ASIC sues NAB over ‘thousands’ of fee for no service breaches

ASIC accuses NAB of unconscionable conduct for continuing to charge fees when it knew no service was delivered.

NAB’s remediation bill for its fees for no service has exploded from its initial estimate of about $15m, to close to $2bn currently. Picture: AAP

National Australia Bank is staring down a potential penalty in the hundreds of millions of dollars after the corporate watchdog sued the lender over “several thousand” alleged breaches of the law for its near-decade long fees-for-no-service scandal.

The Australian Securities and Investments Commission late Tuesday accused the bank of unconscionable conduct by continuing to charge ongoing service fees to its customers, even when it knew it had not delivered any services and had issued “defective” fee disclosure statements between May last year and when it finally stopped the practice on 4 February 2019, the same day the final report for Kenneth Hayne’s royal commission was released.

A day before new NAB chief executive Ross McEwan and chairman Phil Chronican face disgruntled shareholders at the bank’s annual general meeting in Sydney on Wednesday, ASIC has alleged that NAB, between December 2013 and February 2019, was charging fees to a large number of customers, while failing to provide any services and had issued, or failed to issue, disclosure documents that accurately described the fees that consumers were being charged.

NAB is also alleged to have failed to set up proper compliance systems and broken its financial services licence obligations to act “efficiently, honestly and fairly”.

NAB’s remediation bill for its fees for no service has exploded from its initial estimate of about $15m, to close to $2bn currently, in a scandal that was combed over by the royal commission and which sparked the departure of wealth boss Andrew Hagger, former chief executive Andrew Thorburn and chairman Ken Henry.

Mr Hagger, who left the bank after copping a battering at the royal commission after he was accused of not being “open and transparent” with the corporate watchdog over the extent of its fee for no service scandal, is named by ASIC as part of its statement alleging unconscionable charging of ongoing fees.

In a 534-page statement of claim lodged in the Federal Court, NAB is alleged to have charged customers fees where it shouldn’t have 8700 times, and each instance carried a maximum $250,000 penalty.

There are 217 instances of alleged failure to provide proper disclosure documents, each attracting a maximum $250,000 penalty.

On top of this, NAB is facing 1609 allegations of acting unconscionably, each instance carrying a maximum penalty between $1.7m and $2.2m.

NAB is also accused of contravening the Corporations Act by failing to give customers a proper fee disclosure statement on 227 different occasions. Each breach carries a penalty of between $1.7m and $2.1m, depending on the date of the infraction. The action relates to about 1400 customers.

ASIC is looking to score a significant financial penalty and to force NAB to implement a “comprehensive compliance program”, which would add to the cost pressures facing the business.

Last year, NAB received a record-breaking 88 per cent vote against its remuneration report as shareholders whacked the company’s senior executives with a “first strike”. However, the bank is expected to avoid the ignominy of a second strike on Wednesday, such as the one delivered to Westpac earlier this month.

“We take this action seriously and will now carefully assess the allegations,” NAB chief legal counsel Sharon Cook said. “We will continue to work co-operatively and constructively with ASIC to deal with this issue. We have already acknowledged failures where customers have paid fees for services they didn’t receive and have paid $37.8m to 27,500 NAB Financial Planning clients. Remediation began in December 2018 and is expected to be completed by June 2020,” Ms Cook said.

NAB received more than $650m in ongoing service fees from 2009 to 2018 and the company has already provisioned more than $2bn for remediation across all of its advice licensees, which included compensation for fees for no service, insurance and wealth issues.

The fees for no service scandal, which was first made public by ASIC in 2016, has tarred almost every large financial institution in Australia after the industry failed to adapt to Future of Financial Advice reforms.

Andrew Hagger, NAB’s former head of wealth.

A systemic problem across the financial industry emerged where companies were continuing to charge customers ongoing service fees, ostensibly for a financial adviser to run a health check on clients’ portfolios, despite never carrying out any services for their customers.

The compensation bill quickly escalated to an estimated $10bn of wrongly charged money.

AMP, which was heavily bruised by revelations it doctored a supposedly independent report examining its own fee for no service issue, has suffered an almost complete clean-out of its top ranks, and is bracing itself for a potential ASIC action.

“Fees for no service misconduct has been widespread and is subject to ongoing ASIC regulatory responses including investigations and enforcement actions,” said ASIC deputy chair and head of enforcement Daniel Crennan, QC.

“This widespread misconduct was examined in some detail by the Financial Services Royal Commission. ASIC views these instances of misconduct as systematic failures, unfair to customers including those that are more vulnerable,” Mr Crennan said.

ASIC alleges that on or around 7 March 2018, Mr Hagger was sent a note asking him to accept that there was a “residual risk”, given a “critical” and “excessive” rating, about not providing services to customers and failures with its disclosure documents. Then followed a draft report by consultancy PwC on 29 March 2018, which highlighted a range of defects in its systems relating to risks of fee for no service conduct, according to ASIC, and NAB notified ASIC of significant breaches of its financial services licence obligations in three breach reports lodged on May 31.

However, on 2 July 2018, a further memorandum was prepared for Mr Hagger to approve another “excessive risk” notification after the company found its compliance function within NAB’s financial advice division was “largely ineffective”, including in relation to its fees for no service issues, and was not expected to be fixed until September 2019.

ASIC has used these events to allege that NAB was aware that its systems would not be able to assure it was not charging fees for no service from May 31, 2018. “However, NAB did not stop charging fees to its customers until 4 February 2019.”

NAB said in February 2019 it started switching off fees for all customers with ongoing fee arrangements and has stopped entering into new ongoing fee arrangements.

“NAB Financial Planning has made changes to systems and controls and will continue to improve so we can service our clients better,” Ms Cook said.