Still no ownership to inflammatory letter sent to ASIC

As of today, there’s still no owner of the inflammatory letter sent by National Australia Bank to ASIC this year.

NAB chairman Ken Henry. Illustration: Sturt Krygsman.

As of today, there’s still no owner of the inflammatory letter sent by National Australia Bank to ASIC this year, despite chairman Ken Henry’s belief that it has significantly tarnished NAB’s reputation.

Of course, that’s precisely why the April 13 letter — setting out the latest variation in the bank’s position on fees-for-no-service — has been disowned.

Chief legal and commercial officer Sharon Cook signed it but had no formal responsibility, former wealth boss Andrew Hagger had the “primary lead” but is said to have taken a redundancy after his failed bid for the top job at MLC, and chief executive Andrew Thorburn reckons he delegated it and “left it at that”.

Henry’s view, expressed in the royal commission yesterday between sighs and harrumphs, is that the letter represented a “deeply flawed position”.

The chairman said he was ­“appalled” when he saw ASIC’s scathing response. The letter-with-no-owner highlights how NAB’s fees-for-no-service drama has become a sorry mess.

We really should expect a lot more from our top companies.

The underlying cause of these conduct issues plaguing the banks is that the industry is playing catch-up after failing to undertake the necessary investment in systems and compliance to mitigate non-financial risk.

After the financial crisis, prudential regulator APRA was understandably concerned about financial risk and the stability of the system.

That began to switch in late 2015 — around the time that a whole series of compliance issues began to heat up at NAB.

It came as no surprise to APRA, which the royal commission heard yesterday has had a longstanding view that the Melbourne lender is more vulnerable to breaches and prudential issues than its peers.

In April 2016, APRA wrote to NAB about the results of a risk governance review undertaken in the first part of the year.

The regulator required NAB to work on three objectives — a risk-framework appetite enforced through proactive management, reporting and monitoring of risk levels at a board and board-committee level, and development of clearly defined responsibilities and accountabilities in risk management.

NAB started Project Cornerstone in response, which has largely been a financial risk management program but is now transitioning to non-financial risk.

In short, the major banks have been caught behind the eight ball and are ploughing investment into non-financial risk management programs.

While NAB’s risk game has been improving, the bank has had a lot of explaining to do over the last day-and-a-half in relation to its adviser service fee scandal.

The only thing you can say with any degree of confidence is that its exposition has been about as wobbly and self-interested as the remediation proposal signed off by Cook.

In her pitch to ASIC in April, Cook said that instead of repaying fees when it was unable to show the service was provided, NAB should be able to make a distinction between wealth customers signed up before and after the 2013 Future of Financial Advice reforms.

She argued NAB should retain the fees paid by pre-2013 customers because the bank could have persisted with a commission structure instead of switching early to a fee-for-service model.

If the payments were treated as commissions, there was no obligation to provide a service.

ASIC’s response was savage, saying it would continue its investigation because NAB’s proposal failed to show it had any insight into the seriousness of its suspected misconduct, which took place over many years and involved a huge number of customers.

Henry was aghast, saying yesterday it was “absurd” that the process had already taken three years and it appeared that the bank had “taken a U-turn”.

The process managed to get back on track after Thorburn’s first meeting on April 26 with new ASIC chairman James Shipton, who told him that NAB’s technical and legalistic approach was doing it no favours.

The only point that’s remotely in NAB’s favour, which Henry and Thorburn have clung to, is the suggestion that then-ASIC deputy chairman Peter Kell indicated to Hagger that the regulator might look favourably at the FoFA distinction.

Kell will not appear as a witness in this final round of hearings, and Henry said yesterday he had “no line of sight” on the issue.

As it turned out, the entire NAB board had no appropriate line of sight on fees-for-no-service. Information and data was sparing, and there was no real understanding at the bank of how seriously ASIC regarded the issue.

It was clear from Commonwealth Bank’s evidence in last week’s hearings in Sydney that escalation and the flow of important information and data to the bank’s top level was sadly lacking, as well.

Failing to escalate is one thing, but it’s quite another if the systems can’t generate the required information to take informed action in the first place.

Henry said the turning point in the remediation fiasco was the return letter from ASIC. However, he complained that NAB should be able to determine for itself how it remediated its customers.

Asked by senior counsel assisting Rowena Orr if the board should have stepped in earlier to resolve the issue, the chairman responded: “I wish we had, let me put it that way.”

Orr proceeded to ask the same question three more times, demanding a yes or no answer, but Henry refused to budge in a test of wills.

When Orr said she would take his final answer as a yes, the chairman responded testily: “Well, you take that as a yes, all right.”

ETFs and volatility

As global regulators turn their ­attention to assessment of post-crisis reforms, there’s a heightened alert about non-bank finance after growth in the asset management industry from $US50 trillion to $US80 trillion over the past decade.

For the Financial Stability Board, that means continued vigilance of risks associated with the $US30 trillion in open-ended funds that promise investors daily liquidity but in some cases invest in highly illiquid assets.

The problem is exacerbated when there’s an unexpected fall in asset prices, like with the recent volatility in markets.

Shares in exchange-traded funds can be sold immediately, adding to the downward pressure on markets.

Bank for International Settlements general manager Agustin Carstens, whose mission is to improve monetary and financial stability, told a conference in Beijing that, as equity markets became choppier, regulators would need to be on the lookout for ETFs increasing the volatility of underlying asset markets.