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NAB top brass quits after damning Australian banking report

Shares rally as report skirts radical solutions to industry's abuses

Australian banks must change their "profits before people" culture, according to the head of an inquiry into the institutions' practices.   © Reuters

SYDNEY -- One of Australia's biggest banks announced on Thursday that its CEO and chairman will resign, just days after a damning report by a government-backed inquiry into the sector exposed years of misconduct, including charging dead customers for services.

National Bank of Australia chief executive Andrew Thorburn will step down at the end of this month, while Chairman Ken Henry retire from the board once a new CEO has been chosen, the bank said in a statement. Both men were harshly criticized by retired High Court Justice Kenneth Hayne, who led the 14-month inquiry.

Hayne's findings laid out in grim detail the range of unethical practices used by the banks, wealth managers and other financial service providers, such as charging fees for no service (including to people known to be dead), lying to regulators, and giving financial advice not in the best interest of clients.

In his final report, released late on Monday, he blasted the "profits before people" culture at the country's four big banks and singled out NAB for particular censure: "Having heard from both the CEO, Thorburn, and the chair, Henry, I am not as confident as I would wish to be that the lessons of the past have been learned."

While Hayne recommended criminal charges against three unnamed financial institutions and investigation of a further 15, the inquiry stopped short of demanding the break up of the big four banks as many in the industry had feared. Some critics are suggesting its recommendations are too lenient.

Investors in Commonwealth Bank of Australia, National Australia Bank, Australia and New Zealand Banking Group, and Westpac Bank seemed relieved, handing the banks their biggest one-day share price gains since the global financial crisis on Tuesday.

The big four are on track to earn a combined net profit of about 30 billion Australian dollars ($21.4 billion) again in their current financial year, which ends on June 30 for CBA and on Sept. 30 for the other three.

Hayne issued 76 recommendations for the sector. In the end, these were "soft" and a clear win for the banks, according to UBS banking analyst Jonathan Mott. Deutsche Bank analyst Matt Wilson said the recommendations were practical but possibly "too docile."

On Wednesday, CBA announced an after-tax cash net profit of AU$4.67 billion for the second half of 2018, up 1.7% on the year but weaker than expected.

CBA chief executive Matt Comyn said there was "much work ahead" as the bank sought to "understand the implications and implement the recommendations" of the Hayne inquiry.

"We do not believe any of the 76 recommendations by themselves will have a material financial impact on the banks," Mott of UBS said in a note to clients.

Wealth managers AMP and IOOF also emerged from the Hayne inquiry relatively unscathed. One big change recommended for the AU$2 trillion-plus pension fund sector is a single default account that new entrants to the workforce can carry throughout their working lives, rather than having to pay fees to multiple funds when they change jobs.

Elsewhere in the industry, Hayne has recommended a "best interests" duty for mortgage brokers and a ban on trailing, or "life of loan," commissions.

In addition to blasting the banks, the Hayne report also warned the country's two main regulators, the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission, to take a tougher approach. Federal Treasurer Josh Frydenberg has appointed Graeme Samuel, a former chairman of the Australian Competition and Consumer Commission, to review the APRA, which Hayne criticized in his report as being "invisible."

While the banks avoided their most-feared outcome, the scandal laid bare by the Hayne report is likely to reverberate for some time.

Its harsh criticism comes amid a tougher lending market both for housing and business, and just months ahead of a national election.

Financial service companies can also expect a wave of compensation claims, with the inquiry estimating these could reach AU$850 million. There is the possibility that criminal charges, if proven, could result in hefty penalties for financial institutions and potentially jail time for individuals involved in various instances of misconduct.

The investigation brought the actions and culture of the big four banks, along with AMP and IOOF, under intense public scrutiny as it heard evidence from customers, employees, advisers, senior managers, board members and regulators throughout 2018.

A number of senior finance executives quit last year when the inquiry was taking evidence at public hearings, including AMP's chief executive and chairwoman. There could be further high-level casualties after Hayne laid primary responsibility for the sector's many failings "with the entities concerned and those who managed and controlled those entities: their boards and senior management."

Hayne delivered a blistering review of the sector's culture, slamming its pursuit of profit as too often veering toward what he described as criminal conduct. He said it had not changed its ways for the better, despite earlier criticisms and investigations. "Saying sorry and promising not to do it again has not prevented recurrence," he noted.

Hayne concluded that greed was the root cause of the many examples of "fees for no service" conduct.

His recommendations, immediately accepted by the ruling Liberal-National coalition government of Prime Minister Scott Morrison and endorsed by the Labor opposition led by Bill Shorten, will take months and probably years to implement.

With a federal election due by May, both political sides are keen to portray themselves as fighting the good fight for ordinary Australians. At the same time, there is no appetite on either side to completely restructure the banks, because of their central role in home lending and stimulating business. Instead, the most likely outcome over the next few years is moderate reform.

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