Orr got the ball rolling with Comyn’s views on where CBA had gone wrong. Comyn boiled it down to a culture of too often putting profits before people, slow remediation, little or no consequences when scandals emerged, and CBA being too ‘legalistic and defensive’ in its dealings with regulators. He blamed governance failures on remuneration and incentive structures, which ‘in some instances, are not aligned to good customer outcomes’. Lax operational risk and compliance also played a role.
Orr then turned to the controversial CBA Prudential Inquiry Final Report, which had been released on 1 May 2018. Commissioned by APRA after the AUSTRAC scandal and prepared by former ACCC chairman Graeme Samuel, company director Jillian Broadbent and former APRA chairman John Laker, it had found that the CBA board had been largely invisible and had failed in its duties to provide oversight and to challenge management.
Orr took Comyn through the report’s findings, which supported everything the royal commission had heard about the bank. She wanted to examine the bank’s culture, and how Comyn had dealt with the report after its release. More specifically, she wanted to take him through some written responses to the report from 500 bank executives who had been asked by Comyn to discuss the report with their teams and supply a one-page reflection on that discussion. Their responses had been submitted to the royal commission.
Orr read out the response of Marianne Perkovic, who’d been accused of ‘dissembling’ in an earlier round of the royal commission, and had written: ‘I know I have let some of our clients, people and the community down by not speaking up loud enough to stand up to behaviours that I knew were not right.’ Larissa Shafir, a compliance manager in retail banking, wrote that the bank’s compliance department – which is tasked with ensuring that laws, policies, rules and procedures are adhered to – was lacking authority and widely seen as an impediment or ‘blocker’ to business. As Orr put it, the voice of finance subordinated the voice of risk.
Orr summed up her comments: ‘Mr Comyn, Ms Shafir’s comments are an indictment of the culture within CBA in relation to treatment of compliance risk, and operational risk, more generally. Do you agree?’
Comyn replied, ‘Yes, I do.’
Orr then questioned Comyn about remuneration. ‘Why can’t banks pay staff a fixed salary?’ she asked.
Comyn responded by saying he believed financial incentives motivated staff to work harder. He even gave an example of what had happened to a bank in the United Kingdom which had removed its short-term variable rewards. He said he asked one of the bank’s home lenders whether the removal of rewards impacted her work. ‘Her answer was simply, “I probably work 30 per cent less.” And it’s not just about hours of work. It’s also just an alignment between, in her view, “I was going to get paid – I’m basically getting paid the same as I was previously.” She was one of their best performing lenders. “I’m now getting paid the same. And I’m doing 30 per cent less work,”’ he said to Orr.
At this point, Merilyn Swan whispered to Morris, ‘I can’t imagine refusing to dispense a script or a doctor refusing to diagnose a patient without a bonus in the offering. What strange moral compasses these people must possess.’
The banks had become so used to targets and bonuses they couldn’t imagine a world without them.
*
On the second day of Comyn’s testimony, Orr brought up a meeting between Comyn and Narev on 28 May 2015, a month after CBA had discovered rampant mis-selling of consumer credit insurance (CCI). This type of insurance product is designed to help customers with mortgages, credit cards and other kinds of loans meet their repayments if they get sick, have an accident or lose their job. Comyn, who was running the retail bank at the time, told Narev at that meeting that CCI was being sold to more than one hundred thousand customers under false pretences. The customers were students or people in part-time work who would not be eligible to make a claim, as the policy required them to be working a minimum number of hours a week. In a handwritten note Comyn acknowledged, ‘We have not met standards we’ve set for ourselves and we should suspend sales.’ The industry had long been aware of such issues with this kind of insurance. Back in 2011, UK banks, including NAB’s UK subsidiaries had been caught mis-selling similar products and had had to pay out more than £40 billion in compensation.
Orr asked Comyn when he had first become aware of the problem at CBA. He told her it was in 2014. She then took him to an October 2012 audit report prepared by CBA into problems with its direct life insurance policies, which included CCI products. Comyn, despite being CEO of retail banking at that time, and therefore havng direct responsibility for such products, denied having received a copy of the report.
‘That’s a significant failing within your organisation,’ Orr responded. ‘I want to put to you that a report that dealt with sales practices of the product was not provided to the business unit responsible for selling the product?’
‘Yes, I agree,’ said Comyn.
Orr then took Comyn to another document from May 2013, prepared by the retail banking services risk committee, which reviewed CCI products and reported negatively on what it had found. Comyn admitted he had seen this one.
‘But you only developed your concerns about the products in 2014?’ Orr remarked. She then referred to a trip Comyn had made in 2014 to the United Kingdom. There he had been warned about the risks associated with CCI products by his former colleague Ross McEwan, who was then running the Royal Bank of Scotland, which was knee-deep in cleaning up a similar mis-selling scandal. She also highlighted an April 2015 internal CBA audit of credit cards, which had flagged issues with the bank’s CCI product and revealed that 64,000 CBA customers had been sold the product but would never be able to make a claim.
Orr then returned to Comyn’s meeting with Narev on 28 May. In preparation for the meeting, he wrote a list of topics he wanted to discuss, including ceasing to offer CCI products. ‘My recommendation to suspend the sales was not agreed with,’ Comyn told Orr. ‘I suspect we had quite a long conversation about that particular product. And I think we agreed to disagree at that point in time.’
Orr wanted to press him more. ‘What did you think of that outcome, Mr Comyn? You were the head of retail banking services at CBA. This was a product that you were responsible for. How did you feel about agreeing to disagree with the CEO about your recommendation that CBA cease sales of the product?’
Comyn’s mouth seemed to be drying up as he tried to frame suitable answers.
Then Orr returned to the notes Comyn had made prior to his meeting with Narev, and asked him about a handwritten scrawl that appeared to have been added during or after the meeting and recorded a comment the CEO had made to him then: ‘Temper your sense of justice.’ There was an air of shocked disbelief in the courtroom as everyone digested what it meant.
‘What does that mean, “temper your sense of justice”, Mr Comyn?’ Orr asked.
‘That is what Mr Narev said to me,’ Comyn replied.
‘And what did you understand him to be conveying to you when he said to you “Temper your sense of justice”?’
Comyn shifted in his chair and told Orr he believed it related to some career development feedback he had received months earlier, ‘that I needed to focus more on my personal conviction. And to better manage competing agendas. And to pick which battles. So I believe it was consistent with that reference.’ In other words, he was being told to drop his request to ban the product.
Comyn tempered his sense of justice and took the matter no further. Yet the useless CCI insurance continued to be sold until 7 March 2018, when Comyn was still running the retail bank and was also CEO designate (he would become CEO on 9 April 2018). The decision to stop selling CCI was made only a week before the first round of public hearings of the royal commission was set to discuss a case study on CBA’s problems with this kind of insurance.
It was another shocking example of a bank product that was both duping customers out of their money and giving them a false s
ense of security that if something went wrong in their lives, the product would cover them. CBA sold the product knowing it would let those customers down, but the bank wouldn’t do anything about it or tell them because that would mean losing profits.
*
Wearing her signature pearls and glasses and her Order of Australia pin, CBA chair Catherine Livingstone sat down in the witness box with a pained, uncomfortable expression on her face, clearly feeling out of her comfort zone. Before the royal commission, Livingstone had rarely been criticised by her peers or those below her: after chairing Telstra and other influential organisations, in 2014 she had gone on to be president of corporate Australia’s peak lobby group, the Business Council of Australia. But the royal commission was a leveller, with the top echelons of banking put on trial and assessed on their decision-making abilities, handling of misconduct and the tone they set from the top of the organisation.
Orr opened with a long list of wrongdoings at CBA since Livingstone’s appointment to the board on 1 March 2016. The list included the life insurance scandal covered by Four Corners in March 2016; the fees-for-no-service scandal exposed by ASIC in October 2016; an enforceable undertaking in relation to misconduct in CBA’s foreign exchange business in December 2016; and a May 2017 PricewaterhouseCoopers (PwC) review into CBA’s home lending practices that identified concerns with its processes. Then the big one: in August 2017, seven months after Livingstone had become chair of CBA, AUSTRAC’s legal action that alleged breaches of the anti-money-laundering and counter-terrorism financing (AML/CTF) laws – resulting in a fine to the tune of $700 million. That same month, ASIC sent out a media release flagging a $10 million refund by CBA to 65,000 customers who’d been sold unsuitable CCI as part of its CreditCard Plus insurance product.
In January 2018, ASIC lodged proceedings against CBA alleging unconscionable conduct and market manipulation in relation to bank bill swap rates, and in May 2018 CBA had entered an enforceable undertaking with APRA after the release of the scathing Prudential Inquiry Final Report into the bank’s governance and culture. In July 2018 CBA had entered another enforceable undertaking with ASIC in relation to the way it was distributing certain superannuation products, and as a result of that, APRA stipulated that CBA had to set aside an extra $1 billion in liquid capital.
‘Having heard me lay out that chronology of events since your time joining the board of CBA, are there any observations that you would like to make about that chronology of events?’ Orr asked.
Livingstone’s deadpan response was that she thought it was ‘a fairly damning chronology of – in some instances the bank’s behaviour, in other instances, the bank’s control over its non-financial risks’.
‘Fairly damning’ had to be the understatement of the year.
Orr then took Livingstone through the shortcomings highlighted in the CBA Prudential Inquiry Final Report.
‘Now, the prudential inquiry said that those findings related largely to the operation of the board prior to your appointment as chair,’ Orr said.
Livingstone momentarily relaxed, hoping she would get an easy ride.
Then the evisceration began. ‘But you were a member of CBA’s board for ten months before you were chair?’
‘That’s correct, ten months, but probably five meetings – five or six meetings,’ Livingstone responded.
‘Over the course of that ten months?’ Orr asked.
‘That’s correct, because I had leave of absence for the June meeting.’
Orr proceeded to examine the way the CBA board had dealt with the highly contentious AML/CTF laws breaches. She uploaded a series of reports and board minutes to build a case that the board was ineffectual and therefore complicit in the scandal.
The first report confirmed that CBA’s internal audit department had identified issues with money laundering and terrorism back in 2013, then 2015 and 2016, giving them an overall red rating. The most serious rating that could be given in an audit report, a red rating meant controls were failing.
Orr noted that these audit reports with red ratings had been reported to the board audit committee, and she reminded the commission that Livingstone had been on the board audit committee in 2016 when a third red rating was identified. Orr pointed out that Livingstone was also on the committee when it received three regulatory reports of CBA’s interactions with AUSTRAC, including three statutory notices from AUSTRAC requiring it to provide information about its AML/CTF laws compliance.
It was an embarrassing moment, and one that Livingstone tried to salvage by saying she had asked questions and expressed concerns but had been given assurances by management, including the bank’s then chief financial officer, David Craig, that the statutory notices were being dealt with. ‘I have to say, I was concerned about the fact of the [statutory] notices and I had had experience with AUSTRAC in a previous role,’ she said to Orr. ‘So it didn’t feel quite right to me that AUSTRAC would be comfortable with where we were, but management provided assurances.’ She told the commission she had raised the issues at one of the board meetings.
However, as subsequent documents were uploaded and presented to the commission, it became clear that the board hadn’t done its job. Orr reminded Livingstone and the commission that ‘CBA admitted . . . that it had failed to report millions of dollars of suspected money laundering and that money was laundered through CBA accounts . . . [and] that included the proceeds of drugs and firearms importation, and distribution syndicates.’ And on 5 December 2016, the audit committee had been handed another audit report with a red rating, relating to the same issue.
It was difficult to digest all this. Even harder to swallow was the fact that, as Orr made clear, CBA’s board audit committee allocated a total of thirty minutes to three big items, and had spent no more than a few minutes on the AUSTRAC audit with the red rating. But the biggest shock was what the committee did about the information presented to it. The committee was shown a report including a table that highlighted a number of high-risk areas that had overall red ratings including compliance with AML/CTF laws, and the Commonwealth Financial Planning fees-for-no-service matter. Under the table in the report highlighting the risk areas was a line saying, ‘Copies of all audit reports are available upon request.’
‘And having received this document with the one-line summary of the red audit reports, did you request a copy of any of the audit reports?’ Orr asked Livingstone.
Livingstone, whose face and neck were now blood red, replied, ‘No I did not.’ Nor had Livingstone asked for previous audit reports, despite the seriousness of the issue.
Nevertheless, Livingstone was adamant she had raised concerns at board level and been given assurances by management at previous board meetings that everything was under control. Orr challenged this by pulling up board minutes from previous monthly meetings and pointed out that no comments had been recorded about the AML/CTF laws audit issues. Nor were there any records of minutes to prove that Livingstone had noted her concerns in a discussion with management. By law, board minutes are supposed to reflect discussions and any dissenting voices. If these aren’t included, the assumption is they didn’t take place. If the discussions did take place and they weren’t recorded, it’s a breach of the law. It was a bad look for Livingstone.
Livingstone left the commission and reflected overnight on her testimony. She returned the following day, wanting to put the record straight about her role on the board audit committee. She now said she recalled having directly challenged management, led by Ian Narev, about her concerns with the bank’s anti-money-laundering controls at the October 2016 board meeting. Orr took her to the minutes, where there was no record of any such challenge. It was another embarrassing slap-down for Livingstone.
Orr then moved on to the matter of remuneration at CBA, which provided another insight into the science – or otherwise – behind executive stipends. On 8 August 2016, at a time CBA was drowning in the CommInsure and fees-for-no-service scandals, and had received a serie
s of red alerts on its anti-money-laundering audit controls, the board remuneration committee allocated ten minutes to discussing the remuneration of top executives. Based on a series of papers prepared by the bank’s staff, David Cohen, the chief risk officer, recommended that all senior executives should receive their bonuses.
Executives were rated against a scorecard, which included reputation. It meant if an executive ran a business that had a problem that damaged the bank’s public credibility, their score would be affected. Cohen assured the board there were no big risks in the near term that would prevent his colleagues being awarded their bonuses: ‘In summary, for the financial year ended 30 June 2016, I do not believe there to be any risk issues or risk behaviours that would suggest STI [short-term incentive] awards should be modified from that recommended based on other achievements or results.’
Narev agreed his colleagues should receive their full bonus. That year Narev himself was awarded 108 per cent of his short-term bonus. With a lack of consequence for scandals, it was little wonder the bank had been described as the gold medallist for misconduct.
Though Livingstone wasn’t on the remuneration committee, she was on the board, which ultimately approved decisions about remuneration for executives. Presented with the misconduct, Livingstone was forced to take another bite of humble pie: ‘As I’ve indicated, we have all reflected on these outcomes, and would regard them as inappropriate.’ (‘Inappropriate’ had become a much-used euphemism in the corporate world.)
One executive who did receive a reduced bonus was Annabel Spring. Spring was running the wealth management arm of CBA when it was exposed to reputational damage from CommInsure in March 2016, when The Age, Sydney Morning Herald and Four Corners exposed wrongdoing. She was ultimately docked 5 per cent of her $1.05 million ‘target’.
Banking Bad Page 27
