BNZ's parent bank had toxic banking culture but hid it from regulator with EY's help

Thursday, 1 August 2019

National Australia Bank chairman Ken Henry privately told consultants in the midst of the Hayne Royal Commission he was 'confident' that the bank was selling products that ripped off its customers and would eventually trigger compensation.

In revelations that have immediately sparked calls for a parliamentary inquiry into the relationship between the big banks and the nation's largest accounting firms, Henry and dozens of other executives last year told NAB's auditors EY about serious shortcomings in its risk management.

Their candid comments are detailed in a trove of internal documents leaked by a whistleblower concerned about what they claim is the bank's lax approach to risk management, slow customer remediation and conflicts of interest between the bank and its consultants.

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Leaked documents record more than 70 interviews with directors and executives of National Australia Bank including former chief executive Andrew Thorburn, conducted by EY as part of a consultancy project in 2018.

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The depth of the issues raised by the NAB executives was not always reflected in a corresponding report prepared by EY for the $83 billion bank last year as part of a review mandated by the Australian Prudential Regulation Authority and subsequently provided to the regulator.

Henry, a former Treasury Secretary, made his comments five months before his disastrous appearance at the Hayne royal commission in a confidential meeting with EY (formerly known as Ernst & Young).

Former National Australia Bank chairman Ken Henry. Henry told Henry met with consultants EY and highlighted a NAB product which allowed self-managed super funds (SMSFs) to borrow to invest in managed funds. He told auditor EY this was an example of a product 'currently being sold now that they will need to remediate in the future'.

Minutes of the meeting record Henry saying he was 'confident' that 'there are products currently being sold now that they will need to remediate in the future'. He singled out a self-managed superannuation product as an example.

NAB on Thursday declined to answer questions about the specific products Henry was referring to, saying it didn't have access to the minutes but pointed tightened rules for SMSF lending. Henry did not comment.

The then chief executive Andrew Thorburn, in his interview, said the only improvement he would suggest for a key risk committee would be to 'more time for reflection' suggesting have every fourth meeting become an 'on the couch' session with other executives with no agenda to consider risks.

He also said he felt 'current risk settings are about right' and wanted to ensure the bank did not become too risk averse.

Banks and other financial institutions have promised to improve conduct following a series of damaging revelations in the Hayne Commission but the leaked documents suggest NAB faces a difficult task acting on the commission's recommendations and changing its culture.

Henry's testimony to the inquiry culminated in the announcement of his resignation and he is due to step down from the board later this year.

EY has been NAB's auditor for 13 years but has also won millions of dollars worth of non-audit services according to the bank's annual report.

NAB said in a statement on Thursday that EY was restricted from taking on certain consultant work to protect its independent auditor status and that the APRA review was considered part of its audit work. However, the team who worked on the review were from EYs risk advisory services not auditing.

The leaked documents reveal a raft of problems with the systems the bank used to manage its $250 billion loan book and billions of dollars in wealth products and deposits.

NAB chief executive officer Andrew Thornburn earned $6.63 million and in 2018 $4.3m.

On an internal 'traffic light' system relating to risk, the documents show the bank's regulatory, operational and compliance processes persistently attracted 'amber' and 'red' ratings. Some had been red for at least 20 months, while others had been amber for at least 35 months.

Henry alluded to a long running red rating only on compliance risk in his royal commission testimony.

A leaked proposal letter written by EY in 2018 pitching for the job show it offered to provide early communication of findings based on a 'no surprises approach'.

EY declined to answer questions about its dealings with NAB, which covered its role as both auditor and consultant, citing client confidentiality.

After being briefed on the leaked files, Labor MP Deborah O'Neill on Thursday moved to call a parliamentary inquiry into the conduct of the big audit firms including the management of conflicts of interest.

'NAB has policies in place to protect the independence of its external auditor, EY,' NAB's chief risk officer Shaun Dooley said in a statement.

Dooley said the bank had been open about its significant issues with non-financial risk management and compliance.

He pointed to a report released in November in which NAB admitted it had too often to put customers first and its approach to compliance had lacked rigour.

It said NAB had been slow to develop an effective approach to managing conduct risk, something Henry admitted during the royal commission.

The documents suggest EY's consultants questioned NAB's ability to handle the challenges exposed by the royal commission.

'The bank focuses only on addressing the issues through Band-Aid fixes rather than investing in long-term solutions,' says an internal log of EY's observations after interviewing executives and assessing various internal documents.

One document shows that the NAB Wealth division, which included rampant misconduct by financial planners including mis-selling, inappropriate advice and other contraventions dating back to 2009, was still an issue in 2018 and was rated amber.

Ongoing issues regarding NAB's compliance with anti-money laundering and counter-terrorism finance (AML/CTF) laws were also exposed by the leaked documents including a breach involving 1000 customers of its Antares Capital Partners and MLC Investments business.

'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 said.

'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.'

He said he hoped politicians would move to address the problems.

Banking Bad, Adele Ferguson's book about the story behind Australia's toxic banking culture, is on sale from August 5, rrp $36.99, HarperCollins.