He has suggested it could be prosecuted under a little-used provision of the Corporations Act, section 1041G. This makes it a criminal and civil offence for a company, or individual within it, to engage in “dishonest conduct” relating to a financial product or service.

After Smith’s testimony, in the second half of August ASIC began considering whether it should send fee-for-no-service briefs to the Commonwealth Director of Public Prosecutions. Its deliberations continue.

In November, Hayne wrote to ASIC, suggesting that at least two companies had likely breached the section. He declined to specify which ones in his final report, or reveal his thinking on potential offences by particular bankers.

But the report indicated his displeasure at National Australia Bank, which had gone to great lengths “to avoid repaying to customers money to which it was not, and never had been, entitled,” he wrote.

Nicole Smith, former chairman of NAB trustee NULIS, spent three days in the witness box in August, which triggered ASIC’s consideration of criminal proceedings for fee-for-no-service breaches, Commissioner Kenneth Hayne said.  Supplied

Members of NAB’s senior management team had displayed an “abiding blindness to the seriousness of the underlying conduct”. Its internal investigation and its negotiations with ASIC “appeared primarily directed to minimising the amount that NAB would have to refund” to customers, he said.

Chief executive Andrew Thorburn, and chairman Ken Henry, were fighting for their jobs on Tuesday, amid calls for them to relinquish their positions, because Hayne’s blistering analysis fingers NAB’s poor culture as a core driver of the infractions.

“The conduct that has been described reflected a culture, demonstrated by senior executives within the NAB Group, of unwillingness to put right, wholly and promptly, what was evidently wrong conduct. And the conduct had been allowed to continue for many years.”

‘Project Rio’

NULIS, and other NAB entities, were aware of problems with charging “plan service fee” and “adviser service fees” from at least 2015. It had codenamed its response “Project Rio”. The troubles began when NAB began switching MLC customers from a commission to a single fee in 2012.

But fees were being deducted from accounts not linked to an adviser, effectively charging them for advice not provided. In addition, the trustee wasn’t aware whether some customers with an adviser were being provided with advice and they weren’t told they had a right to turn off the fees.

Hayne was scathing about NAB’s dealing with ASIC over the matter. He suggests the bank misled the regulator to publicly report a lower compensation number in order to protect its reputation.

It was August 23, 2016, when ASIC wrote to Smith and former head of wealth Andrew Hagger, suggesting it “formalise” a customer remediation plan via an enforceable undertaking with oversight from an independent expert.

But three weeks later, there had been no response from NAB’s trustee boards, and a NAB breach notification provided no estimate of the financial loss.

General counsel Sharon Cook and former head of wealth Andrew Hagger leave the royal commission in April.  Stefan Postles

A month later, Thorburn was put in the loop. On October 19, he got an update from Hagger, who presented to the group risk return management committee, of which Thorburn is a member.

Hagger said compensation was expected to total $34.3 million – more than twice the number that ultimately landed in an ASIC report.

On October 21, ASIC distributed a draft report that was pleasing to acting executive general manager of corporate affairs, Nathan Goonan. He emailed Thorburn suggesting a “reactive” approach, given NAB had been cited as “just one in the pack rather than called out as an outlier”. The report showed its compensation bill as $16.9 million.

Three days later Hagger made a call to ASIC’s Greg Tanzer. Hayne suggests this was misleading by omission. By the time of the conversation, the board of NULIS’s administrator had recommend to NULIS it make full remediation. But Hagger left Tanzer with the impression this issue had not yet been decided.

Kenneth Hayne: NAB displayed a “abiding blindness to the seriousness of the underlying conduct”. AFR

Hayne said the reason NAB had not provided its latest compensation assessments was because “NAB wished ASIC’s report to still show the bank’s conduct as ‘middle of the pack’, regardless of NAB’s knowledge when it responded to ASIC’s inquiries about the draft report and when Mr Hagger spoke with Mr Tanzer.

“And NAB wanted to remain ‘middle of the pack’ lest news of what it had discovered overshadow its CEO’s announcement of full-year results.”

And so it proved. The ASIC report on fees-for-no-services across the sector was released on October 27. NAB told ASIC of its revised estimate only on November 3. Two years later, the compensation amount had ballooned to approximately $435 million pre-tax, for which NAB has taken a charge in its accounts.

Hayne was also dismissive of NAB’s approach to reporting breaches to ASIC more broadly – a matter squarely on Thorburn’s radar, after it was discussed at a meeting with the new ASIC chairman, James Shipton, on April 26 last year. Between 2014 and 2017, there had been 84 reports of significant breaches by NAB provided beyond the statutory requirement of within 10 business days; 83 of these were said to relate to NAB Wealth.

‘An abiding blindness’

The commissioner also singled out general counsel, Sharon Cook, who last year proposed an “opt-in” method of remediation to ASIC, on the basis a more lenient approach than other banks was warranted because NAB led the industry away from commission-based adviser remuneration structures in the first place.

Like any listed company, NAB is bound to consider carefully whether it should pay compensation to others and to take proper steps to pay only such compensation as can be shown to be justified.

“But NAB’s conduct in connection with fees for no service went beyond taking proper steps to ensure that it paid no more than was proper compensation for its wrong. It sought to avoid repaying to customers money to which it was not, and never had been, entitled,” the commissioner said.

“That NAB either did not grasp this basic proposition, or was unwilling to face the consequences of having done so, is troubling. That its general counsel should be complaining to ASIC, as recently as April 2018, that having to pay back what had been taken was unfair to NAB, is, if anything, even more troubling. It suggests an abiding blindness to the seriousness of the underlying conduct.”

NAB CEO Andrew Thorburn has defended the bank’s fee-for-no-service conduct as a sloppy mistake rather than a situation of any dishonesty.  Eamon Gallagher

And so it’s hardly surprising Thorburn was being targeted and was on the defensive on Tuesday, pushing back on suggestions of criminality. “It wasn’t dishonest, it was sloppy, it wasn’t professional, it wasn’t putting clients first – but I don’t think we have been dishonest,” he told Neil Mitchell on 3AW.

Pamela Hanrahan, a professor of commercial law and regulation at UNSW Business School, says the Australian criminal law uses two possible tests of dishonesty, the so-called Ghosh and Peters test.

“The Ghosh test – currently used in section 1041G – requires the prosecution to prove beyond a reasonable doubt that the defendant’s conduct was dishonest according to the standards of ordinary people, and also that the defendant knew the conduct was dishonest. The Peters test – the preferred test adopted by the High Court in common law – only requires the prosecution to prove that the conduct was dishonest according to the standards of ordinary people,” she explains.

“ASIC and the CDPP might have felt the Ghosh test was hard to meet. But the royal commission final report strongly suggests Commissioner Hayne, a former justice of the High Court, thinks that both elements of the existing Ghosh test could at least in theory be made out against the banks in those fee-for-no-service cases.”

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