1.2 Evidence

1.2.1Fees for no service

As my Interim Report records, ASIC started its ‘Wealth Management Project’ in 2014.[1] This was a major project focusing upon the financial advice businesses conducted by ANZ, CBA, NAB, Macquarie, Westpac and AMP. And, as also recorded in the Interim Report, ASIC announced in April 2015 that it was ‘investigating multiple instances of licensees charging clients for financial advice, including annual advice reviews, where the advice was not provided’.[2] In August 2018, the then Deputy Chair of ASIC told the Commission that about $260 million had already been paid in compensation for the charging of fees for no service, that the total amount of estimated compensation (including what had already been paid) was about $850 million and that he ‘wouldn’t be at all surprised if it ends up being in excess of a billion dollars’.[3]

The Commission’s inquiries about NAB’s superannuation business and fees for no service examined four matters:

• The charging of ‘Plan Service Fees’ (PSFs) to members of funds of which MLC Nominees and, later, NULIS was trustee;
• NAB’s dealings with ASIC about those matters, in particular in connection with ASIC’s publication, in October 2016, of its Report 499: Financial Advice: Fees for No Service;
• The charging of ‘Adviser Service Fees’ (ASFs) to members of funds of which MLC Nominees and, later, NULIS was trustee; and
• NAB’s reporting to ASIC of breaches, or likely breaches, of its obligations under section 912A of the Corporations Act 2001 (Cth) (the Corporations Act).

Plan service fees

Until July 2016, MLC Nominees was the trustee of The Universal Superannuation Scheme (TUSS) fund. Masterkey Business Super (MKBS) and Masterkey Personal Super (MKPS) were divisions of TUSS.[4] MKBS was described as ‘the corporate employer division’ and MKPS as ‘the personal division to which a member is automatically transferred after ceasing employment with the relevant employer sponsor’.[5] MLC Nominees invested the TUSS assets in investment-linked life insurance policies issued by MLC Limited.

From 2012, members invested in MKBS and MKPS were charged a PSF. The PSF was introduced as part of a wider project by MLC Nominees and MLC Limited (called ‘Superannuation with Fee Transparency’ or ‘SWiFT’) to change the structure of fees and charges and, in particular, to replace the then existing asset–based commission and employer service fee with a single fee.[6]

The PSF was also subsequently applied to members from other funds or products who were ‘traded-up’ to the MKBS and MKPS products. The first relevant trade-up, known as ‘Encompass’, took place in December 2012 and involved the intra-fund transfer of members from other products issued by MLC Nominees to MKBS and MKPS.[7] The second relevant trade-up took place in May 2013 and was also an intra-fund transfer, this time of members in The Employee Retirement Plan (TERP) to the MKBS and MKPS products.[8]

As has been noted, before the PSF was introduced in 2012, members paid an asset-based commission and a fee for general advice services called the ‘Employer Service Fee’.[9] The asset-based commission was paid to an adviser for arranging the commencement of an MKBS plan and for providing members in MKBS and MKPS access to ‘ongoing general support services’.[10] The Employer Service Fee was deducted from member accounts of the MKBS where the employer and the adviser had agreed that the fee would be charged.[11] The Employer Service Fee and asset-based commission were deducted by MLC Limited from members’ accounts and paid to the relevant advisers. If there was an adviser linked to the member’s account then MLC Limited paid the asset-based commission and Employer Service Fee to the linked adviser. Documents produced in evidence suggest that it is possible that the latter fee was deducted even where there was no linked adviser, and was retained by either MLC Nominees[12] or MLC Limited,[13] I cannot say which.

The PSF introduced by MLC Nominees was about equal to the total of the amounts that had been charged as asset-based commission and Employer Service Fee. MLC Nominees deducted the PSF from members’ accounts.[14]

On 1 July 2016, the members of TUSS were transferred, by successor fund transfer (SFT) under the SIS Act, to the MLC Super Fund. NULIS was the trustee of that fund. As a consequence of the transaction, NULIS became the trustee responsible for MKBS and MKPS,[15] MLC Limited ceased to be administrator, and National Wealth Management Services Ltd (NWMSL) became administrator in its place.[16]

ASIC proceedings

On 6 September 2018, after the Commission’s hearings into superannuation had concluded, ASIC commenced proceedings against MLC Nominees and NULIS in the Federal Court of Australia.[17] The proceedings sought a pecuniary penalty under section 12GBA of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act) and various declarations in relation to the charging of PSFs and related conduct. The documents filed by ASIC alleged that: [18]

• Contrary to the terms of MKBS and MKPS, the trustees had deducted (or authorised the deduction of) PSFs totalling approximately $33.8 million from the accounts of approximately 220,000 members who were not ‘linked’ to a plan adviser (no-adviser members).
• Documents issued to no-adviser members represented that the trustee was entitled to deduct the PSF and that members were obliged to pay it.
• The trustees had deducted (and NULIS continued to deduct) PSFs exceeding $67 million from the accounts of approximately 305,000 members who were linked to a plan adviser.
• For members who had a plan adviser linked to their account, the trustees were subject to a Licence Remuneration Agreement with each plan adviser’s licensee, which did not oblige the adviser to provide any services, but which obliged the trustee to pay the PSF unless the trustee reasonably believed the adviser was no longer providing the services to which it related.
• For linked members, the trustees did not know what services, if any, plan advisers had agreed to provide. They had no system to enable them to know whether advisers were no longer providing the services to which the PSF related and were not aware of any services being provided to linked members in the MKPS division.
• Upon linked members ceasing employment with the employer, they were transferred to the MKPS division and no longer received the services to which the PSF related.
• The trustees did not exercise their right to terminate the PSF for linked members upon that member ceasing employment and being transferred to the MKPS division.
• Documents issued to members, including product disclosure statements, did not inform members that linked members in MKPS had the right to elect to turn off the PSF by notifying the trustee.
• The trustees’ documents included statements that positively misrepresented the rights of linked members in MKPS with respect to the PSF.
• The conduct and the representations gave rise to contraventions of law including section 912A(1)(a), 912A(1)(c) and 1041H(1) of the Corporations Act, sections 12DA(1), 12DB(1)(g) and 12DB(1)(i) of the ASIC Act, sections 29E(1)(a), 52(2)(b), 52(2)(c) and 55 of the SIS Act, and certain general law duties of the trustees.

The Commission’s Terms of Reference provide that I am not required to inquire, or continue to inquire, into a particular matter to the extent that I am satisfied that the matter is being, or will be, sufficiently and appropriately dealt with by a civil proceeding. I am, of course, satisfied that the matters relating to the charging of PSFs to members, and what the trustees represented to members about the PSFs that are raised in the proceedings, will be sufficiently and appropriately dealt with in those proceedings. I make no findings about the particular contraventions alleged in those proceedings. Whether other forms of proceeding could or should be instituted in respect of these matters in the first instance is a matter for ASIC and I say no more about it.

It remains important, however, to deal here with two matters in respect of the PSFs: first, NAB’s internal investigations into the issues with the PSFs and, second, NAB’s dealings with ASIC about the PSFs around October 2016, when ASIC published its Fees for No Service report.

Internal investigations

In around August 2015, representatives of MLC Limited and MLC Nominees raised queries internally, including with those in the risk team, in relation to the introduction of PSFs.[19] This led to an event being raised in NAB’s risk ‘event management system’ on 4 September 2015, and investigations into what had happened.[20] The event and investigations focused on the charging of PSFs to members who had been part of the TERP trade-up.

The investigations appear to have been conducted by persons working within NAB Wealth and were preceded by investigations relating to ASFs. As part of the investigations, legal advice was received by NAB Wealth that expressed the view that PSFs should be refunded if there was no adviser linked to the member’s account.[21] As NAB had waived legal professional privilege over this advice, a copy was made available to the Commission. The advice noted that employer service fees and ASFs that may have been deducted where there was no adviser linked to the account should also be refunded.[22] A paper presented in October 2015 to the Breach Review Committee (BRC) in respect of the TERP trade-up event expressed the view that the BRC may consider it prudent to notify APRA and ASIC of the event given the large number of members affected. This was said to be 46,875, with the total PSF deducted from the members since the trade-up said to be approximately $4 million.[23] The paper noted that PSFs were still being charged to members who did not have an adviser linked to their account.[24] On 3 December 2015, the boards of NULIS and MLC Nominees were told that a potential issue had arisen in relation to the PSFs. It was not clear from the evidence why the issues were not communicated to the boards until then.

On 24 December 2015, MLC Nominees (as trustee of TUSS) and MLC Limited (then the administrator of TUSS) lodged a breach notification with ASIC about the issue.[25] The notice said that when implementing the trade-up, MLC Limited established systems to apply the PSF to the accounts of transferring members including non-advised members and, as a result, the PSF was deducted from those members’ accounts and retained by MLC Limited.[26] On the same day the breach notification was lodged with ASIC, MLC Nominees lodged a similar breach notification with APRA in relation to that event.[27]

Ms Smith told the Commission that a further investigation was then conducted from around early 2016 to September 2016 in relation to PSFs introduced for members who were part of Project SWiFT and the Encompass trade-up.[28] An event was raised internally on 11 July 2016[29] and further breach notifications were lodged by MLC Nominees and MLC Limited with ASIC on 14 September 2016.[30]

The investigations in relation to the PSFs were conducted by persons working within NAB Wealth. They considered whether it could be said that general advice services provided to members, such as telephone assistance, could justify retaining the PSFs that had been charged to unadvised members.[31] Ms Smith told the Commission that she was aware at ‘a very high level’ of this[32] and that she understood at the time that there were two pieces of legal advice that had differing views.[33] This further advice, which appears to have been external to NAB, was not before the Commission. NAB, as it was entitled to do, did not produce to the Commission either the instructions to the external lawyers or the advice itself. At least initially, however, those within NAB Wealth having the carriage of the matter appear to have proceeded on the basis that it may not have been necessary to refund all PSFs charged to members without a linked adviser.

Although Mr Carter did not accept this characterisation of events, what was done at this time was consistent with senior employees in NAB Wealth trying to find a way to retain the revenue derived from PSFs paid by unadvised members.[34] Be this as it may, NAB Wealth concluded that the services provided by the administrator did not provide a basis to retain the fee as the services the administrator offered were services generally available to all members and members paid for those services by the administration fee.[35]

Communications with ASIC in relation to Report 499

After the breach notifications were made in respect of the TERP and other PSF events, representatives of NAB Wealth and NULIS had several meetings and discussions with ASIC. In respect of the TERP event, NAB Wealth and NULIS gave ASIC regular updates of the estimated total of PSFs charged and number of members affected, as well as the manner in which NAB might approach a remediation program. But NAB did not give ASIC the figures that it had arrived at internally for remediation of the SWiFT and Encompass events. In particular, as will later be explained, NAB did not give ASIC these figures before ASIC completed and published its report into Fees for No Service as part of its ‘Wealth Management Project’ despite ASIC asking for revised figures about identified and estimated remediation.

In February 2016, Mr Damian Murphy of NAB Wealth, wrote to ASIC providing an update on the TERP trade-up event. He told ASIC that the issue was estimated to affect 96,920 members and the PSFs totalled $10,797,403.[36] An update, provided to ASIC in June 2016, again recorded that the number of members affected had increased from the 47,000 members indicated in the breach report to more than 96,920, but it also said that the financial impact then totalled $14 million.[37]

On 23 August 2016, ASIC wrote to Ms Smith and Mr Hagger confirming that it had told them that ASIC would be prepared to ‘formalise’ the obligations of NULIS and NWMSL ‘under the TERP trade‑up and PSF remediation programs’ on the basis that NULIS and NWMSL committed to remediation in an open letter and acknowledged that ASIC would monitor the implementation of the remediation programs and report publicly on them. ASIC proposed that the obligations be recorded either in an enforceable undertaking (EU) or in licence conditions.[38] ASIC otherwise rejected NAB’s proposal that the matter be resolved by what NAB had called ‘Negotiated Commitments’.[39] ASIC indicated that it may be willing to resolve the issues arising out of the SWiFT and Encompass matters on a similar basis to the TERP trade-up and PSFs remediation programs.[40] ASIC said that it expected to be informed of the response of the boards of the relevant NAB entities ‘relatively soon’.[41] ASIC also said that it considered a separate and more specific ‘Assurance Review’, by an independent external expert, was required.

Shortly after that, in emails dated 6 and 7 September 2016 between Ms Karen-Anne Herald of the Risk team and Damian Murphy, the Chief Risk Officer, Ms Herald acknowledged that provisions had been booked for the remediation of $13 million for the TERP PSF event and that provisions had been made for the SWiFT and Encompass PSF events in the amount of $21.6 million.[42]

As noted above, when the breach notification was formally provided to ASIC in respect of the SWiFT and Encompass PSF events on 16 September 2016, an estimate was given of the number of members affected by the events, but no estimate of financial loss was given.[43]

On 16 September 2016, ASIC wrote again to Ms Smith and Mr Hagger stating (once more) that ASIC considered that an independent review pursuant to an EU would be an appropriate regulatory outcome.[44] ASIC noted that it had not yet received a response from the boards of the relevant NAB entities: NULIS, NWMSL and NAB Wealth.[45]

On 19 October 2016, Mr Hagger provided an update on the PSF events to the Group Risk Return Management Committee, which included NAB’s Chief Executive Officer, Andrew Thorburn, and other senior NAB Group executives.[46] Mr Hagger said that compensation was expected to total $34.3 million for the three events.[47]

On the same day, ASIC sent an email to NAB to say that it would be publishing a public report with respect to fees for no service in the following week.[48] Andrea Debenham from NAB’s Regulatory Affairs wrote to Mr Hagger, Mr Carter, Mr Murphy and others noting that ASIC’s report would include details of the ‘TERP PSF breach’ but that it was unclear whether it ‘would extend to mentioning the SWiFT and Encompass PSF events’. Ms Debenham asked for agreement and instruction on whether the intention was to pre-emptively communicate about the TERP PSF Event and associated remediation; or all PSF events and associated remediation; or Project Rio in total; or none of these. (‘Project Rio’, an internal review of the matters raised by ASIC, was considering the appointment of KPMG to conduct an independent ‘assurance review’ of the adequacy of compliance and risk management practices in NAB’s superannuation business as a whole. In about June 2016, there had been some discussions with ASIC about such a review[49] and, as is explained below, in January 2017, ASIC required NULIS to do it.) Ms Debenham said:[50]

To be clear, I’m not necessarily proposing that we should communicate pre-emptively. Rather, I wanted to flag that if we go down that path I’ll need to engage ASIC as soon as possible. Whichever way it falls, we might need to consider how this lines up with EOY results announcements.

On 20 October 2016, Chris Owens from the Corporate Affairs team sent an email to Mr Hagger, Mr Carter and others noting that ASIC ‘plans to announce the “TERP Plan Service Fee” event as part of its public report on Ongoing Advice Service Fees’ and setting out ‘a number of media options to minimise reputation risk for the Group’.[51] The email said that Corporate Affairs’ ‘preferred option would see NAB proactively announce all aspects of the PSFs issue, including customer numbers and the total remediation amount’.[52] Mr Owens also suggested that NAB approach ASIC and ask it to consider delaying the announcement until after the banking reporting season.[53] NAB’s reporting of its annual financial results was scheduled for 27 October 2016.

On 21 October 2016, Ms Louise Macaulay of ASIC sent NAB a redacted draft copy of the ASIC report entitled Financial Advice: Fees for No Service.[54] The details of financial compensation in respect of NAB ‘fees for no service’ events were set out in a table. The equivalent detail in respect of other banks was redacted but the overall totals of compensation paid or agreed to be paid and estimated future compensation by all of the entities the subject of the report were not redacted.[55] The table said that the total compensation paid or agreed to be paid by all the entities examined was $23,098,808 and that the estimated future compensation was between $57 and $63 million (an overall total of $80–86 million).

Later that day, Nathan Goonan, the acting Executive General Manager of Corporate Affairs sent Mr Thorburn and others an email saying that ASIC had invited feedback on the draft report. He said:[56]

At this stage, having seen the report, our thinking is to be reactive from a communication perspective given, as drafted NAB is seen as just one ‘in the pack’ rather than called out as an outlier. Andrew H and team are considering this feedback and we will settle on a recommendation over the weekend.

Mr Goonan’s email attached a paper entitled Project Rio Issue Summary – 21October 2016 at 4:30pm.[57] The paper said that NAB had been named in the ASIC report as having total exposure of compensation of $16.2 million for about 120,000 customers. It said that the remediation option in respect of the SWiFT and Encompass events was to be presented to NWMSL (the NAB administrator for NULIS’s superannuation business) and NULIS for approval on Monday 24 October 2016 and Wednesday 26 October 2016 respectively. The paper went on to say:

… while we can’t see the other bank’s compensation details, this probably means that NAB is middle of the pack when it comes to compensation. … remediation has not begun for PSF, as we have been attempting to resolve legal differences of opinion. The most likely remediation will be to ~220,000 members for approximately $34 million across TERP PSF, SWiFT and Encompass.

…

ASIC has invited feedback on the draft report by 10 am Monday. The relevant executives for the PSF issue (Andrew Hagger and Paul Carter) are considering this feedback. There are two possible outcomes of NAB’s feedback to ASIC.

…

ASIC’s report is published next week in largely the same form that it is now … this would mean NAB is seen as just one of the banks tied up in [the matter] …

[or] ASIC’s report is adjusted and/or delayed to include NABs expanded PSF numbers (making NAB the ‘worst’ of the banks in the report.)

The reference to ‘legal differences of opinion’ appears to be a reference to the legal advice referred to above.

Mr Hagger was responsible for the feedback that would be provided to ASIC on the draft report.[58] Mr Thorburn forwarded Mr Goonan’s email and attached paper to Mr Hagger and Antony Cahill with the request that they ‘please discuss Monday, when we meet’.[59] By an email sent shortly after that, Mr Hagger emailed Mr Cahill and copied in Mr Thorburn saying that he had had a telephone call with key stakeholders and that they intended to recommend that the current approach was the most suitable one. He said:[60]

the additional nuance is that we think I should call Greg Tanzer or Peter Kell on Monday morning to advise the latest as to where we are up to on the PSFs. All in the ongoing interests of openness and transparency. We doubt they will wish to shoe-horn the matter into their report given deadlines, their multi-phased approach and the very substantial rewrite which would be required to their report overall.

On 24 October 2016 at 8:00am the board of NWMSL met. The minutes of the meeting show that the board resolved to recommend to NULIS that NULIS approve full compensation (plus interest) for the PSF events for all non-linked members and to approve NWMSL indemnifying NULIS for the compensation.[61] The minutes noted that a full refund of the PSFs was more generous to members and that NWMSL’s preferred approach had been for opt-in compensation.

Mr Hagger left the meeting after the resolution had been passed and telephoned Mr Tanzer. On re-joining the meeting, Mr Hagger told the board about the call.

Later that morning, at 10.56am, Mr Hagger sent an email to a number of NAB employees, including Mr Carter, setting out his account of the conversation that he had with Mr Tanzer.[62] In his evidence, Mr Hagger described this email as his ‘file note’ of the discussion.[63] The email records that Mr Hagger told Mr Tanzer the NWMSL and NULIS boards were meeting ‘that week’. The email does not record Mr Hagger as having told Mr Tanzer that NWMSL had already met and resolved to approve full compensation and indemnify NULIS. The email does not record Mr Hagger as having provided any estimate or range of future compensation or any update to Mr Tanzer in respect of loss or compensation.[64]

Mr Hagger told the Commission that he said to Mr Tanzer:[65]

… if he wants to know anything further of any of this, so if he said to me what do you think the dollars involved are, I would have referred him to our earlier conversation, which is that they had the number of members and I had given him an indication of approximately what the dollar figure was. So, you know, as an accountant I could have multiplied those two together. He was obviously capable of doing that.