Chapter 26
Round 7: NAB
‘Hubris wrapped in arrogance’
WHEN THE HIGHLY ENERGETIC Andrew Thorburn walked into courtroom 4A of Melbourne’s Commonwealth Law Courts on 26 November 2018, wearing a dark plaid suit and pink dotted tie, he looked every bit the stereotypical banker. The courtroom for part two of the seventh round, which had resumed in Melbourne, was packed. Thorburn had brought along lawyers and staff to fill the seats. There were also some familiar faces. The Bank Warriors, who’d become a common fixture at the hearings, were there dressed in their usual bow ties – both to symbolise the importance of the royal commission and to pay respect to whistleblower Jeff Morris who had worn a bow tie to the royal commission a week earlier.
Thorburn’s colleagues hoped their boss would be able to keep the focus on how NAB had changed its practices, rather than on the adverse publicity it had received weeks earlier in the commission’s closing submission at the superannuation hearing, which had lambasted NAB for its ‘total disregard’ for the law and regulators and concluded that NAB’s behaviour in the fees-for-no-service scandal was in part due to ‘culture and governance practices within the NAB group’.
When senior counsel assisting, Michael Hodge QC, started cross-examining Thorburn, the NAB boss treated each question as if it were a landmine, to be avoided at all costs. Like his peers, he had been rehearsing for weeks how to steer the conversation to safe ground. A few jokes and some personal stories about his love of fishing would create the right tone – or so he hoped. But Hodge wasn’t going to be diverted by Thorburn’s spin. He’d heard it all before from other witnesses and wanted to drill down into NAB’s culture, board and management accountability.
Thorburn tried to ingratiate himself by admitting he had been wrong to oppose a royal commission; he said he’d been defending the system because he ‘thought it was right’. He claimed that what had come out in the hearings had ‘provoked critical self-examination and driven change for customers’ and said, ‘When you read the case studies you say this is, like, so upsetting and so damning, what went wrong?’ He went on to proudly outline his new management strategy, EPIC, standing for ‘Empathy, Perform, Imagine, Connect’.
Hodge pointed out that the malpractice revealed during the royal commission shouldn’t have been a shock because Thorburn must have been very familiar with the case studies that had been highlighted, including fees for no service, the widespread false witnessing of customer documents by staff, and the bank’s introducer program, which paid members of the public a kickback for referring customers for home loans but resulted in illegal activity as well as the sale of loans that were unsuitable, resulting in severe financial stress for many customers.
Commissioner Hayne didn’t buy Thorburn’s spin either. ‘You spoke of the commission raising real cases, in effect, publicly. Is that right?’ Hayne asked.
‘That’s right,’ Thorburn replied.
‘The real cases it raised publicly were cases within your organisation,’ Hayne reminded him before asking: ‘What does that say about the need for different supervision and governance within the bank to recognise the reality and importance of the kinds of cases that have been the object of public scrutiny and publicity?’
Governance and culture were just the start. Hodge moved on to highlight dishonest practices, including accepting fees for no service and attempting to avoid paying customer remediation. He referred to one situation when customers were transferred from one fund to MLC Direct, which didn’t provide personal advice, and were still charged fees for advice by NAB Financial Planning, which never paid them back.
In June 2015, ASIC had asked NAB to review all its licensees and NAB Financial Planning for ongoing service-fee issues. The review made it clear that NAB had been charging fees for no service and requested it remediate its customers. NAB put forward three proposals in 2016 and July 2017 which ASIC found unacceptable. Then in October 2017 ASIC sent NAB a report titled Outlined Suspected Offending by NAB Group. The report referred to a series of complaints from super fund members who had been wrongly charged fees from 2011, and outlined a number of breaches that indicated the bank had engaged in misleading and deceptive conduct and failed to fulfil its regulatory reporting duties.
NAB’s response to ASIC’s report, according to the royal commission, was to deny it had a systemic issue. On 13 April 2018, NAB sent ASIC a new remediation proposal, signed by the bank’s chief legal and commercial officer, Sharon Cook. The proposal suggested using an interpretation of the law to divide affected customers into two categories: those who had signed up before the 2013 implementation of the Future of Financial Advice (FoFA) laws, and those who had signed up after that. NAB offered to review all post-FoFA cases, but said it would not reassess the cases of pre-FoFA clients unless they came to NAB and attested that they hadn’t received any service in return for the fees they had paid. It was a discriminatory policy and clearly aimed at reducing NAB’s exposure to remediation. What made it worse was that the other major banks were already remediating their customers for fees for no service in ways acceptable to ASIC.
Hodge turned to a meeting Thorburn had had with ASIC’s chairman, James Shipton, on 26 April 2018. He asked Thorburn to summarise the meeting.
‘He made it very clear to me that . . . they had been very disappointed with the legal technical way that we had been dealing with this matter. I walked out thinking we’ve got to do something to change the course here because that’s not the reputation we want,’ Thorburn recalled.
Hodge then brought up a 30 April board risk-committee meeting attended by Thorburn and the chief risk officer, David Gall, which included a presentation by Sharon Cook on the status of ASIC’s investigation into the fees-for-no-service scandal and the bank’s remediation proposal.
Hodge asked: ‘And as I understand it nobody said then, “This is not doing the right thing”?’
Thorburn, squirming in his chair, said no.
‘And it didn’t strike you at the time that the position was unacceptable?’ marvelled Hodge.
Just over a week later, on 9 May, ASIC formally rejected NAB’s proposal for remediation.
‘Do you think, Mr Thorburn, reflecting on that letter of 13 April 2018 that that was an ethical approach for NAB to take?’
Thorburn gave a convoluted answer that tried to deflect blame while at the same time appearing to be supportive of his staff: ‘I believe it was Andrew Hagger’s and others’ intent that we would solve this . . . But I don’t think we were intending to create this issue and to be, in your words, unethical . . . To the people – the people I deal with, I have dealt with on this, Mr Hodge, I believe are ethical people and bring ethical principles to work.’
Thorburn had mentioned Hagger’s name too many times for Hodge’s liking. He responded: ‘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 said no.
Hodge continued, ‘You don’t seem to have asked yourself the question, “Why couldn’t we three see that we were not doing the right thing?”’ Hodge was referring to the executives who had attended the risk meeting – Sharon Cook, David Gall and Thorburn himself, who were all still at the bank.
Again, Thorburn tried to offer excuses. ‘I just don’t think we saw it with the clarity we do now,’ he said. ‘You know, it wasn’t an agenda item on a busy board schedule. It was a matter that had been going for two years . . . It has been a challenging exercise for me to really look at it and find out where our failings have been, and I think this has been one of them.’
As Thorburn exited the royal commission, stage left, EPIC, the new NAB management strategy he’d so proudly outlined during his evidence, had already been renamed ‘Earnings, Profit, Incentivised, Conflicted’.
*
Each time Henry answered a question posed by Rowena Orr QC he gave a greater insight into the arrogance of bank boards. Instead of answering simply and directly, he philosophised, responded with rhetorical answers, and sometimes answered his own questions. It greatly frustrated Orr.
Early in the proceedings, Orr tried to delve into the culture at NAB. She asked Henry about an initiative he had developed with Thorburn two years earlier, called ‘Back the Bold’, which involved ‘taking a stand for customers’ and ‘winning together’ and training staff to back exceptional people ‘who move this country forward’. Essentially Orr wanted to know whether there was any substance to the catchy ‘Back the Bold’ slogan.
Orr asked Henry, ‘In what way do you want your staff to be bold? In what way do you want them to be exceptional?’
Henry replied that he wanted them to put a high value on excellence, on always getting it right. ‘I want them not to feel intimidated by those who are above them, to feel that if they think there’s something going wrong in the organisation, that they can speak to people above them in the organisation and get their message through to the highest levels of the organisation, and, if necessary, to the board.’
‘What about “win together”?’ asked Orr. ‘What is it that you want won?’
‘That’s about corporate collegiality,’ Henry replied. ‘It’s more about the together than the winning although the winning is intended to be motivating, that we come to work energised and motivated, but, importantly, that we do it together. But also, and it’s in that second behaviour under “win together”, that we understand that we’re not going to be successful as a team unless we make it simpler and faster.’
‘Is it winning business, for customers? What are they winning?’
‘We want our people to be – to know that they are part of a business which stands out among its peers. That’s what it’s about. That they feel proud of working for National Australia Bank, because they see it as Australia’s leading bank.’
Henry might have meant it, but it sounded like management-speak: empty but well-rehearsed slogans.
Orr drilled down further, wanting to find out how Henry had arrived at Back the Bold. She told him that Thorburn had explained that the purpose of the initiative was to back those who move Australia forward. ‘What does that mean, Dr Henry?’
‘I thought he explained it rather well. We didn’t come to this purpose quickly. You know, we didn’t just go into a dark room and have a quick chat about what might look good as a – as a slogan for the organisation,’ Henry said defensively. But the more he talked, the more it sounded like gibberish. And when Orr asked how long it was going to take to embed the right culture, Henry responded, ‘It could be ten years. It could be. I hope not. But I wouldn’t be at all surprised. That would not be unusual for organisations that seek to embed challenge in cultures.’ Investors listening in, many of whom see things from a more short-term perspective, were horrified by this response.
Orr then used NAB’s handling of charging customers fees for no service to show how the board and the risk committee had failed in its duties, asking Henry why they didn’t take the issue more seriously. Orr pointed out that when a report from the chief risk officer was sent to the board’s risk committee, it failed to point out that this was a serious issue, explain its causes or identify which laws had been contravened.
‘That’s, perhaps, not so unusual, but that is true,’ Henry responded.
Dissatisfied with his response, Orr asked him why a breach wasn’t discussed. Henry’s response, that it was up to the chief risk officer to say whether there may or may not have been a breach, resulted in more frustration from Orr.
‘Isn’t that something the risk committee should know: “This might contravene the law and these are the provisions that at the moment we’re concerned might have been breached?”’
Henry responded with another ‘perhaps’.
‘Why only perhaps, Dr Henry?’ Orr asked, to which Henry replied that it wasn’t clear cut about breaches and there were many differing views about whether breaches may or may not have occurred.
Orr pressed on: ‘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?’
‘Yes,’ was Henry’s abrupt reply.
‘Surely those were matters that the chief risk officer should have reported to the risk committee?’
‘Perhaps,’ Henry responded.
‘Back to where we started, “perhaps”, Dr Henry?’
‘Yes, perhaps,’ Henry answered.
‘And I’m afraid I still don’t understand the reason for your hesitation,’ said Orr.
‘I probably can’t explain it to you,’ he replied.
It was just one of many excruciating exchanges. At one point Henry likened working with the regulators to dealing with children. He was speaking of the tussle with ASIC over the various remediation proposals put forward by NAB in the fees-for-no-service scandal and the delays in remediating customers. He blamed ASIC, saying it didn’t give clear indications of what it wanted from the bank. ‘It’s almost like that game that children play: you’re getting colder, you’re getting warmer,’ he said.
Orr was having none of it and fired back, ‘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.’
Reprising the curly topic of board accountability and executive accountability, which had left CBA’s Matt Comyn and Catherine Livingstone floundering, Orr referred to the NAB board’s handling of remuneration. She uploaded an email Thorburn had written in 2016 saying executives, including himself, should be entitled to 100 per cent of the funds that had been set aside for bonuses. His proposal had the support of the chief risk officer, David Gall. Yet at the time of the email, NAB was engulfed in regulatory breaches and scandals, including taking fees for no service, manipulating the benchmark interest rate, and misconduct on its foreign exchange trading desk. Thorburn neglected to mention any of these issues in his email, though the board knew about them anyway. The board backed Thorburn and Gall’s proposal.
However, the board remuneration and risk committees, which advises the board on these issues, challenged Gall and Thorburn on the poor risk outcomes and expressed unease at paying out the full bonuses. Before making a recommendation to the board about the bonuses, the two committees asked Thorburn to consider two options: one, that the bonus pool should be paid out in full but that a strongly worded statement should be issued by senior management echoing the board’s request that there be further improvements in risk management; or two, that five per cent should be deducted from bonus payments to underline the board’s concerns.
The risk and remuneration committees left it to Henry and NAB director and chairman of the remuneration committee Danny Gilbert, co-founder of law firm Gilbert + Tobin, who had held the remuneration role at NAB for ten years, to make the final decision. Henry and Gilbert then asked Thorburn for his recommendation. Not surprisingly, he chose option one. Asking the recipient of the proposed bonus for his recommendation was akin to ASIC asking the banks how they’d like to be punished. It was a red flag of poor governance and gave an insight into the company’s lack of good judgement as well as the power of the CEO over the board. Thorburn’s argument for retaining the full bonus was that the business had met its financial targets in 2016 and the bonus pool had previously been reduced in 2014.
‘That was because of the mis-selling of payment protection insurance [PPI] by your businesses in the UK?’
Henry couldn’t remember the details, except that it was UK-related.
Orr read ou
t Thorburn’s explanation: ‘The reason incentives were reduced in that year was not because of the poor management of risk, but because the remediation of those issues meant that cash earnings hadn’t been achieved.’
She summed up the breaches and asked Henry, ‘Given the very significant compliance breaches and other breaches in [2016], do you think that you made the right decision in deciding that there should be no risk-related reduction to the bonus pool?’
‘Yes,’ said Henry.
The exchange harked back to Hayne’s comments in his interim report about the banks being motivated by greed, and it underlined the fact that no matter how big the scandal or how serious the risk management concerns, bank boards seldom reduced executive bonuses.
Orr continued to press the point about remuneration with Henry: ‘You said earlier, Dr Henry, that you weren’t sure what the board could have done differently or when it could have done something differently. I want to suggest to you squarely that this was a point at which the board could have conducted itself differently. It could have sent a strong message by reducing the [bonus] pool in response to these very significant compliance issues?’
‘Of course, we could have, and we decided not to. For very good reasons,’ Henry responded. ‘And I’m still happy with those reasons.’
The more Orr highlighted how wrong it was of the board to approve full bonus payments in such circumstances, the worse Henry’s mood became.
‘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?’ Orr proposed.
‘Well, we could have fired everybody, I suppose,’ was Henry’s flippant response.
It was a watershed moment in the royal commission. Andrew Hagger had already been scalped as a result of his testimony, Thorburn’s reputation had been tarnished by his responses to questioning, and now Henry’s pompous and at times elitist tone was about to go viral, leading to calls for his head.
A NAB board member since 2011 and board chairman since December 2015, Henry had presided over numerous scandals and was therefore in no position to take the high ground. This was amply illustrated when Orr asked him whether NAB’s board should have stepped in earlier after customers were charged fees for no service and the bank dragged its feet on remuneration.
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