Embedding healthy culture could take 10 years: NAB's Henry

That wraps up our royal commission blog for the day. NAB chairman Ken Henry will return to the stand at 9.45am tomorrow.

Thanks for joining us.

Senior counsel assisting the commission, Rowena Orr QC, has been quizzing NAB chairman Ken Henry about how the bank plans to measure whether it's succeeded in embedding its targeted customer-centred culture.

Orr: "Do you think it's possible to measure culture as this sentence suggests, Dr Henry?"

Henry: "That's our ambition."

Orr: "And do you have any idea, any plans for how you're going to do that?"

Henry: "That's a big piece of work in front of us, yes."

Henry says the board will know it's got a healthy culture when it sees things like fewer incidents of non-compliance with both external regulation and internal policies, lower regulatory risk, and more appropriate treatment of customers, leading to better customer experiences and outcomes.

Orr: "Do you have a view on how long it's going to take to embed the culture that you want?"

Henry: "It could be 10 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."

NAB chairman Ken Henry has been asked to explain NAB’s purpose "to back the bold who move Australia forward”, something chief executive Andrew Thorburn was quizzed about earlier.

What follows is a lengthy soliloquy that includes the example of its financing of Vegemite, lending money to drought-stricken farmers, and the role of the bank in Australian society.

Ken Henry offered the bank's financial backing of Vegemite as an example of "backing the bold".Credit: Michele Mossop

“You know, we didn't just go into a dark room and have a quick chat about what - what might look good as a - as a slogan for the organisation,” Henry says.

“The purpose statement was developed over a 12-month period on the basis of interviews with people right across the organisation, at various levels of the organisation, looking at the role the bank had played through its 150 or 160-year history, and the things that - and identifying the things of which - well, the things that we thought spoke most eloquently about the role that National Australia Bank plays in Australian society,” Henry says.

Henry then offers a few examples such as its financial backing of Vegemite.

“We backed the development of Vegemite. Vegemite failed on the first occasion. We came in again and backed it for the second time, right, and then Vegemite has become a global brand name. It was stories like that,” he says.

NAB chairman Ken Henry is taking a slightly different approach to other witnesses who have appeared at the banking royal commission.

He knows a lot about finance, having been Treasury Secretary between 2001 and 2011 when Australia was fending off the global financial crisis. He’s been chairman of NAB since 2015, when the bank has been fending off compensation requests from the corporate regulator.

NAB chairman Ken Henry raised a few key questions for senior counsel assisting the commission, Rowena Orr QC, pictured.Credit: webcast

Henry has raised a few key questions for senior counsel assisting the commission, Rowena Orr QC, which seemed to put her (for just a second) on the back foot.

Here’s the exchange:

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."

Ken Henry is in the witness box and senior counsel assisting the commission, Rowena Orr QC, is quizzing the former Treasury Secretary turned NAB chairman.

First up, Orr takes Henry to a speech he gave to the Australian Shareholders' Association (ASA) earlier this year about the period following the financial crisis in Australia, which tapered off here by 2011.

NAB chairman Ken 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."Credit: webcast

We hear that Henry said at the ASA conference: "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 then asks Henry: "And is that what you think has led to the misconduct examined by this commission, 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."

Here's some vision of NAB CEO Andrew Thorburn from this morning saying if the bank is not building customers' trust, then it is failing in its purpose.

NAB boss Andrew Thorburn has just wrapped up giving evidence at the royal commission and the commission is taking a five-minute break.

Next up will be NAB chairman Ken Henry. The former Treasury Secretary will no doubt be quizzed about how and why NAB sets executive remuneration as well as his ideas of potential policy changes coming out of the royal commission.

NAB boss Andrew Thorburn is under sustained questioning over a controversial proposal the bank made to the Australian Securities and Investments Commission (ASIC) about how it would compensate customers who had been charged fees, but not received advice.

NAB wanted to not automatically refund fees to customers who had signed up before the Future of Financial Advice laws (which banned commissions).

Senior counsel assisting, Michael Hodge QC, says this was not just unacceptable but “absurd”.

“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?” Hodge says.

Thorburn does not necessarily agree with “absurd” but he acknowledges it was too technical, and too legal.

“Well, absurd - absurd is the word you've used. I mean, I think when you look back on it, Mr Hodge, I acknowledge we got this wrong. I think we were - we were trying to - we had the right intent, but it - you know, we - 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.”

Hodge suggests bank had a revenue reason – he tables a memo to the board risk committee that mentions “potential revenue at risk”.

Thorburn says it’s not the reason, but acknowledges it was “a factor”.

Thorburn: "I actually don't think that was the - the reason. I don't think that was a sort of conscious or openly discussed matter, Mr Hodge, through this."

Thorburn admitted the bank’s proposed compensation approach was wrong and there were “consequences” for him, chief legal counsel Sharon Cook, and former wealth boss Andrew Hagger.

Thorburn also maintains the proposed compensation arrangement was not “unethical” but says it would not have earned its customers’ trust.

Welcome back to the afternoon session of the commission.

Senior counsel assisting, Michael Hodge QC, is now delving into the involvement of NAB's chief commercial and chief legal officer, Sharon Cook, in the bank’s handling of the fees-for-no-service scandal with the corporate regulator.

As we’ve heard, NAB was an outlier compared to the other banks in terms of resolving the matter by agreeing to pay compensation to affected customers. NAB had tried to argue the point that it was within its legal rights to charge some customers fees despite there being no linked service.

NAB CEO Andrew Thorburn says as he saw it, former wealth boss Andrew Hagger (pictured) had the primary responsibility for dealing with ASIC over the fees-for-no-service scandal.Credit: Darrian Traynor

NAB boss Andrew Thorburn tells the commission he handed responsibility of the matter from former NAB chief customer officer, wealth, Andrew Hagger, who left the bank on October 1, to Cook in April.

Hodge asks why Cook appears in board minutes to be in charge of the matter much sooner. We’ve also seen a report on the legal tactics NAB staff took and the report is supported by Cook, not Hagger.

Earlier today, Thorburn said NAB had taken an overly legalistic approach to its dealings with the Australian Securities and Investments Commission (ASIC) during its fees-for-no-service investigation.

Thorburn has just been presented with an email Cook wrote to Thorburn in May after receiving more contact from ASIC.

Hodge: "This is her short note of her role in the ASF (advice service fees) … And her simple point, as she says, is that she did not assume either responsibility for, or accountability of, our negotiations until after we received the cranky letter from ASIC dated 9 May 2018." And you've accepted that?"

Thorburn: "I accept the - the essence of that, yes. Yes, I do, Mr Hodge."

Hodge: "And I'm just trying to understand, in your own mind, how does that fit with the fact that since November of 2017, the correspondence that has been occurring has been occurring between people from ASIC and Ms Cook?"

Thorburn: "Yes."

Hodge: "From NAB and that also, just so you can have all of these things in your mind, that is Ms Cook who is presenting or sponsoring the management paper that's coming to the board risk committee about the negotiations for the board risk committee's meeting on 30 April 2018?"

Thorburn: "Mmm."

Hodge: "And that Mr Hagger is nowhere in sight?"

Thorburn: "So, clearly, they - the two of them are - were both important leaders in this resolution and taking it forward and probably dealing with ASIC. But as I saw it, Andrew Hagger had the primary responsibility for dealing with ASIC on it."

The grilling of NAB's Andrew Thorburn has now paused for lunch, with the hearing to resume at 2pm.

Let's look back at some of the morning's highlights:

• First up, Thorburn said a focus on sales culture had led to much of the misconduct uncovered at the royal commission. He believed four elements were at play across the sector: putting profits over people; taking a short-term view; the move to variable remuneration; and banks becoming more complex.
• Thorburn defended some amount of “variable” pay but said it should be more “balanced” to encourage better behaviour. He said more needed to be done to further lower the amount of bonuses that were based on sales for front-line staff. But he did not agree when senior counsel assisting Michael Hodge QC asked whether purely fixed remuneration could be extended to senior staff, perhaps including himself.
• Thorburn admitted NAB's "introducer" incentive scheme was an example of the bank "putting the bait right there for people”, and people “stepped over the line”. He later said the program remained under review.
• Thorburn said the bank's conduct when it charged fees to dead people was "absolutely wrong"  but not dishonest as there was no "intent". Sticking to fees-for-no-service, Hodge asked whether one possible explanation for the bank's conduct was that it "just didn't care?” to which Thorburn replied: “Yes.”
• Thorburn agreed the move by retail banks into wealth management was probably “a failure”.
• There was also quite a philosophical discussion about NAB's "purpose" and "vision" and Thorburn admitted the bank did not previously have an official “purpose” until he and chairman Ken Henry led the work into this.

Join us again in half an hour when the hearings resume.