National Australia Bank’s fee scandal was just the beginning after issues in a risk report in 2015 were bought to light.
It was also revealed NAB management did not bring the issue to the immediate attention of the board.
NAB chair Ken Henry faced his final day of questioning from senior counsel assisting Rowena Orr at the Royal Commission on Tuesday.
Orr questioned the bank chair on whether the revelations in 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?”, she asked.
Henry: "Yes, I would agree with that, yes."
Orr: "And should it have done so, Dr Henry?"
Henry: "Yes, I think it should. Yes, I do think it should."
Orr continued to probe Henry as to why it would take NAB take years to negotiate with ASIC a “customer centric remediation program.”
Henry stated ASIC was to blame as the organisation would view the issue as an industry wide problem.
“In some circumstances ASIC will say, "Well, this is an industry-wide issue. And we're looking at NAB’s approach. We're also looking at the approach of others. And we're not prepared to tell you whether we're happy with your approach or not. Keep going."
Henry went on to say the “reputation of NAB has been tarnished considerably” by the current scandals stating he wished he had told management “enough is enough.”
Instead, Henry claimed NAB would need to be sued to start clarifying matters leaving Orr confused
“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: “That's the question. Who knows.”
“Honest, efficient, fair” were the words used Commissioner Kenneth Haynes used to bring the topic back to the view the NAB should hold.
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?”
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.”
Bonus cut questioned
Orr also asked Henry about a significant breach report to ASIC plus one of NAB’s subsidiaries, MLC Nominees, reported a significant breach about these matters to APRA.
NAB’s compliance risk performance was rated “red” for all but one month across a three-year period.
Henry said not breaching one of the bank’s 14,000 separate compliance obligations would be “quite extraordinary”.
“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. “
Remumeration was again a topic of conversation between Orr and Henry with Henry stating there was resistance from NAB’s remuneration and risk committee.
The committee sought to cut pay for staff and executive pay to reflect the ongoing issues faced at NAB.
However, NAB CEO, Andrew Thorburn decided to recommend to the board the bonus poll be reduced by only 15 per cent.
Henry agreed the bank should have taken a stronger stance in cutting senior executive bonuses because of the fees for no service outrage.
A 20 per cent cut for chief risk officer David Gall and a risk-related cut of 20 per cent for chief financial officer Gary Lennon was handed down along with as 75 per cent cut from former wealth boss Andrew Hagger but mainly because of “risk issues”.
Whilst Henry agreed these cuts were sufficient, he agreed the board could have made similar adjustments in earlier years.
Sharing his view on NAB today, Henry said: “For what it's worth, NAB’s view clearly today is that incentives should be aligned with customer experience and customer outcomes,” Henry said.
He said that the bank had positioned the business in a way that its sole purpose was to maximise shareholder returns “subject to customer and regulatory tolerance”.
“Rather the purpose of the business should be about maximising the outcomes for customers subject to financial viability. And it is a rather profound distinction.”