It’s now the National Australia Bank’s turn to do the walk of shame, after the Hayne royal commission’s examination of the entrails of the country’s $2.6 trillion retirement savings industry exposed how the Melbourne-based bank had for years gouged its clients’ retirement savings and shirtfronted regulators.
By Thursday afternoon, and after four excruciating days of testimony, the bank’s chief executive Andrew Thorburn tried by stanch the bleeding by tweeting his apologies for the bank’s failure to act “with honour”, while at the same time briefing journalists that the bank did not believe it was guilty of criminal behaviour.
It remains to be seen what findings Commissioner Kenneth Hayne reaches as to the bank’s behaviour. He certainly sent shockwaves through the entire super industry when he asked a witness whether she had contemplated the possibility of criminal proceedings given that the NAB wealth business had deducted plan service fees from clients’ super accounts, without providing the particular advice.
“Did you think to yourself that taking money to which there was no entitlement raised a question of the criminal law?” he asked Nicole Smith, who was until recently the chairwoman of NAB’s superannuation trustee, NULIS. “I didn’t”, she replied.
The commission’s forensic focus on whether trustees can be relied on to look after the best interests of super fund members was explained by counsel assisting, Michael Hodge, QC.
Even though super now accounts for about half of all household wealth, most people are indifferent to what is happening to their super savings, and there is no active regulator keeping a lookout for bad behaviour by trustees. That means the system relies on trustees to fulfil their duties to fund members.
“But, of course, trustees are surrounded by temptation. To preference the interests of their sponsoring organisations, to act in the interests of other parts of their corporate group, to choose profit over the interests of members”, Hodge explained.
“What happens when we leave these trustees alone in the dark with our money? Can they be trusted to do the right thing?”
Hodge then preceded to tease out the question, by taking a close look at National Australia Bank’s wealth arm, MLC, and the various fees and commissions that were paid by members of its super funds.
A NAB executive, Paul Carter, explained that MLC advisers reached agreement with employers to charge super fund members various fees on their super accounts.
These could include an adviser contribution fee – up to 5.88 per cent – and a plan service fee (which was for the financial adviser providing members with general education on super and industry trends) of up to 1.5 per cent.
When members left the employer-sponsored Masterkey business super account, they were transferred into the Masterkey personal super product, and the plan service was capped at 0.44 per cent. The problem was that fee continued to be charged to fund members who didn’t have a financial adviser attached to their account, even though that meant it would have been impossible for the service to have been provided.
In documents provided to super fund members, MLC explained that members could negotiate a different fee with their advisers. What it failed to point out was that if members contacted MLC and said they didn’t want to pay the plan service fee, it would be scrapped entirely.
Carter testified that although MLC management formed the view back in 2012 that there was “an entitlement to charge the fee… we ultimately concluded that was not the right basis”.
But the process of reaching that decision was tortuous. Some NAB executives took the view that there was some ambiguity as to whether the financial advice needed to be provided by a financial adviser. Perhaps the fee could be justified, and retained, on the grounds that MLC itself provided general advice and support services.
Carter conceded there was a debate within the bank about whether MLC’s general advice and support services could justify charging the fee.
“What I can say with confidence is that when we finally put a management paper to the trustee on this issue, we had settled on a position and recommended full remediation and repayment of the customers’ money”, Carter testified.
Although NAB notified the corporate regulator, the Australian Securities and Investment Commission, of a significant breach relating to the charging of plan service fees back in December 2015, it wasn’t until the following October that NAB had decided what compensation should be paid.
One of the issues that dragged out the process was working out how to remediate customers who’d paid the plan service fee, but had never received the services.
At one stage, NAB was leaning towards an “opt-in” compensation approach that would have required MLC writing to members of some of the funds involved, asking them whether they would like to have their fees refunded. As Carter conceded that the “likely outcome” of taking this approach was that NAB would have had to pay less remediation to clients.
Hodge, suggested to former NULIS chairman Smith that NAB’s wealth management division was “hopelessly conflicted” when it came to what recommendations it made about how to remediate super fund members who had paid the plan service fee, but had not received any advice.
After all, NAB’s wealth division had been taking the members’ money, which had lifted its profits. Its revenue would be hit if it had to pay the money back to clients.
But Smith defended the arrangement. “I believe they [NAB’s wealth division] are in a conflicted position,” she said. “I don’t believe it’s hopelessly conflicted.”
But the question of whether NULIS was taking a keener interest in NAB’s commercial interests rather than its own duty to act in the best interests of its super fund members deepened on Thursday, when Hodge showed Smith a letter to ASIC from December 2018.
The letter, which Smith signed, stated that the trustee’s position was that the plan service fee was “properly applied” to MasterKey personal super accounts “for the continued access to general advice and ongoing support services”.
“Why did you sign a letter saying that the fee was for access to service if you believe now, and have always believed, that it was a fee for service,” Hodge demanded to know.
“I would suggest that was an error on my behalf…and not what I believed at the time.”
Smith then conceded that the letter had been drafted by someone in NAB’s wealth management business and “they gave it to me, I reviewed it and I signed it”.
Three months later, Smith signed another letter from NULIS to ASIC, which continued to argue that plan service fees were charged for access to service, rather than for actual services. Was this, Hodge asked, part of a positioning for a negotiation with ASIC over what NULIS would have to do. “Yes”, Smith replied.
Another major test for the NULIS trustee arose in mid-2016, when NAB’s decision to sell its life business meant that super funds had to be transferred across.
That gave the trustee the opportunity to examine whether commissions paid to financial advisers which had been grandfathered by the FOFA legislation should be retained. Getting rid of grandfathered commissions would have benefited fund members, but would have adversely affected the overall revenues of the NAB Group.
In particular, NULIS was able to reexamine the MLC Five Star products – legacy products with high fees and commissions – and decide to “trade up” members to better super products. But despite the clear benefit to members, the trustee decided not to scrap the grandfathered commissions.
Not surprisingly, NAB’s wealth management division prepared a paper which argued that if grandfathered commissions were terminated, there was a risk that the funds could lose members if disgruntled financial advisers encouraged their clients to switch out of MLC super accounts. This could leave remaining members with higher fees and costs in order to cover the fixed costs of running the funds.
NULIS was also extremely obliging when it came to transferring members into the new low-fee MySuper accounts. It was agreed that only 5 per cent of members in the old high fee-paying accounts – known as accrued deficit accounts – would be shifted to the low-fee MySuper accounts each quarter in 2014 and 2015, with the remainder shifted across in 2016.
But plan service fees weren’t the only fees that MLC super fund members were paying without receiving any service. Some fund members continued to have advice service fees deducted from their retirement savings, even after they requested that the financial adviser be removed from their account. Others paid advice service fees even when their supposed financial advisers were inactive.
And, in a sobering reminder that the Commonwealth Bank wasn’t the only financier that continued to charge deceased people for advice, the NAB has confessed that in some instances advice service fees continued to be deducted from members’ accounts, even though the bank or the trustee had been notified that the member had died.
This raised serious doubts in ASIC’s mind about how thoroughly NAB had investigated problems relating to fees for no service, which resulted in a two-year argument about what methodology the NAB should use to determine whether there were further fees for no service breaches.
The NAB was defiant, arguing that it only had to test whether there’d been any interaction between a customer and a financial adviser. But the corporate regulator insisted the bank needed to test whether it had delivered the express commitments it had made to customers.
In a letter to NAB dated November 2017, ASIC complained that the bank’s approach was “out of step with some of its major peers” that were close to finishing their reviews of fee for no service, and implementing remediation programs.
And in a letter to NAB in June this year, the corporate regulator noted that its investigations into NAB’s adviser service fees issue is continuing.
The corporate regulator has also taken issue with the bank’s tardiness in notifying it of significant breaches of its financial services licence, describing the bank as an “outlier in the industry” and pointed to110 instances where the bank allegedly failed to notify ASIC within 10 days as required under the Corporations Act.
The commission’s hearings this week were a chilling reminder of the serious design flaws in a system that relies on trustees alone to stoutly defend their members’ interests against powerful commercial interests.
It remains to be seen whether any of the behaviour that has come to light will result in criminal charges. But what is certain is the NAB has now joined AMP and the Commonwealth Bank in seeing its reputation for being a trustworthy institution – surely among any bank’s most valuable assets – severely reduced.