was a point in time at which it was identified that this stream of revenue was coming into MLC Direct?”
Thorburn: “Yes.”
Hodge: “But, nevertheless, NAB didn’t stop charging the fees immediately when that was identified?”
Thorburn: “That’s correct. Yes.”
Hodge: “And in relation to deceased members, you say the conduct occurred as a consequence of a lack of process to reduce adviser service fees to zero after being notified of the member’s death?”
Thorburn: “Right.”
Hodge: “And the issue was only identified after CBA, or after the revelations about CBA during the second round of hearings in the royal commission?”
Thorburn: “That’s right.”
Hodge: “Now, in the case of NAB Financial Planning and the retaining of fees by MLC Direct, the problem was not so much discovered as explored after customer complaints were received and an event was raised in NAB’s event management policy?”
Thorburn: “Yes.”
Hodge: “And so in both cases, it would seem something external prompted NAB to look at the issue?”
Thorburn: “Yes. I think that’s right.”
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Hodge: “And the other event that you’ve discussed in your statement is concerned with the discovery that there were accounts of deceased members that had been charged service fees?”
Thorburn: “That’s right.”
Hodge: “And in your statement, you say that in around 60% of cases there was adviser activity on the accounts following the death of the client, such as by assisting family members?”
Thorburn: “Yes.”
Hodge: “But you agree even that wasn’t actually authorised conduct?
Thorburn: “Yes.”
Hodge: “I’m going to ask you some questions about that just so you know to begin with, what I’m going to exclude is anything to do with the plan service fees, which, as you know, is now the subject of federal court proceedings which have been brought by Asic?”
Thorburn: “Yes.”
Hodge: “Against your trustee Nulis?”
Thorburn: “Yes.”
Hodge: “So I’m not – the questions I’m going to ask is just going to be about adviser service fees and some of the adviser service fee events. Now, you’re familiar with those events?”
Thorburn: “Yes.”
Hodge: “And those events were the subject of significant breach reports to Asic and Apra?
Thorburn: “Yes.
Hodge: “One of the events was a NAB financial planning event which involved the charging of advice fees by NAB Financial Planning to customer who had transferred to MLC Direct?”
Thorburn: “Yes.”
Hodge: “And that meant the customer had no linked adviser when the fees were charged?”
Thorburn: “Yes, that’s right.”
Hodge: “And the fees were, nevertheless, retained by NAB Financial Planning?”
Thorburn: “Yes.”
Hodge: “But there was no advice service provided?”
Thorburn: “Yes.”
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Hodge moves onto another topic.
Fees for no service.
This has been a huge problem for the industry. They’ve been caught out taking fees from customers for “service” that was never provided.
Stealing, is what it was.
We’re back from a short break.
And we’re onto remediation.
Customer remediation for being ripped off.
Hodge: “Mr Thorburn, I want to turn briefly to customer remediation. NAB has recently established what it terms a customer remediation centre of excellence?”
Thorburn: “Yes.”
Hodge: “And there was a study tour to the UK and conversations with the KPMG remediation centre which led to the establishment of your centre. Is that right?”
Thorburn: “I think it was around the same time, Mr Hodge. I’m not sure it led to it, but, yes, it was in the mix.
Hodge: “One of the things that NAB learned from its study tour was that remediation programs should be seen as an investment?”
Thorburn: “Yes.”
Hodge: “Does NAB view remediation as an investment or as a distraction, do you think?”
[This want not an invitation to speak in gibberish, but apparently it was taken as such].
Thorburn: “I think if you go back to my premise around our vision and purpose, earning trust of customers, when you’ve made mistakes, for whatever reason, and you know them, you’ve got to fix that in order to ensure that you have ongoing trust with the client. And not just with those clients but with others who hear about it. So I think it’s an important capability that we have that we will need for some time.”
Hodge: “Do you think in the past that NAB has had a tendency to view remediation as a distraction?”
Thorburn: “I wouldn’t say a distraction. I would say it’s like one of the many tasks we have to do. It didn’t have the priority that it should have, but I wouldn’t say that we thought of it as a distraction, no.
Hodge: “And is the consequence of it not being thought of as a priority that, in your view, a lot of the remediation programs that NAB has undertaken have just been too slow?
Thorburn: “Yes.”
That’s an interesting answer.
Remember, the royal commission in August accused NAB of withholding information from the corporate regulator about its plans to boost compensation payments for fee-for-no-service victims because it wanted to avoid a public relations controversy.
So it’s wrong to say that NAB hasn’t prioritised some aspects of remediation.
Hodge: “I’m interested in understanding why you think it took a royal commission to provoke that kind of critical self-examination?”
Thorburn:
That’s a good question. Well, because in my personal and professional experience, most transformation opportunities come out of pain.
“The commission, when you read the case studies, you say: ‘This is like, so upsetting and so damning, what went wrong?’ I remember one of the ones was the default interest. One [default interest rate] for one of our clients who was at the commission. I said to our team: ‘Why is it 18%?’ And there wasn’t a really good answer to that.
“Why do we – you know, why do we hit people so hard when they are in difficulty? I went back to the first 20 years of my career where that wasn’t the mindset. It just got too complex, we’re not challenging enough. You know, people inside the bank are a bit passive and we’re reinforcing the current system not because we want to – it is just we’re in the drift fishing boat.
“I think what has happened this year is we’ve been confronted by some of the things we needed to be confronted by and out of that is coming good change and I believe will cause us to think about what is the purpose of the bank and it’s about earning your clients’ trust and building a long-term sustainable business over five to 10 years. That’s what we’re getting back focused on.”
Honestly.
That answer was reminiscent of prime minister Scott Morrison’s woeful defence of his reason for opposing a banking royal commission more than two dozen times.
Apparently Morrison didn’t quite understand the “deep hurt” Australians have endured at the hands of the banks.
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It’s easy to poke fun of analogies.
If you’re not feeling generous, it’s too easy to mock someone for using one.
But they are illuminating. They provide an insight into how someone’s thinking about an issue.
Take this one.
Thorburn just compared the “drift” in the banking industry over the last 30 years, away from customers towards short-term profits and greed, to being in a fishing boat.
He said he likes to drift fish. No anchor. You start here and 20 minutes later you end up over here, because the tide’s taken you.
“So I’ve been in the system and I believe I have the right integrity and capabilities and skills but I didn’t see it. You know, I kept probably defending it because I thought it was right.”
That’s how he’s thinking about the scandals that have overwhelmed the industry in recent years.
He’s a good person. He was just being taken by the tide, a force too powerful to do anything about.
Thorburn agrees banks' move into wealth management a failure
Hodge: “I wonder whether, in your view, now with the benefit of hindsight, the move by retail banks into other areas, and particularly into wealth, has been a failure?”
Thorburn: “I think if you looked at the – I mean, if you looked at the raw evidence – [I] probably have to agree it had been. I don’t think it needed to be, but it probably has been.”
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It’s actually fascinating listening to bank executives talk about remuneration.
It’s clear they spend a lot of time thinking about it.
They can talk for hours about scorecards, short-term and long-term KPIs, how a staffer’s rating translates into a “performance multiplier”, it’s mind-boggling.
It’s also pseudo science.
Do they know how much time bank victims spend thinking about the homes they once had, and the lives they once lived? Probably just as much.
Thorburn is asked about remuneration for bank staff.
Hodge wants to know if senior executives become harder to motivate when banks shift away from a system of remuneration that relies so heavily on bonuses.
Thorburn gives a long-winded answer about the need to attract quality staff and the importance of paying some type of variable remuneration, but he says NAB has introduced many recommendations from the Sedgwick review, along with the other big four banks. Since the big four have been instituting the remuneration changes simultaneously, it hasn’t created a competitive disadvantage for anyone (another reference to the first-mover disadvantage that oligopolists fear so much).
Hodge: “Has there been any issue for NAB with finding that its previous top performers are not performing as well as they used to as a consequence of the change to the remuneration model?”
Thorburn: “I haven’t heard anything to that effect, Mr Hodge.”
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This is annoying listening to Thorburn’s evidence, to be honest.
He’s saying all the right things.
He says the need to produce a profit can motivate both good and bad behaviours (obvious point), if you offer good products and good service then you’ll attract and retain customers and make profits for your shareholders that are sustainable (obvious point), but if your business doesn’t have effective controls there’s a risk bank staff will engage in risky behaviour that will generate the type of profits that prove unsustainable in the long-term (obvious point) and which will damage your customer experience (obvious point) and reputation (obvious point).
I do not make as much money as Thorburn.
He made $4.3m in the year to September 2018, after taking a $2.1m haircut on the prior corresponding period (where he earned $6.4m) as a consequence of the fallout from the royal commission, including potential criminal misconduct on the part of NAB staff.
But I could have told him these things. So could every other Australian (who is not a bank executive).
Have these things dawned on him recently? Has it taken him three decades in banking to realise?
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Banking model 'not really sustainable', Thorburn says
Hodge wants to know what Thorburn is actually advocating for.
Hodge: “What I wonder is whether somebody listening to the points that you’re making might think that what you’re advocating for is a shift toward, or some would probably say back to, a more service-oriented and utilitarian view of banking?”
Thorburn: “Well, I think definitely a shift back to – I mean, we can’t go back – we’ve got to go back in some ways but we can’t because the world has changed so fast and there’s so many different technologies now and competitors.
“So I’m not harking [back] to the past for, you know, anything other than getting the basics right, but it should be service-based. It should be relationship-based. It should be stewardship based. It should not be sales-based.
“And I think, Mr Hodge, if we don’t do that inside our company and in the sector, we will continue to make mistakes and be exposed because it’s not really sustainable.”
Updated
Hodge asks Thorburn about the shift towards a sales culture.
Thorburn: “I think that started to happen. That was like a symptom of focusing on the short term. Focusing too much on growth, short-term growth that’s not really sustainable, and a sales culture was introduced, not just in our bank, in the system. And I think that created wrong outcomes as well. Unintended consequences.”
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Thorburn: “This company has been going 150 years and my role should be to make it stronger and better for the long run, not just for the next one or two years.”
Thorburn: “If you go to my other points where I talk about becoming short-term, focus too much on the next six or 12 months, focus too much on the profit ... then I think you start to build some unsustainable foundations, you don’t invest enough, you don’t listen to customers enough.”
Hodge is interested in a point Thorburn made in that letter that banks will build a sustainable business for all stakeholders if they get the “customer experience right”.
Hodge wants to know what “sustainable business” means.
Thorburn says all businesses have to start by focusing on their customers. That should be the primary focus of a bank.
“When I started in banking, that was, indeed, the sole focus.”
He says banks need to generate profits, and profits will come if banks earn customers’ trust so they stay with you and do their business with you.
“That should be the primary focus of any business, including a bank.”
Hodge asks: “Does that carry with it the implication that you think, in part, some of your business, the NAB business, has become unsustainable?”
Thorburn: “Well, yes.”
Updated
Senior counsel assisting the royal commission, Michael Hodge QC, is leading the questions today.
Hodges has taken Thorburn to a letter the CEO personally wrote to the royal commission, which accompanied NAB’s submission to the inquiry’s interim report.
Thorburn told the commission, in that letter, that four significant changes had occurred inside banks over the last 30 years that explain why things have gone so wrong.
One: The focus had shifted away from customers to profits.
Two: The focus shifted from a long-term view to a short-term one.
Three: There was a move from base pay to greater incentive compensation (leading to most bank staff receiving variable awards calculated by reference to short-term considerations).
Four: Banks had become more complex, partly due to increasing regulation and compliance obligations.
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NAB's turn in the spotlight
Good morning everyone,
Welcome back to Guardian Australia’s blog of the banking royal commission.
We’re still in the 7th round, for those keeping count, and this week we’ll be hearing evidence from more bank bosses.
NAB’s chief executive, Andrew Thorburn, AMP’s acting chief executive, Mike Wilkins, ANZ’s Shayne Elliott, and Wayne Byres from the Australian Prudential Regulation Authority (Apra), will take the stand at various times. As will executives from Bendigo and Adelaide Bank.
Thorburn will be first up. And he’ll have a lot to answer for. He ended up issuing a public apology in August after NAB endured a horror round of evidence.
A quick recap:
NAB is paying more than $100m in compensation to superannuation customers after charging them a “plan service fee” for general advice when the customers didn’t have an adviser linked to their account.
It’s also charged adviser fees to accounts of members who have died.
Thorburn has admitted that problems began seeping into the Australia’s banking industry two decades ago. Think about that. He entered banking 30 years ago, so two-thirds of his banking career has been spent in an industry drifting away from customers.
Anyway, the hearings begin at 10am so please stay with me.
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