Banking royal commission: Round 7 — policy and CEOs - Ken Henry and Michael Wilkins

AMP reveals it could be facing another fees for no service issue for workplace superannuation and employer plans.

Senior counsel assisting the financial services royal commission Michael Hodge QC. Picture: Supplied

Thanks for joining our live coverage of the seventh and final round of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, this week being held in Melbourne.

Today NAB chairman Ken Henry returned to the witness box to answer questions from senior counsel assisting the commission Rowena Orr QC.

On Monday Dr Henry was extensively questioned about NAB’s culture and how it was changing. He said it may take a decade to fix the problems with the bank’s way of doing business.

Dr Henry was followed by AMP acting CEO Michael Wilkins, questioned by senior counsel assisting the commission Michael Hodge QC.

Some of today’s major developments included:

• Dr Henry defending why bonuses were still paid to senior NAB executives despite a rising tide of breaches, suggesting the bank could have “fired everybody” instead
• Mr Hodge examining NAB’s relationship with the regulators especially ASIC, what Dr Henry described as “dysfunctional”
• Dr Henry suggesting that he should have funded the bank’s own customers to sue itself
• Mr Wilkins admitting to a blow out in costs to $778 million to remediate customers of its advice business
• Mr Wilkins conceding AMP could be on the brink of another fee for no service case for its workplace superannuation and employer plans

Thanks for joining us for today’s hearings. We’ll be back covering the commission when Mr Wilkins resumes his testimony at 10am tomorrow.

4.20pm: AMP CEO not accountable

Mr Hodge suggests that AMP has adopted the Banking Executive Accountability Regime (BEAR) in a way least likely to disrupt the existing organisation.

He cites a report from EY that benchmarked the three pillars of AMP, Group, Life and Bank against its peers and that AMP was trailing behind in attributes utilised.

Further, he sites an internal report prepared in February this year that noted that further action was required to create a risk management framework commensurate to the size and complexity of AMP.

Turning back to BEAR, Mr Hodge asks why it was implemented in a way that preserved the legacy processes, systems and controls of AMP.

“I think BEAR needs to be implemented in a way that also works for the organisation,” Mr Wilkins answers, conceding also that the CEO of AMP Group is not an accountable person under the company’s hybrid model.

“Why not take the step to adopt that group level accountability model for AMP?”

Mr Wilkins says he cannot comment specifically because the decision was made before his time there - adding that AMP will comply with whatever legislation is put in place.

“And the Commissioner has raised a good question around whether it should apply to conglomerate entities,’ he adds.

The Tuesday session finishes, up, with tomorrow’s hearing to begin at 10am - Mr Hodge noting he should be finished with Mr Wilkins within half an hour.

4.09pm: Is this another fees for no service issue?

Mr Wilkins concedes he might have another fees for no service case on his hands - in relation to arrangements with its workplace superannuation and employer plans.

“Is the risk that AMP faces in relation to this that it may have another fees for no service case on its hands?”

“Yes.”

He confirms that AMP is currently conducting a detailed historical service review of the plan service fees charge for employer plans since 2008.

Further, he says the entity is still going through the process of understanding the scope of the issue, the first paper merely to bring the matter to the attention of the board.

Mr Hodge confirms that PwC is conducting a review of AMps corporate superannuation governance controls and processes but that the report is said by AMP to be subject to legal professional privilege.

4.01pm: Adviser licences ‘overly bureaucratic’

Mr Hodge asks whether cost is a factor in having adequate processes and procedures in place to monitor advisers.

“I think there is some evidence of the fact that we have preferred short-term performance over making appropriate investments for the longer term,” Mr Wilkins answers, making reference to AMP’s $100 million spend to improve processes as announced in July.

Commissioner Hayne asks what his view is on the “so-called rolling bad apple” or adviser that moves from business to business.

“I think that there should be more protocols for that in place... but my personal view is that it probably would be an overly bureaucreatic step to require individual licensing.”

Pressed further by Mr Hodge on why they should not be required to be licenced like other professionals, Mr Wilkins says there should be a self-enforcement approach instead of an individual license.

3.53pm: Trustees follow business lead

Mr Hodge turns to AMP’s sale of its life insurance business, highlighting APRAs view that the proposed sale represents an opportunity for the trustees to refresh their approach to related party arrangements.

He draws Mr Wilkins attention to the 50 per cent reduction in administration fees by AMP Trustees on its MySuper products but questions its timeframe, what was determined by the product part of AMPs business.

“Is this conduct that is consistent with a strong and independent board?” Mr Hodge asks.

“I think the board certainly is strong and independent in the way in which it looks after the interest of the members...I think the decision has to be ultimately that of the AMP Trustees.”

3.38pm: Grandfathered commissions to get even older

On grandfathered commissions, Mr Hodge highlights a number of AMP’s arguments in favour of grandfathered commissions, including that it could negatively affect the viability of some financial adviser practices and that it raised constitutional issues.

“Almost eight years have no passed since the industry was first consulted about the FOFA reforms... how can it really be that more time is needed to implement the required changes?” he asks Mr Wilkins

Mr Wilkins answers that more time is needed for advisers to make alternative arrangements.

“That just seems like an extraordinary explanation for deferring it,” Mr Hodge responds, adding that surely advisers had switched.

“No I don’t believe that’s the case, and certainly that’s not what has shown from some of the work that has been done with the AMP advice network.”

Mr Wilkins agrees that a ban on grandfathered commissions would affect AMP’s business, but says it would not oppose a total ban on grandfathering if there was a period to allow for alternative arrangements to be made.

“How long?” asks Commissioner Hayne.

“I think one year would be too short. Three years would probably be the maximum,” he answers.

AMP acting CEO Michael Wilkins appearing at the financial services royal commission in Melbourne. Picture: Supplied

3.22pm: Robo advice is here to stay

Mr Wilkins agrees that as acting CEO it’s impossible for him to go back to a time when he wasn’t involved and understand how the culture developed.

Instead, he says he has to instil the right values and culture within the business.

Mr Hodge asks if the challenge is AMP’s move away from its adviser distribution channel.

“We think that there will always be a role for face-to-face advice. What we do think though is that technology can be used to both assist in the professionalism and the productivity that comes from that face-to-face network.

“I think there is a place for robo advice,” he adds.

3.10pm: ‘I don’t have an answer to that’

Mr Hodge turns to AMP’s conduct in regards to the buyer of last resort (BOLR) and ring-fencing issues.

Mr Wilkins says the remediation for those issues is complete. A total of $4.7 million has been paid to 15,712 customers. Several changes were implemented, including the firing of one employee and four managers and executives who had their deferred incentive payments forfeited, Mr Wilkins says.

Mr Wilkins says he considers it is improbable that the relevant conduct such as in the BOLR and ringfencing issues, would occur with AMP in the future.

“But on 31 May 2018, AMP made a breach notification to ASIC regarding intentional conduct by the managing director of one of AMPs licensees of keeping fees on while clients had no adviser?” Mr Hodge asks.

“Yes.”

Mr Wilkins points out that this matter was immediately escalated within the advice business and overturned within four days – which he says is proof that newly-implemented policies and procedures were working.

Citing Mr Wilkins’ “very significant experience in corporate life” before AMP, Mr Hodge asks what he thinks has gone wrong at AMP.

“Part of the issue has been the lack of clarity and consequences that come from inappropriate behaviour,” he responds. “But that has been compounded by an underinvestment that AMP has made in its risk and compliance governance systems.”

“How does a culture develop within an advice business where anybody thinks it’s okay to charge money for a service and not provide that service?”

“I don’t think I have an answer to that.”

2.53pm: Fees for service vs commissions

Mr Wilkins concedes that it is a failing for AMP not to have adequately educated its adviser network that they needed to actually provide services in exchange for fees.

Mr Hodge asks whether AMP’s early move to fees for service were “fees for service in name only, treated by many as simply train commissions continuing”.

“Certainly... I think the change in approach needed to be both within AMP but also from advisers themselves.”

Further to that, Mr Hodge asks whether financial advisers struggled to understand the shift from a distribution network to professionals providing advice and acting in the best interests of clients.

“And the mental shift that many financial advisers seem to find difficult was to understand they were no longer a distribution network for product manufacturers; they were now professionals providing advice and acting in the best interests of clients.”

“That was certainly a significant change for a number of people in the advice network,” Mr Wilkins answers.

2.41pm: AMP had a nine-year plan

Mr Hodge shares with the commission the information that AMP had initially set a five year plan for remediation. It had to be amended to a nine-year plan and will cost $1.185 billion to complete.

Mr Wilkins said a move to expedite the remediation plan was prompted in part by the reputation effects of round 2 of the royal commission, but pushed further by a board view that the process was proceeding too slowly.

Mr Wilkins confirms that the goal is now to complete the plan in three years, at a cost of $778 million - including the cost of remediation, reviews and lost earnings for inappropriate advice and fees for no service.

He says there are two issues outstanding with ASIC - the quantum of services provided, and AMP’s proposal to collect testimonials from customers that they had received appropriate service.

Mr Hodge points out that until AMP agrees with ASIC on the final policy issues, it will continue to remediate in accordance with the baseline, nine-year approach.

2.20pm: $440 million in remediation

AMP acting CEO Mike Wilkins. Picture: AAP

Acting AMP chief executive Michael Wilkins has taken the stand for the second session on Tuesday, to be questioned by Senior Counsel Assisting Mr Michael Hodge QC.

After the usual formalities of swearing the witness and tendering his statement, questioning begins on remediation for inappropriate advice, fees for no service and fees charged in error.

Mr Hodge takes Mr Wilkins through the chronology of its remediation charges agreed to by ASIC - a sum that was initially $4.6 million in 2016, increased to $7.3 million in 2016 and to $290 million in July 2018.

Mr Hodge points out that the current total amount estimated has blown out to $440.4 million - $80.7 million for inappropriate advice and $359.7 million for fees for no service.

He asks why the amounts were significantly larger than those first estimated in 2016.

“I think we did not have a full appreciation of the impact of this on the small number of sample files that we looked at... I think AMP believed, as did the industry, that this was not such a large issue.”

12.50pm: The two strikes rule

Ms Orr asks about a meeting between Dr Henry and APRA chair Wayne Byres as well as several other representatives from APRA.

In notes prepared by APRA, Dr Henry is said to have described long term incentives as a “lottery ticket”, and that execs did not view them as incentivising, given hurdles were high and that there was an asymmetry in valuation of remuneration .

Asking a similar question to that posed to CBA chair Catherine Livingstone, Ms Orr asks whether the two strike rules requires boards to focus too much on financial measures.

“My personal view is yes... the two strikes rule would never have been legislated in today’s circumstances,” Dr Henry answers.

But when quizzed on what changes should be made, he says he doesn’t know.

“That really is, in my view, your challenge, and I think it’s really hard.”

And with that Ms Orr says she has no more questions.

After some brief clarification of a document by NAB counsel Wendy Harris QC, Dr Henry is excused and the commission breaks for lunch.

The hearing will resume at 2pm.

12.42pm: Changes to remuneration structures

Questioning turns to NABs review of its executive remuneration framework. Ms Orr says it will be her last topic for the session.

She clarifies that NAB’s new reward system does not distinguish between short-term and long-term variable remuneration.

“There are now no performance hurdles that determine whether the deferred part of the variable remuneration will vest, is that right?”

“Not really. Or I could say yes.. and no,” Dr Henry answers, saying that the board reserves the right to claw back an executives pay if issues are discovered later.

“What sorts of circumstances?”

“Probably the sorts of circumstances we’ve been talking about today.”

NAB chairman Ken Henry appearing at the financial services royal commission in Melbourne. Picture: Supplied

12.29pm: Why not both?

Ms Orr takes aim at an achieved risk rating for chief legal and commercial counsel Sharon Cook at an October 2018 remuneration and risk committee meeting.

“What are the circumstances that rendered that appropriate, Dr Henry?”

“We’ve been through them.”

“I don’t think we have.”

Dr Henry continues through the arguments in Ms Cook’s favour, saying she was only communicating NABs position to ASIC, no matter how flawed that communication might have been.

Turning to the bonus pool, Ms Orr points out that while financial adjustments cut the pool to 85 per cent, there was no risk-related adjustment.

Pulling out points from the board’s discussion, she asks about a point that expresses concern that remuneration consequences might inhibit employees from proactively stepping into risk issues and taking up accountability for them

“If a person is not willing to accept accountability for risk-related matters, then they should not be an executive in a financial services institution.” Ms Orr suggests.

“That’s obviously the case,” Dr Henry answers, but adds that if there is a “mess there already” employees considering moving into that role might be less inclined to do so.

Ms Orr goes on to ask about the results of that meeting, where the bonus pool was revised to 70 per cent for the executive leadership team and 85 per cent for all other employees.

Ms Orr questions Dr Henry on the vesting of deferred remuneration for any executive after the adviser service fees and plan service fees issue.

Dr Henry says the board decided not to dock those payments for Mr Hagger, but recognised he was responsible, saying they cut his current bonus instead.

“Well why not out of both?” Ms Orr asks.

“Well, why out of both? I just don’t understand,” Dr Henry responds tersely.

“To show the way the board treats conduct that leads to issues such as the adviser service fees and plan service fees issues,” Ms Orr suggests.

“I think that’s very clear from the outcomes. Very clear now. I don’t think anybody in NAB is in any doubt about it.”

11.58am: Refunds would be ‘unjust’

Ms Orr goes through an outline of NAB’s suspected offences provided by ASIC in 2017, as negotiations between the two parties continued.

A proposal from NAB emphasised that it had shifted to a fee for no service model before the introduction of FOFA reforms, claiming that it would be “unjust” for NAB to have to refund customers in circumstances where NAB couldn’t track down appropriate records.

That proposal was struck off as unacceptable by ASIC, with the regulator saying it did not see benefit in continuing to discuss the further review methodology with NAB.

Dr Henry says he was appalled at this view from ASIC, that the issues had taken so long to be remediated, confirming that at this point the issue had been discussed by the two parties for almost three years.

He accepts that NABs engagement with ASIC over that period had harmed its relationship with the regulator.

“Why didn’t you say to management at this point, ‘Enough is enough. This is harming our customers. Get it fixed and get it fixed now”?” Ms Orr asks.

“We did say that at some point,” Dr Henry says, going on to say he cannot recall the exact words the board used at the time.

Ms Orr points out that it was not until September this year that NAB agreed a methodology with ASIC.\

“Did NABs management do enough in response to ASICs letter to get this issue resolved?”

“I think so... This marked a turning point.”

Asked why it took a letter from ASIC of that nature to reach that point he says: “That’s a good question”.

Asked why the board didn’t step in earlier he says “I’ve already answered that request and... I don’t know the answer to that question.”

He says he wished the board would have stepped in earlier.

“But do you accept that the board should have stepped in earlier” Ms Orr prods.

“I have answered the question how I can answer the question.”

“Is that a yes or a no?”

“I’ve answered the question the way I choose to answer the question.”

“I’ll take that as a yes, Dr Henry.”

11.40am: ‘We could have fired everybody’

Ms Orr asks about the point that incentives be tied to shareholder outcomes, prompting another long monologue from Dr Henry.

“I don’t know whether now is the appropriate time to have this discussion,” he starts...before launching into musings about capitalism and the balance to be struck between customers and shareholdes, before concluding that there has been a “monumental shift” since that view was expressed in 2016.

Ms Orr now dissects an email from Mr Thorburn, noting that it did not mention a number of NAB’s issues at that time.

The two butt heads on a point in the email in which Mr Thorburn justifies a previous discount to the bonus pool – which he said was due to cash earnings not being achieved and should not be applied in the same way in this instance. The reduction in cash earnings was brought about by the payment protection insurance scandal in the UK.

Ms Orr is getting more frustrated with Dr Henry’s sometimes blasé attitude to her questions.

But there was no mention of NAB’s then-current local issues.

“So he didn’t mention any of those matters, adviser service fees, plan service fees, the bank bills swap rate, the foreign exchange breaches,” Ms Orr says.

“Did you have enough information from Mr Thorburn about those issues and the consequences that those issues might have to make your decision?”

“Yes. “

“Did it concern you that Mr Thorburn’s email to you did not mention any of those matters?”

“No.”

“Well, Dr Henry, given the very significant compliance breaches and other breaches in that financial year, do you think that you made the right decision in deciding that there should be no risk related reduction to the bonus pool?”

“Yes, bearing in mind that there was a requirement that the chief executive communicate to the organisation right through the organisation that the board expected to see a substantial uplift in performance.”

Dr Henry continues. “Of course, we could have, and we decided not to. For very good reasons. And I’m still happy with those reasons.”

Asked what a better way to demonstrate intolerance of practices of misconduct might be, Dr Henry answers, “Well, we could have fired everybody I suppose”.

“So you maintain that this was the correct decision?”

“Absolutely, I do, yes.”

11.22am: Should bonuses be cut?

Questions turn to remuneration and how NAB’s board recommends and adjusts the size of its bonus pool depending on risk.

Dr Henry confirms he does recall a report from the CEO in October 2016 that did not suggest any risk-related adjustments to the short term variable remuneration of the executives.

Ms Orr reads out a recommendation from the chief risk officer ahead of a joint meeting of the remuneration and risk committees:

“Whilst there have been a number of events and breaches identified during the year, they have been subject to appropriate and timely reporting, remediation and consequence management,” it says, going on to recommend no adjustment to the group’s bonus pool was required.

Adding to that, Ms Orr says the CFO and CEO recommended that 100 per cent of the short-term bonus pool be funded, referencing only financial metrics.

Dr Henry says that the committee was “unhappy” that there was no risk adjustments proposed and had discussed the issue at that meeting. But it accepted the arguments from chief customer officer David Gall and CEO Andrew Thorburn that change had been put in place.

Meticulously going through the deliberations of the board, Ms Orr tells us that the committee discussed:

• that there had been change in risk related matters
• that a reduction in the bonus pool would impact staff morale and that most employees didn’t have the capacity to influence risk management
• that the tone from the top should be very clear
• that incentives should be aligned with shareholder outcomes

She highlights two options deliberated by the board, to set the bonus “pool” at 100 per cent or at 95 per cent, the 5 per cent discount to “send a message” about the board’s concerns.

11.02am: APRA governance review of NAB

NAB chairman Dr Ken Henry appearing at the financial services royal commission. Picture: Supplied.

Ms Orr asks what NAB did to address a governance review from APRA, and whether enough was done to improve oversight of non-financial risks.

“We continue to have gaps in our non-financial operational risk performance. So that’s a continuing piece of work.”

Responding to yet more findings from APRA, which highlighted failings of the bank, Dr Henry says the findings were no surprise, “concerning, but not a surprise”.

“It was motivating, it was helpful,” he adds.

Dr Henry accepts APRA’s characterisation of NAB’s remuneration framework, which included points that the bank should have included adjustments for risk and that there was a too much emphasis on profitability measures.

10.45am: NAB could fund customers to sue it

Ms Orr asks about the amount of regulatory information presented to the board and whether it is sufficient.

“Are they providing any more of the sorts of information that I’ve directed you to?”

“I hope so... But you know, there is always a risk that issues are not being elevated to the board at the appropriate time and in the appropriate form.”

Commissioner Hayne interjects to ask whether the entity, in this case NAB, take primary responsibility for deciding what should be done to fix what has happened.

“It leaves the primary responsibility ultimately with the board but primarily the business to identify in fact what has happened as well as what might have happened and then decide what is to be done to fix it and how,” Commissioner Hayne says.

“Yes, I agree 100 per cent,” says Dr Henry, suddenly more attentive.

“I think our habit of going to ASIC and seeking to negotiate an outcome with ASIC , I think that has led to elements of dysfunction and it has certainly contributed to an insufficient pace of remediation for customers,” he says.

“It also leads to the mindset, ‘Well what’s the best deal we can do with ASIC’, Commissioner Hayne suggests.

“Exactly. It is a deal because it’s a negotiation.”

Going further, Dr Henry says he has wondered whether NAB should have, “years ago” funded customers to take the bank to court.

“To sue NAB?” Ms Orr asks.

“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.”

Ms Orr is not convinced.

“Why should it come to that, if management and the board are doing their job, why should you need someone to sue NAB so you can sort this out?”

“So the question is: ‘Is the law sufficiently clear that anybody can come to that view’. That’s the question. Who knows?”

10.29am: ‘A very unlikely scenario’

Ms Orr asks whether the risk committee should be advised of risk matters at an earlier point, a point before the ASIC notification.

“Indeed, I wonder whether it’s necessary, in all occasions, to negotiate with ASIC at all, rather simply notify and get on and fix it,” Dr Henry says.

Ms Orr asks what NAB should have done.

“We all agree we should have done something differently. Honestly, I’m not sure exactly what and when.

“I would like to find a way of us being able to secure remediation without having to negotiate with ASIC but to be able to do it in a way where we are protected from future ASIC action.

“And if the Commission can help with that, I think you would do us all a great service.”

Ms Orr says the bank needs only to propose a remediation program focused on customer outcomes. Dr Henry says this is something NAB was already doing.

“I suggest to you very strongly that that is far from what you were doing.”

Dr Henry agrees, saying further that ASIC might have a different view on what “ought” means and that negotiating with the regulator can take years. ASIC may not even be prepared to comment on a proposal.

“That seems a very unlikely scenario.”

Dr Henry says negotiating with the regulator can be like “the game that children play - you’re getting colder, you’re getting warmer”.

Senior counsel assisting the financial services royal commission Rowena Orr QC. Picture: Supplied

10.18am: Perhaps, perhaps, perhaps

Ms Orr notes that several of ASIC’s concerns regarding foreign exchange, fees for no service and inappropriate advice were raised at a monthly meeting of the risk a committee.

“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. Do you agree with that?”

Dr Henry sighs heavily. “Yes, I would agree with that”.

Turning to another document, with the minutes of a NAB board meeting from April 2015, which Dr Henry says he cannot recall.

Taking him through the document, Ms Orr asks why there was no background, explanation or possible contraventions of the law included in the risk committee report.

He says “perhaps” the risk committee should have known that the issues might contravene the law.

“Surely, those were matters that the chief risk officer should have reported to the risk committee?” Ms Orr asks again.

“Perhaps.”

“Back to where we started, perhaps, Dr Henry?” says Ms Orr.

“Yes, perhaps.”

“And I’m afraid I still don’t understand the reason for your hesitation.”

“I probably can’t explain that to you.”

10.00am: Rated red

To begin today’s questioning, Ms Orr tenders a letter from ASIC’s Louise Macauley to then NAB head of wealth, Andrew Hagger.

Recall that senior counsel assisting Michael Hodge QC yesterday accused NAB CEO Andrew Thorburn of using Mr Hagger as a scapegoat to cover for himself and others.

Dr Henry says he does not recall seeing the letter, saying it was his fault for not reading the full set of tender documents he was presented with.

Ms Orr draws his attention to a memorandum prepared for a meeting of the risk committee in May 2015 – a time when Dr Henry was not yet board chair but chair of the risk committee.

We hear that over a four-year period, the risk compliance rating was almost always “red”, having rated no better than amber, (which it was for a single month only) during that time.

Dr Henry says he has no tolerance of compliance breaches and that they need to be managed.

“But you also say that for a three-year period it was rated red?” Ms Orr asks.

“Yes.”

Bringing forward another document, Ms Orr points out the rating guidance, which records that “compliance risk will be rated red when we have breached appetite and do not have an agreed plan to remediate the position”.