Banking Bad

by Adele Ferguson

It was no coincidence that the email was sent on 10 February 2015, just days after NAB’s relatively new chief executive, the New Zealand–born career banker Andrew Thorburn, had been hailed as NAB’s new messiah, for apparently turning around a decade of poor shareholder returns. The bank, under the effervescent Thorburn, had posted a strong quarterly profit of $1.65 billion while unveiling a series of asset sales, including spinning off and listing the Great Western Bank and selling £1.2 billion of higher-risk loans from its British commercial real estate portfolio. But the whistleblower was unimpressed by Thorburn and senior management at NAB.’

  Some of the issues John raised related to long-term problems within the bank’s credit risk department, which was supposed to monitor such things as systemic inadequacies in loan documentation and charging fees for no service, and ensure they were properly flagged and managed.

  According to John, NAB had a culture of burying bad news, which dated back to at least 2002, when it had been rocked by a foreign exchange traders scandal. Four members of NAB’s forex trading desk, on the hunt for big bonuses and bragging rights, had lost $360 million and then falsified records to cover their tracks. The scandal had snowballed into a crisis that had claimed the chief executive Frank Cicutto’s job and sparked a bitter board split, which subsequently felled NAB’s then chairman, Charles Allen.

  The bank, its reputation in tatters, had promised to clean up its act. It seemed that it would be forced to do so under close supervision by APRA, after APRA published a scathing report into the forex disaster, noting that within NAB ‘risk management controls were seen as trip-wires to be negotiated’.1 Yet in the decade-plus since, John claimed, little had changed. Serious issues were toned down in NAB reports sent to various committees at the bank, such as the Wealth Operational Risk and Compliance Committee and the Group Chief Risk Officer Office.

  After I agreed to protect his identity, John sent me a series of internal NAB documents that supported everything he’d claimed – and revealed much more. I could see that what John was exposing had the potential to be a big story, one that, yet again, would vividly illustrate the extent of the rot in Australia’s banking system.

  My first port of call was Ruth Williams. She was about to go on maternity leave but, like me, immediately recognised the importance of this new lead. We were still on a high after our Timbercorp articles had helped stop the wind-back of FoFA. This exposé promised to help push for a royal commission.

  The trove of documents John had sent was so vast that Ruth and I had to devise our own filing system for it. We worked out a timeline setting out when the key documents were written and what they contained, as well as important events in the banking and political worlds that had influenced or were mentioned in the leaked material. While we had no reason to doubt John’s motivations, we needed to independently verify the authenticity of his documents, first by crosschecking every fact, name and event mentioned against publicly available records and by running them past other contacts in the banking sector.

  The documents were, at times, dense and highly technical, and many of them had been heavily ‘word-smithed’ to downplay problems, just as John had described. But not even this internal spin could cover up the evidence of a dysfunctional culture. One internal NAB document from August 2014, with the lengthy and lofty title of ‘Memorandum for group risk return management committee: NAB Wealth advice review’, had been commissioned by NAB in response to the June 2014 report of the Senate inquiry into ASIC. Andrew Hagger, who was running NAB’s wealth division at the time, had authored the memorandum which, despite containing some troubling revelations about the state of NAB’s advice division, had been heavily spun by him to suggest that while NAB had detected a few issues in its advice arm – with a few rogue planners – the bank had dealt with them swiftly. Hagger’s memorandum suggested that compliance was strong and customers were the epicentre of everything NAB did.

  Hagger had written: ‘The differences between NAB Wealth’s operations and CBA’s as described in the Senate inquiry are significant. In contrast, NAB Wealth had and continues to have a strong culture and compliance framework with no bias toward higher revenue earners with regard to audits conducted and consequence management. We use experienced industry-leading non-executive directors to differentiate our governance processes. With their independence they assist in addressing any conflicts of interest that are escalated to their attention including compliance related issues, sales practices and approved products (including NAB Group products).’2

  In cases of ‘inappropriate advice’, Hagger claimed NAB had terminated the employment of the wrongdoers and extended its reviews ‘beyond the initial issue identification and findings to identify related cases’. In reality, some had been allowed to leave – and pick up a reference on the way out.

  Hagger’s report even managed to put a positive spin on the fact that NAB had identified and quietly dismissed thirty-seven financial planners, for reasons including that they had provided their clients with inappropriate advice, had committed forgery or fraud or had committed repeated compliance breaches.

  The report stated that one of the bank’s star planners, Graeme Cowper, had been terminated in 2010 for ‘file reconstruction’ – in other words, retrospectively altering records to cover up mistakes or misconduct – and compliance breaches. A more familiar name mentioned was that of Emmanuel Cassimatis, who had quit as an agent of NAB’s MLC arm in the 1990s after being caught applying a ‘cookie-cutter’ approach to his job – giving all of his clients the same financial advice regardless of their age, financial background or risk profile.

  According to Hagger’s report, NAB had everything under control and there was nothing to worry about. But the documents spoke for themselves. Of the financial planners removed for misconduct, only eight had been reported to ASIC. Cassimatis had not been the subject of a breach report to ASIC. None of the planners accused of forgery or fraud had been reported to the police. At least thirty-three planners NAB had pushed out received no black marks against their names, so they were able to move to similar jobs elsewhere and repeat the same poor behaviour. Some of them did, with catastrophic results.

  Graeme Cowper had been the subject of a breach report to ASIC, but NAB hadn’t terminated him, contrary to what had been stated in Hagger’s internal report. In fact, NAB had allowed him to resign and given him a glowing letter wishing him ‘every success in the future’, as well as a payout of $185,000. He’d then moved from firm to firm before ending up at AMP.

  The sackings and the compensation payments made by NAB Wealth – to seven hundred customers totalling between $10 million and $15 million – had been kept quiet by NAB and were unknown to ASIC or the public. That meant there had been no oversight or transparency regarding how customers were being compensated.

  In the absence of any outside scrutiny, Ruth and I suspected NAB hadn’t treated customers fairly. Cowper had had hundreds of clients, yet NAB had compensated only fifty-three. I called CBA whistleblower Jeff Morris to inform him there was another scandal ready to blow. Morris wasn’t surprised. One of the Ferrets who’d left CBA in disgust had gone on to work at NAB financial planning, only to discover the culture there was as bad or, possibly, worse than CBA’s.

  Morris, it turned out, had also helped a former colleague, single mother Veronica Coulston, battle NAB for compensation after Cowper’s inappropriate advice had left her financially devastated. Morris had happened to bump into Coulston and been shocked by her appearance: her face was drawn, her eyes were hollow and she hadn’t been sleeping. She told him how her life had been destroyed after she had made the fateful decision to use an inheritance to pay down her mortgage with NAB. When she went into a NAB branch to do so, a bank employee had insisted she see Cowper (no doubt thereby earning a referral fee). Instead of recommending Coulston pay down her mortgage, Cowper plunged her inheritance into high-fee-paying NAB funds and pushed her to borrow to invest more.

  By 2009, after her investments had plummete
d in value, Coulston owed $350,000, including the debt on a maxed-out credit card. Yet Cowper’s advice was to increase her line of credit, even though she was only earning $45,000 a year as a secretary at the time.

  It soon became clear to Morris that Coulston’s problems had arisen as a result of another bonus-incentivised financial planner determined to flog more product to vulnerable, low-income clients. Just like Storm Financial. Just like ‘Dodgy Don’ Nguyen at CBA. NAB couldn’t lose. If Coulston defaulted, the bank could sell her home and recoup all the funds.

  As Morris and Coulston tried to build a case for compensation with NAB, they were confronted with a wall of silence and obfuscation. The bank refused to hand over key documents, such as the original signed loan application forms and assessments, claiming they’d been lost.

  Eventually Morris found a key loan document in Coulston’s files which had been filled out by Cowper and was riddled with errors and, crucially, overstated Coulston’s asset position. Morris wrote a blistering letter to NAB chairman Michael Chaney, asking him to investigate the ‘predatory lending’ and the conduct of ‘bonus incentivised employees of NAB’. The bank paid Coulston a small amount in compensation, and hoped she would go away.

  During a meeting with ASIC staff in February 2011, Morris raised Cowper’s conduct at NAB. Morris was still working at CBA, and it was more than two years since he had blown the whistle on CBA and Don Nguyen. He pointed out the parallels with CBA and Nguyen, including NAB’s unwillingness to discipline a planner who wrote them a lot of business. Morris was assured that somebody at ASIC would investigate his allegations. Four years had passed since then and nothing had been done.

  *

  Ruth and I compiled a detailed set of questions to send to NAB days ahead of the deadline for our article. NAB responded with an invitation to interview Andrew Hagger at the bank’s headquarters in Melbourne’s Docklands, with the only slot available just hours before we were due to file our article. When we arrived, Hagger – smooth, polished, confident – sported a big smile. As we turned on our recorders, he launched into a contrite spiel. But he made it clear that he believed NAB had no ‘systemic issues’.

  Hagger put a positive spin on the documents we’d obtained. Rather than them being evidence of deep-seated issues, he pitched them as a healthy sign that the bank was confronting its (limited) problems. He was emphatic that NAB wasn’t like CBA, no matter how much we referred to the leaked documents and the specific problems they revealed – such as cost and time overruns on multiple critical projects, a recent spike in internal breaches reported to regulators, and the numerous highly rated internal risks.

  It wasn’t just Hagger we had to contend with as our deadline for filing loomed. Cowper had responded to a list of questions we’d asked him about his time at NAB with a threat to sue us for defamation if we went ahead and published our article. We decided to press on, believing it was too important a story not to run.

  The article appeared on the front page of the Sydney Morning Herald on 21 February 2015.3 It was accompanied by a photo of an angry Cowper getting into his car, and it made a wider point: ‘The revelations that NAB’s financial advice arm has been infected with some of the same contagions as CBA’s – including forged client signatures, file reconstructions, and poor advice leading to compensation payouts for some clients – underscores the problems festering in Australia’s financial advice industry. They are likely to re-energise calls for a royal commission, which the Abbott government has so far resisted.’

  After the article went to print – as with the previous scandals we had exposed – Ruth and I received a torrent of emails from other victims of Graeme Cowper, outlining their stories. Some had never received compensation, others had received a pittance. We also received some emails from former NAB staff who identified other rogue advisers and lax compliance systems.

  NAB apologised and opened up a compensation scheme. Senators Sam Dastyari and Wacka Williams held an inquiry into NAB, which required senior bank executives along with NAB victims to come to parliament to give evidence. Veronica Coulston attended, accompanied by Jeff Morris. The NAB whistleblower, John, listened to evidence and sent questions to me to pass to various senators grilling the executives.

  Meanwhile Graeme Cowper’s lawyers sent Fairfax a letter requesting tens of thousands of dollars for defaming him. The letter said if we paid up, he would go away. If we didn’t, he would issue legal proceedings for defamation. Fairfax’s lawyers sent a politely written letter back telling Cowper to go his hardest.

  Our exposé had prompted AMP – Cowper’s employer at the time – to suspend him while it examined his client files. What AMP uncovered in the files resulted in Cowper’s dismissal. Cowper fought AMP for unfair dismissal and filed a defamation claim against Ruth, myself, Jeff Morris and Fairfax. The defamation action took more than a year to go to trial. Some would-be defamation plaintiffs give up along the way, but Cowper was determined to press on. The case was eventually scheduled for a four-week jury trial at the NSW Supreme Court in late 2016.

  Cowper would soon come to regret his decision to proceed with his action. The court evidence painted a disturbing picture of what had gone on at NAB. ‘Who do you think you f***ing are? . . . If you try to get me, I’m going to throw you under the f***ing bus,’ Cowper had told a NAB compliance manager while he was conducting a random compliance check of Cowper’s files, according to evidence given by the compliance manager in court.

  On the eve of his cross-examination, Cowper capitulated. He had to pay $200,000 in legal costs and agreed that judgement should be entered in our favour. All up Cowper’s ‘inappropriate’ advice forced NAB to pay more than two hundred clients $13.4 million in compensation. In June 2018, ASIC finally issued a four-year banning order preventing Cowper working as a financial adviser. But by that time he had already left the industry.

  As we were compiling our NAB investigation in 2015, the failings of ASIC again emerged as a significant theme. One of the documents sent by the NAB whistleblower revealed a shocking fact about ASIC that had not yet been exposed. The document referred to a draft media release ASIC had sent to NAB for ‘review’. It turned out that the year before, ASIC had offered NAB – an institution that it regulated – the opportunity to check and suggest changes to ASIC’s own media release about wrongdoing by the bank before it was sent out to the media and made public. The media release related to a four-year-long system error that affected tens of thousands of customers. In the release, ASIC acknowledged the ‘co-operative approach taken by NAB Wealth in this matter’.4 That raised a lot of eyebrows, as it suggested that the regulator was rather too chummy with those it regulated. As the whistleblower pointed out, the strategy conveniently resulted in minimal media coverage and public reaction. A month later, the ASIC chairman, Greg Medcraft, having been hauled in front of a parliamentary hearing, tried to justify the practice but conceded that ASIC had since reviewed its policies and would now allow only a short window of up to twenty-four hours for an institution to review a press release, and that would only be to check accuracy, not amend the wording.

  The cosy relationship between NAB and ASIC was highlighted in other documents too, one of which smugly described the bank’s relationship as ‘open and trusting’. What was even more shocking was that the cooperation between ASIC and NAB had occurred around the time Greg Medcraft had been lamenting in parliament how ASIC had been too trusting of CBA.

  *

  In 2004 banking analyst Brett Le Mesurier (who would later be interrogated by ASIC about his Macquarie Bank analysis) had mischievously referred to NAB’s UK banking arm as the ‘Death Star’, a play on NAB’s red star logo. More than a decade later, the phrase was revived when NAB subsidiaries Clydesdale Bank and Yorkshire Bank were caught up in a scandal.

  NAB had entered the UK market in the late 1980s and early 1990s, purchasing banks including Clydesdale Bank and Yorkshire Bank. Then, as part of a sales drive, these NAB subsidiaries had started aggressivel
y selling complex business loans to small-business owners, who usually believed they were signing up for standard business loans. Called tailored business loans (TBLs), these loans incorporated embedded hedging products, which meant they were unregulated and risky.

  When interest rates plunged during the GFC, thousands of customers of these loans went to the bank to change their contracts to take advantage of the lower rates. It was then they realised what they had signed up for. Buried in the contract was a prohibitively large break fee – up to 40 per cent of the loan in some cases. Many customers had no idea they had signed a contract laced with derivatives, which left them saddled with interest repayments as much as three times their bank’s variable rate. The products, and the resulting devastation they caused, prompted an investigation in 2014 by the UK financial regulator and a parliamentary inquiry into nine banks, including Clydesdale. At that inquiry, David Thorburn, who had resigned as chief executive of Clydesdale in January 2015, admitted that the relevant terms and conditions letters of TBLs would not pass a plain-English test. He also conceded that TBL customers could not reasonably have anticipated the costs to which they had exposed themselves.5

  A Yorkshire Bank customer, David Farndon, who had read about the NAB financial planning scandal, tipped me off about this situation, saying, ‘You should look at the damage NAB has done in the UK. It has destroyed families, businesses. These bank people need to go to prison. It’s a disgrace. If you need case studies please contact me as there are hundreds.’ He went on to say that his family had suffered terrible treatment from the Yorkshire Bank. ‘Currently they’re trying to take my home of ten years. They are also trying to take the home of my eighty-three-year-old mother, who has Alzheimer’s. Normally businesses reward their loyal customers. But not NAB, they destroy them.’ Farndon said he had been with Yorkshire Bank for ten years and never missed a payment.

  The more stories I listened to, the more I could see parallels with the 1980s foreign currency loans scandal, which had caught out Wacka and others, and, more recently, the debacle at Bankwest, which had pulled the rug out from numerous small businesses after CBA became its new owner. One of the worst stories I heard – and wrote about – was that of John Glare, who had bought a majestic four-hundred-year-old country manor house in Dorset in 2002 for £4.5 million to use as his home and business premises. He converted it into a Christian resource centre and a reception house for weddings. The business was financed by a TBL of £3.95 million with Clydesdale.