Banking Bad

by Adele Ferguson

  Henry replied, ‘I have answered the question how I could answer the question.’

  ‘I’m sorry, is that a yes or a no, Dr Henry?’

  ‘I’ve answered the question the way I choose to answer the question,’ Henry reiterated.

  ‘Well, I’d like you to answer my question, Dr Henry,’ Orr insisted. ‘Do you accept that the board should have stepped in earlier?’

  ‘I wish we had,’ responded Henry.

  ‘I’m going to take that as a yes, Dr Henry,’ Orr said.

  Henry replied, ‘Well, you take that as a yes. All right.’

  As chairman, Henry was supposed to set the tone for the culture, governance and image of the bank. In a few short hours he had shattered any perception that it was admirable and provoked a storm of condemnation. One customer tweeted: ‘Question for @AndrewThorburn, is Ken Henry’s indifferent and flippant attitude a real window into the culture at @NAB? My wife still has transaction accounts with NAB (after I pulled my super from MLC), she is now adamant they are closing this week #bankingRC.’

  ABC journalist Dan Ziffer also took to Twitter to comment: ‘The wild performance of Ken Henry – scoffing at counsel’s questions, talking under his breath, grunting responses – could be how he responds to tough discussions, but it has come across as lacking any respect for #BankingRC or the issues it’s tackling. Very surprising.’

  In an interview with me, Dr Andy Schmulow, a senior lecturer in law at the University of Wollongong in NSW, described Henry’s performance as ‘hubris wrapped in arrogance surrounded by conceit’. It was a damning indictment of the chairman of one of the biggest companies in Australia, and formerly one of the country’s most powerful public servants.

  Despite all the talk about culture, being bold, putting customers first, and adopting the trite ‘EPIC’ slogan, both Thorburn and Henry had demonstrated a yawning disconnect with customers and regulators in relation to executive remuneration and other issues. It was another case of too much focus on profits. If profits were up, then the apparent conclusion among executives and the NAB board was that rewards should come aplenty, no matter how those profits had been obtained.

  Hard-working NAB staff were horrified by what they’d heard. Following Thorburn’s and Henry’s revelations of the bank’s profit-focussed culture, some were abused on buses and trams. Shareholders also made their anger clear, notably at NAB’s annual general meeting on 19 December 2018. Those investors had already held meetings with Henry and others about the bank’s high levels of remuneration, but Henry and the rest of the NAB board clearly had tin ears. This time, the shareholders made themselves heard, 88 per cent of them voting against NAB’s latest remuneration decision – the biggest investor protest against a remuneration report in ASX history.

  As the chairman of NAB’s board, Henry had given Australians a glimpse into the ugly face of elitism. His performance, and Thorburn’s, would have extremely serious consequences – for the bank and for the executives’ future careers.

  Chapter 27

  Round 7: ANZ

  Slow to respond, loath to change

  TIME WAS NOT ON the Commission’s side. Hayne had given himself just two weeks to hear from the big four banks, AMP, Macquarie and the regulators. If he expected more than motherhood statements and apologies, he must have been disappointed.

  Shayne Elliott, the boss of ANZ since January 2016, appeared on 28 November. It was obvious that he had listened to the testimony of CBA’s Matt Comyn and Catherine Livingstone and NAB’s Andrew Thorburn and Ken Henry, and learned from their mistakes. Elliott spoke clearly and directly and kept to the topic of the seventh round of hearings – why misconduct had occurred and what could be done to prevent it in the future – without being asked.

  Rowena Orr asked Elliott to explain what he meant by a statement in his submission to the royal commission that misconduct had occurred at ANZ largely due to a culture that had become overly focussed on revenue and sales.

  He replied, ‘People who drove good revenue outcomes were seen to be doing a good job, and we paid less attention to how they achieved those outcomes.’

  Orr then listed a series of other causes that Elliott had identified in his submission including poorly calibrated performance and remuneration plans. ‘You accept that that has been a contributing cause?’

  Elliott replied, ‘Yes, I do’.

  ‘Failures to quickly recognise systemic issues and to elevate them to senior management for action?’

  ‘Yes,’ said Elliott.

  ‘Insufficiently clear lines of responsibility and accountability?’

  ‘Yes.’

  ‘And inadequate investment in things such as customer remediation programs?’

  ‘Yes’.

  Orr then asked, ‘Has ANZ’s technology and its oversight of technology also been a contributing cause, in your view?’

  ‘Yes.’

  Admitting everything, he then tried to put what went wrong into its context. The industry, he said, had had the good fortune to be profitable and fast growing at the same time. But that had encouraged it to get bigger and it created complex organisations that were difficult to manage. The only clear measures of success were profit and revenue.

  At this stage of the hearings, though, after the testimonies of so many board chairs and senior executives, it was impossible not to be cynical. ‘Margin Call’, a business column in The Australian, didn’t buy Elliott’s spin: ‘It was hard to believe this self-flagellating man was the same banker who once ran ANZ’s infamously fast-and-loose institutional bank back in the Mike Smith-era. The same banker who as ANZ’s CFO sat on the board of Malaysia’s scandalous AmBank. The same banker currently fighting a criminal cartel case launched by Rod Sims’ ACCC [Australian Competition and Consumer Council] over ANZ’s August 2015 capital raising.’1 This was a reference to the revelation that around two million ANZ customers had been overcharged on their credit card and home loan accounts or hadn’t received discounts the bank had offered in relation to their home loans. It amounted to hundreds of millions of dollars falling into the pockets of ANZ and its staff. According to Elliott, the discrepancies were ‘processing errors’ due to the legacy systems in use at ANZ

  Despite the mea culpas, it was clear that when it came to identifying problems, reporting them to ASIC and remediating customers, ANZ had performed poorly. Orr turned to a September 2018 ASIC investigation into the breach reporting practices of twelve entities, including ANZ, over a three-year period from 2014 to 2017. ANZ had provided ASIC with data on eighty-seven significant breaches that it had reported in that three-year period. ASIC found that the twelve entities took, on average, 1517 days to identify an incident that was later determined to be a significant breach. ASIC hadn’t been any more specific, but Orr was. She revealed that on average it had taken ANZ more than four years to identify problems linked to customer detriment, another seven months to file a breach report with ASIC, and another six months after that to make the first repayment to customers.

  ‘How did it get to the point, Mr Elliott, in ANZ where it took more than four years for you to identify incidents that involved significant breaches?’ Orr asked.

  Elliott blamed it on ineffective systems and processes which didn’t proactively identify issues. He said staff weren’t always encouraged by senior management to identify and report compliance issues, and the bank’s compliance and operational risk database was complex and difficult to navigate. He claimed that in the past year ANZ had been trying to fix its systems, but when Orr asked him to commit to a shorter time frame for identifying incidents, Elliott started to duck and weave.

  ‘What average would you like to see, as opposed to the 1517-day average?’ Orr asked.

  ‘I’m not – I’m not sure it’s the type of statistic that lends itself to a target . . . I don’t know that I can put a number on that. But I would say it’s significantly lower than 1500 days,’ Elliott replied.

  Orr then returned to the ASIC document which had
referred to one institution where ‘there was less focus on customer remediation. It was seen as a distraction, at the expense of earning revenue, and therefore not always given the highest priority.’ She outed the institution as ANZ. In fact, the ASIC assessment was based on an internal ANZ document entitled ‘The changing focus of customer remediation’, which concluded that remediation was ‘delivered in an ad hoc and inconsistent way’.

  Orr asked Elliott, ‘What happened at ANZ that led to it treating remediation of its customers, for errors that ANZ had made, as a distraction?’

  Elliott tried to distance himself from the document. He said it had been pulled together by a team of mid-ranked executives and was not ‘an official analysis’, so therefore it didn’t reflect a widespread attitude. In other words, it was another case of ‘nothing to see here’.

  Bank victims sitting in the courtroom shook their heads in disgust. Susan Henry, a former trauma counsellor and victim of the collapsed managed investment scheme Timbercorp, which had been bankrolled by ANZ, sent me a message which expressed the mood: ‘Noble assurances, claims of shame, contrition, learning and commitment to change are hollow spin . . . It’s about so much more than cataclysmic loss of money for victims and their families. Abuse of power and betrayal of trust [have] wide-ranging detrimental impacts extending to society as a whole.’

  It wasn’t a good look for Elliott or the bank. Nor was Orr’s revelation that ANZ had missed several ASIC deadlines, including a refund of trailing commissions to about six thousand customers and the repayment of adviser services fees to about three thousand customers. Elliott responded: ‘Our limitations to date relate to the complexity we’ve built into our business over time. Again, [it was] our fault, [and] shouldn’t have happened, but it did . . . We are getting better at this. In the future, with better processes and a simpler bank, the time scales will come down dramatically.’

  The bank had changed its attitude to remediation, he said. ‘There has been a significant uplift in ANZ’s understanding of the importance of remediation. And the reason I know that is it is talked about more at our board. The facts are that we are now beginning to get first payments to customers faster than we were before. That we are learning from mistakes and being able to apply learnings from one set of remediations to another. So I do believe there has been an impact of those but there’s clearly more to . . . more to do.’

  Orr moved on to the subject of executive remuneration and suggested there should be more transparency around payments and bonuses, and that executives should be held accountable when things go wrong.

  Elliott rejected this, arguing that publishing more details about bonuses would amount to little more than ‘ritualistic public shaming’ which would be of little value ‘in fact, potentially a significantly negative consequence in terms of attracting, retaining, motivating the very best people for the future’.

  ‘Can I suggest to you that it’s not so much about a public shaming; it’s just a part of holding them accountable?’ Orr said.

  Elliott vehemently disagreed. ‘I have forty thousand people who come to work every day at ANZ in thirty-three countries. They have all sorts of backgrounds . . . For me to be able to confidently assess that I can nail that communication and it not to be misunderstood, that it not create a culture of fear, I think would be extraordinarily difficult.’

  Unperturbed, Orr asked why Elliott was prepared to inform the public that his variable remuneration had been reduced. ‘You tell us in your statement that it has been reduced on account of conduct issues raised in the Royal Commission and consequent reputational damage?’

  ‘Yes,’ said Elliott.

  ‘I just want to ask you to reflect on what the difference is between publication of the consequences for you and publication of the consequences for your senior executives?’

  Elliott said it was because he was the CEO. ‘I have a higher degree of responsibility and accountability than anybody else in the company,’ he said.

  Orr turned to the email where Elliott had requested his own pay be deducted in line with the senior executives. ‘It’s about unity, accountability and frankly credibility, externally but even more importantly internally,’ he had written to ANZ’s chairman, David Gonski. ‘I can’t ask my people to be down 22 per cent unless my own rem reflects a similar number. I want you to reassess your recommended CEO rem as a result and have time to consider.’ Elliott said he made the decision after announcing on 8 October that the bank would set aside $374 million to remediate customers who had received inappropriate advice or been charged fees for no service.

  All very well, but Orr was trying to understand why Elliott considered the perception created internally was more important than the perception of the public. One of the problems with bank misconduct and poor culture was executives had managed to avoid the public glare and avoid public accountability. ANZ was no different.

  Orr pointed out that it was the first time in a decade bonuses had been cut and asked, ‘Why is it that it has taken until the last financial year for ANZ to exercise this important power of withholding deferred remuneration?’

  Elliott said he believed it was a failing on ANZ’s part.

  Yet while Elliott received a reduced short-term bonus, his overall package in 2018 was still $5.25 million, down from $6.2 million in 2017. To many observers, the fact that he and his executives had received a bonus of any kind during the royal commission, with all the dirty laundry it had aired, beggared belief. Investors reacted accordingly. At the bank’s annual general meeting in December, 34 per cent of shareholders protested against the remuneration report. It was a first strike against the board.

  Before finishing with Elliott, Orr asked him about the results of an internal culture survey which showed that only 67 per cent of staff felt they could raise issues and concerns at ANZ without fear of reprisal or negative consequences. It was a 3 per cent decrease on the last survey in 2016.

  Elliott understood the significance. ‘If we don’t have a culture where people feel free to speak, we will fail,’ he replied. ‘We will fail in terms of our responsibilities of being well managed and ultimately we will fail our customers.’

  Clearly, ANZ still had a long way to go to rebuild trust and change its culture.

  Chapter 28

  Too close for comfort

  Banks and their auditors

  THE CURTAIN FELL ON the royal commission on 30 November 2018. The final round of hearings had been full of promises of a bright future, with executives of financial institutions saying they’d learned their lessons and regulators promising to be tougher. But the whole thing had a hollow ring to it.

  There had been more than 10,000 submissions to the royal commission, but fewer than thirty victims had been called. Moreover, many guilty former executives had not been summoned to the dock to account for their misconduct. Some were still in their jobs; others had moved on to different institutions, spreading poor behaviour further.

  It seemed to me that too many stories had been left untold, and I wasn’t the only one feeling that way. Not long after the hearings finished, a whistleblower emailed me, expressing fury at ongoing bad behaviour at NAB and concern that the inquiry had only brushed the surface. ‘After working for many years in the financial services industry, I’m tired of turning a blind eye to the lies and unethical behaviour so executives can keep their bonuses,’ the whistleblower wrote. ‘I’ve decided to take a big risk in disclosing a cache of highly sensitive NAB documents after losing patience with APRA, ASIC and the royal commission in exposing the true extent of failures in NAB’s risk management practices . . . a symptom of cultural decadence and operational incompetence.’

  The cache was shocking both in what it revealed and in how little of it had been canvassed in the royal commission. For connoisseurs of scandals and misconduct in the financial sector, it made for fascinating and compelling reading.

  One incident that concerned the whistleblower was the alleged fraud perpetrated by Rosemary Roger
s, former chief of staff under Andrew Thorburn and his predecessor, Cameron Clyne. During 2018 Rogers was investigated by NSW police over allegations that she had received kickbacks from events management company the Human Group to secure inflated bank contracts – kickbacks potentially amounting to $110 million worth of corporate travel. (Police subsequently froze nearly $8 million in assets owned by Rogers, including a $1 million NAB bank cheque.) At the time of writing, the case had still to come to trial.

  Thorburn had done nothing illegal, but why, the whistleblower asked, had the alleged fraud been discovered only when a staff member came forward with concerns? That certainly raised questions about NAB’s risk controls and auditing, and Thorburn’s judgement, given it had gone on under his nose, and it spoke of a systemic blind spot in risk management.

  In addition, the whistleblower was disappointed that APRA and ASIC and the royal commission had not investigated NAB’s failure to fix issues with its regulatory, operational and compliance processes, which, as the leaked documents showed, had attracted ‘amber’ and ‘red’ ratings on an internal traffic-light rating system in 2018. Persistent red ratings were indicative of a breakdown in the capability of people, processes and technology inside the bank, and, based on a report dated March 2018, some of NAB’s ratings had been red for at least twenty months, while others had been amber for thirty-five months.

  One of the leaked documents, prepared in April 2018, revealed that NAB had made an ‘error’ – which it described as an ‘emerging issue’ – with regard to the prudential rules requiring it to report quarterly on how much capital it is holding as a measure of its financial health. (All Australian banks are legally required to put aside capital to protect themselves if things go wrong.) The ‘error’, made in March 2018, involved understating its risk-weighted assets by $2.8 billion, which made it look like it was in a stronger capital position than it really was. The report said that the issue would be discussed at a ‘significant event review’ to be held on 26 April, and then a fix would be implemented to correct the results in time for the 31 March 2018 half-year results. That ‘significant event review’ was just two days after NAB executive Andrew Hagger’s grilling at the royal commission over why NAB staff were unlawfully falsely witnessing the documents of thousands of customers. Hagger wrote it off as ‘sloppy and unprofessional’ and a practice that had got out of hand inside the bank; the documents supplied by the whistleblower suggested it was due to poor systems controls and a culture that made excuses for poor behaviour.