The finance royal commissioner thinks Ken Henry just doesn't seem to get it

By Stephen Easton

February 5, 2019

The finance royal commission’s final report singles out NAB as the big-four bank that seems least willing to learn its lessons and accept responsibility for its failings, tarnishing the reputation of a former Treasury secretary in turn.

In the view of royal commissioner Kenneth Hayne, the bank chaired by Ken Henry “stands apart” from the other three as the one that still still doesn’t quite get all the fuss about the fact it was charging fees for no services. His view is based not only on its slow and inadequate responses to misconduct in the past, but also the way its leaders responded to questioning during the inquiry, and how their employees continued to work back at the office.

“Having heard from both the CEO, Mr Thorburn, and the Chair, Dr Henry, I am not as confident as I would wish to be that the lessons of the past have been learned,” Hayne reports.

“More particularly, I was not persuaded that NAB is willing to accept the necessary responsibility for deciding, for itself, what is the right thing to do, and then having its staff act accordingly.”

One key part of Hayne’s findings that particularly applies to NAB is that some financial institutions are unwilling to decide for themselves what honest, fair and efficient service delivery looks like, “without first having the regulator agree with what the entity judges to be required in order to meet that standard”.

“That is, there remains a reluctance in some entities to form and then to give practical effect to their understanding of what is ethical, of what is efficient honest and fair, of what is the ‘right’ thing to do.

“I was not persuaded that NAB is willing to accept the necessary responsibility for deciding, for itself, what is the right thing to do, and then having its staff act accordingly.” – Kenneth Hayne

“Instead, the entity contents itself with statements of purpose, vision or values, too often expressed in terms that say little or nothing about those basic standards that underpin both the concept of misconduct and the community’s standards and expectations.”

The footnotes for the above quotes refer to the evidence given by Henry and NAB chief executive Andrew Thorburn.

“I thought it telling that Dr Henry seemed unwilling to accept any criticism of how the board had dealt with some issues,” Hayne reports elsewhere. The former Treasury boss said today he was “disappointed” at that.

“I thought it telling that Mr Thorburn treated all issues of fees for no service as nothing more than carelessness combined with system deficiencies when the total amount to be repaid by NAB and [its superannuation subsidiary] NULIS on this account is likely to be more than $100 million,” the commissioner continued.

“I thought it telling that in the very week that NAB’s CEO and Chair were to give evidence before the Commission, one of its staff should be emailing bankers urging them to sell at least five mortgages each before Christmas.

“Overall, my fear – that there may be a wide gap between the public face NAB seeks to show and what it does in practice – remains.”

Henry and Thorburn responded today in a media release, the chairman saying the bank “welcomed” being challenged by the royal commission. “We led the sector in calling for the Royal Commission to be held,” Henry said, referring to a letter to the government he personally drafted, asking for input from then-Treasurer Scott Morrison before sending the final official version.

“In his final report, Commissioner Hayne said I seemed unwilling to accept criticism of how the Board had dealt with some of the issues raised by the Commission,” he acknowledged.

“I am disappointed that the Commissioner formed this view. I know that it is not so. The Board and I have reflected deeply on those and other issues and, as I have said previously, we take them very seriously.

“We have said we are not prepared to accept good intentions where urgency, consistency and discipline is required. The Board has led a deep examination of our culture, governance and accountability. We are the only bank to publicly release our assessment, which clearly outlines 26 areas we are focusing on to be a better bank.

“It is our highest priority for everyone at NAB to put customers first. At NAB we are determined to change and accept that we will ultimately be measured by the actions we take.”

A common finding was of companies whose directors gave too little attention to non-financial risks. Hayne finds the NAB board were not given sufficient information about the long-standing misconduct, which they heard about well after it had been uncovered and the Australian Securities and Investments Commission involved.

This meant they did not appreciate its seriousness or the potential risks to the company.

“Negotiations between NAB and ASIC in relation to the adviser service fees issues dragged on for years. NAB made many proposals to ASIC about how it would investigate the issues and compensate members, and ASIC rejected those proposals – describing them more than once as not being ‘customer centric’. While these negotiations dragged on, NAB was not remediating its customers.”

The board led by Henry failed to recognise the importance of the issue and did not do enough to strongly encourage management to address it with “an appropriate proposal” to the regulator, according to the commissioner.

Hayne says this is obvious from the regulator’s “blunt response” to one proposed remedy for the misconduct in April last year. It told the bank the suggestion failed “to adequately reflect any insight into the seriousness of the suspected misconduct” and was even worse than a very long series of previous ideas ASIC had already rejected.

Hayne suggests there was a gap between what the chairman said about this in the commission’s hearing, and what the bank did next.

“Dr Henry said that when he read what ASIC wrote, he was ‘appalled’. But, despite that reaction, it still took NAB until September 2018 to agree a position with ASIC about the remediation of some of its customers.

“Even as late as November 2018 (when NAB’s Chair and CEO were to give evidence to the Commission) NAB had not agreed with ASIC what NAB would do in relation to the customers of its aligned licensees.”

Hayne notes boards aren’t there to “review every piece of correspondence that goes out the door” but they are meant to be on top of significant issues, seek all necessary information and set the “strategic direction” of the response.

“When management is acting in a way that is delaying the remediation of customers, and damaging the bank’s relationship with regulators, it is appropriate for the board to intervene and say, ‘Enough is enough. Fix this, and fix it now’.

“Dr Henry would go no further than saying that he wished NAB’s board had stepped in sooner. In my view, it is clear that NAB’s board should have acted sooner to impress on management the importance of resolving this issue quickly, and resolving it in a way that was in the interests of NAB’s customers.”

Thorburn pledged to “engage constructively” on matters that have been referred to ASIC but also said it was hard to swallow the commissioner’s other observations, that “NAB may not be learning the lessons we need to from the past and, in particular, that we don’t know what the right thing to do is.”

“As the CEO, this is very hard to read, and does not reflect who I am or how I am leading, nor the change that is occurring inside our bank,” said Thorburn in the statement.

“While we have made mistakes, I believe there is a lot of evidence that we are making sustainable and serious change to once again regain the trust of all our customers.”

The CEO said he had cancelled his long service leave to “personally and visibly” lead the bank’s efforts to improve.

READ MORE: Soft enforcement link to regulatory capture

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