Banking royal commission: NAB quizzed on trailing commission

NAB went to extraordinary lengths to keep paying now-illegal trailing commissions to financial advisers.

NAB’s former wealth boss Paul Carter, centre, leaves the royal commission with his legal team after giving evidence yesterday. Picture: David Geraghty

National Australia Bank went to extraordinary lengths to keep paying now-illegal trailing commissions to financial advisers, the royal commission has heard.

Facing a grilling on the first day of a new round of hearings, NAB executive Paul Carter initially said the bank feared advisers would revolt over a potential breach of contract if it ended the lucrative payments.

This, Mr Carter said, could lead to NAB falling foul of its duty to act in the best interests of members, as advisers withdrawing customer savings would reduce the scale of the fund.

But under questioning from senior counsel assisting, Michael Hodge QC, the banker was forced to admit this was not true because no such breach of contract was possible.

Over four hours of questioning, the difference between a “fee” and a “commission” was examined at length, with Mr Carter forced to admit that a guide to one super product that described what he insisted was a commission as a fee used language that “could have been enhanced”.

The difference is important because if Mr Carter was proved incorrect and it was a fee rather than a commission NAB might have had to refund it because no service was provided in return for the money.

Mr Carter’s evidence — he is to resume his spot in the witness stand this morning — came as the commission began a fortnight of hearings on the superannuation sector that will examine retail and industry super funds, including AustralianSuper, MLC Super Fund and Colonial First Choice Superannuation Trust.

The commission will consider how super funds gain new members, how they use members’ money, and their governance ­arrangements.

Evidence given by Mr Carter, who is now chief customer officer for consumer and wealth at the Bank of New Zealand, and previously was executive general manager in NAB’s wealth division, focused on changes to the structure of the bank’s super business in 2016. At the time, the bank reduced the number of super trustee companies it used from three to one, called NULIS, and killed off a number of old super products.

The commission heard NULIS had legal advice to say it could keep charging commissions as it moved the super accounts from one trustee to another.

From mid-2013, new commissions for financial advisers were banned under Labor’s Future of Financial Advice reforms, but funds were allowed to continue paying existing commissions under a “grandfathering” arrangement.

“The members were having commission deducted from their account balances and receiving no service in exchange for it before … and that would continue,” Mr Hodge said. “They had nothing and they still have nothing.”

Mr Carter denied that no services were provided.

The commission heard members were charged a “plan service fee” of up to 1.5 per cent of their account balance because a financial adviser was available to provide general advice about super, investment options or insurance arrangements. The same fee was charged whether or not the adviser actually provided any advice.

Members of the fund could call NAB’s super arm MLC and say they did not want to pay the plan service fee any longer, but this ­option to opt out was not explained in the fund’s product disclosure statement.

“The disclosure to members about their ability to dial that fee all the way to zero should have been clearer,” Mr Carter conceded.

Members transferred from one fund to another had the fee cut from up to 1.5 per cent to up to 0.44 per cent. Late last month NAB said it would refund $67 million to customers who were charged hundreds of dollars in fees for the opportunity to access a financial adviser. NAB has told the commission the payout will actually total $87m, after interest and investment losses are included. The bank has previously said more than 300,000 customers were affected.

Asked by Mr Hodge what the benefit was to fund members of continuing to pay advisers’ trailing commissions, Mr Carter said that “if the commission arrangements were cancelled, that would, in effect, have the result of a breach of contract by the trustee with its advisers”.

“If that happened, it is also highly likely that advisers and the amount of assets in the fund would be reduced,” he said.

But Mr Hodge pointed out that the trustee had no contractual arrangement with the advisers because those deals were with a different MLC company.

“So it can’t be that NULIS would have breached any contract by refusing to continue commissions,” Mr Hodge said.

“That is true,” Mr Carter responded.

Additional reporting: Ben Butler