IMPACT ANALYSIS: NAB’s senior management was aware of compliance failures as bank fined A$18.5 million

The Federal Court of Australia has ordered the National Australia Bank (NAB) to pay a A$18.5 million civil penalty for failures relating to misleading disclosure statements to customers and other compliance failures. 

Justice Jennifer Davis set out in her judgment that the bank had made “false or misleading representations” to its clients in relation to fees they paid. The NAB breached the Corporations Act on 2,285 occasions between 2013 and 2019 when charging 1,382 clients more than A$2 million in fees that they were not entitled to charge. NAB senior management were aware of the issues but continued to overcharge customers.

The court found that the NAB, as holder of an Australian financial services licence (AFSL) had not acted “efficiently, honestly and fairly”, and in fact its conduct was “unfair” to its customers. The action was successfully taken by the Australian Securities and Investments Commission (ASIC) and arose out of the Financial Services Royal Commission in relation to banks charging “fees for no service”. Firms need to ensure they have a compliance oversight in place that ensures systems works and there is appropriate disclosure to customers.

2,285 civil penalty contraventions

Between December 2013 and February 2019, the NAB entered into an ongoing service arrangement under which the NAB provided financial services to customers through its business unit, NAB Financial Planning, and customers agreed to pay fees on an ongoing basis. There were approximately 37,000 customers who had ongoing service arrangements with the NAB. The services included financial reviews conducted annually, personal consultations, interval reviews, and written reports on the status of the client’s strategies.

Fees were generally paid monthly by direct debit from a customer nominated account. The NAB admitted it told clients 130 times that they were paying a certain amount in fees when they were not. The NAB told 1,485 clients that they were receiving particular services for their fees when they were not. On 641 occasions the bank charged fees to clients without providing a disclosure statement that would have disclosed what fees clients were being charged at any particular time. In other circumstances, the disclosure statements contained incorrect information about how much the clients were paying for the services.

The NAB was involved in 2,285 civil penalty contraventions stemming over a period of five years and ASIC alleged that the conduct was systemic in nature. At least 1,382 clients were affected in relation to all of the contraventions and specifically 1,195 clients received false and misleading statements about the services and fees that they paid. There were 435 clients who collectively paid A$1,299,132.11 in continuing fees which the NAB was prohibited from charging.

Inadequate compliance

During the five-year period, the NAB did have policies, procedures and systems in place for monitoring the delivery of the service arrangements and the provision of fee disclosure statements. However, the NAB accepted at court that these compliance systems were inadequate to identify whether services were being provided to clients in accordance with service fee arrangements, whether disclosure documents were accurate and failed to consider whether NAB financial planning could charge continuing fees.

“NAB’s conduct was inefficient and was also unfair, insofar as the inadequacy of its documented compliance policies may have impaired the prospect that clients would receive an accurate fee disclosure statement …” Justice Davis said in her judgment.

The NAB also admitted that it failed to comply with its AFSL licence conditions and also contravened the law and that it did not establish or maintain systems that were adequate to ensure its fee disclosure obligations under Sections 962G, 962P and 962S (fee disclosure provisions) of the Corporations Law.

“NAB system failures resulted in significant fee disclosure failures over an extended period. This caused harm to customers as the inaccurate information meant that they could not make informed decisions about the financial services they were paying for,” said Sarah Court, ASIC deputy chair.

Analysis: Knowledge of NAB senior management

ASIC made submissions that the civil penalty should be A$40 million given the serious nature of the conduct and the numerous breaches of the law. 

The major cause of the contravention was the NAB’s compliance deficiency and its slow piecemeal steps to address the clients’ failures. ASIC also submitted that there was “deep knowledge” within the NAB of the compliance deficiencies that were identified prior to December 2013.

ASIC submitted that the knowledge of senior management was especially significant because although they knew of the failures on May 31, 2018, the NAB continued charging fees. 

“The knowledge of senior management was especially significant because between May 31, 2018 and February 4, 2019, NAB continued charging continuing fees to clients without ascertaining whether it was entitled to do so and over half of the prohibited charging contraventions included charges after May 31, 2018,” said ASIC in its submissions to the court.

Justice Davis considered the seriousness of the compliance failures in deciding the imposition of the pecuniary penalty indicating the penalty it must act as a “specific deterrent” and also as a “general deterrent”. The judge found that customers were entitled to expect that the NAB would give timely and accurate fee disclosure statements and would not deduct fees that it was not entitled to charge. The court found that seriousness of the civil penalty contraventions lies in the fact that the statutory disclosure of the statements was not met.

ASIC informed the court that the bank had an inadequate compliance culture and was concerned about systems failing, the inadequacies in NAB’s responses to those system failures and that NAB senior executives continued to charge fees even after they became aware of the failures in May 2018.

In deciding the A$18.5 million civil penalty, Justice Davis said “it seems appropriate to impose an overall penalty for the civil penalty contravening conduct having regard to the overlapping factual substratum leading to the breaches of ss962P, s962S and Section 12DB. The contravening conduct was not in the lower spectrum of seriousness.”

Appointment of an expert

The court made orders under Section 12GLA of the ASIC Act and ordered the appointment of an independent expert to review, recommend, and report on the NAB’s compliance procedures and for the establishment of a compliance program incorporating the expert’s new recommendations. The report will be provided to ASIC to assess in the coming months.

This is the first penalty imposed by a court for fee disclosure statement failures under the Corporations Act. Financial Institutions and firms need to ensure that they have not only compliance procedures in place, but an effective compliance oversight regime that ensures that systems are tested and reviewed and updated so customers receive timely and honest information about fees they are required to pay.

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This article first appeared on Thomson Reuters Regulatory Intelligence.

Niall is a senior regulatory intelligence expert, Asia Pacific.  He joined Thomson Reuters in 2013 from FTI Consulting, where he was managing director for investigations in Australia.  Prior to that, he was was a senior specialist advisory for the Australian Securities & Investments Commission (ASIC) and the director of enforcement for the Dubai Financial Service Authority (DFSA).

Niall is a Barrister of the High Court of Australia and has over twenty years experience in financial markets and international regulation. In 2002, he was awarded an ASIC Australia Day Honour Medal for his work in corporate investigations.  He has written a book on corporate investigations published by Thomson Reuters and has been a commentator in the Australian Financial Review and television on financial crime, regulation and compliance.

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