Banking royal commission: NAB executives still got full bonuses, despite scandals

Senior NAB executives still got their full bonuses in 2016 despite directors being unhappy about a rising tide of breaches.

27/11/2018 NAB Chairman Ken Henry leaves the Banking Royal Commission in Melbourne.Picture : David Geraghty / The Australian.

NAB’s board gave its senior executives their full bonuses in 2016 even though directors were unhappy about a rising tide of breaches including a fee-for-no-service ripoff, chairman Ken Henry has told the banking royal commission.

The commission has heard that during 2016 the board’s risk committee heard for the first time about the fee-for-no-service scandal, which was discovered internally two years earlier and involved hundreds of thousands of customers of its superannuation business.

NAB was also under fire from the prudential regulator about its remuneration, which the Australian Prudential Regulation Authority said needed to be improved to embed control of risk in the bank’s culture.

It was also in trouble with Austrac over anti-money laundering and counter-terror finance law breaches, and with the Australian Securities and Investments Commission over alleged bank bill swap rate rigging and a foreign exchange breach.

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Mr Henry said that members of a joint board risk and remuneration committee who met early on the morning of October 5, 2016, were “unhappy” with management’s recommendation that there be no cut in the executive pool.

The committee proposed two options to chief executive Andrew Thorburn - either leaving the bonus pool intact and sending a strong “tone from the top” message to all staff, or cutting it to 95 per cent.

Mr Thorburn recommended option one, saying in a briefing paper that the bank had “made real progress in the risk area this year”.

“We should pay the pool at 100 per cent, and give a clear message that risk has been carefully weighed up, that we are concerned about some aspects, and there needs to be a lift in the operational risk and compliance area in 2017,” Mr Thorburn said.

Counsel assisting the commission, Rowena Orr, QC, asked Dr Henry if he thought the committees were right to accept management’s assurances that no consequences were necessary because changes were being made.

“Yes,” Dr Henry said.

Ms Orr asked: “Do you think you did enough to challenge those assurances?”

“Yes,” Dr Henry responded.

“I think we did. Mmm, I do.”

Asked what better way there was to demonstrate intolerance of customer ripoffs than reducing the bonus pool, Dr Henry responded: “Well, we could have fired everybody, I suppose.”

Earlier, Dr Henry suggested the bank could fund aggrieved customers to sue it in the Federal Court to determine its liability for alleged rip-offs and rorts.

He also compared dealing with the corporate regulator to playing the children’s game of hunt the thimble, complaining that the Australian Securities and Investments Commission would only tell the bank it was “warmer” or “colder” when negotiating remediation programs.

Dr Henry said trying to negotiate deals with ASIC “has led to elements of dysfunction, and it has certainly contributed to an insufficient pace of remediation for customers”.

“It is not right,” he said.

“In other areas of the law, as you would be familiar, there are other approaches that are followed… 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.”

“To sue NAB?” Ms Orr asked.

“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.”

In his second day in the commission hot seat, Dr Henry said NAB management hadn’t given the board enough information about the bank’s habit of charging customers fees for services they did not receive when the issue blew up within the group in 2015.

Internally, NAB realised in 2014 there were problems with charging two sets of fees to super customers, a plan service fee and an adviser service fee, with its subsidiary MLC reporting the ripoff as a significant breach in December that year.

However, the board was not informed until August the following year, in a report dealing with the bank’s engagement with regulators.

“ASIC is not yet satisfied that the control failures are limited to operational processes of the issuing entities,” the board was told in the report, tendered to the commission.

“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.”

Dr Henry said he believed this was the first time the board learned of the problem.

“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,” Ms Orr said.

“Do you agree with that?”

Dr Henry replied: “Yes, I would agree with that, yes.”

Asked if it should have done so, he said: “Yes, I think it should. Yes, I do think it should.”

Dr Henry initially said that the fact that NAB’s compliance risk rating had been red for all but one month during his tenure as chairman was normal.

He said the board risk committee spent time in 2015 “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 that there would not be a red risk rating against compliance,” he said.

However, he agreed with Ms Orr that a red rating wasn’t just the result of a breach - “it was about appetite being breached and there being no agreed plan to remediate the position”.

“That’s correct, yes,” he said.