Speaking during the fourth day of the seventh round of hearings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the chairman of the Australian Securities and Investments Commission (ASIC) was questioned over several topics, including the regulator’s enforcement and investigation actions at major financial institutions.
Recalling evidence given by NAB in the first round of hearings of the royal commission in March, counsel assisting Rowena Orr questioned ASIC chairman James Shipton on the regulator’s action when it came to investigating NAB for its conduct in overseeing its introducer program.
During the first round of hearings in March, it was revealed that NAB employees fraudulently submitted home loan applications in collusion with introducers. (NAB CEO Andrew Thorburn has previously conceded that there were “gaps” in its governance of introducers and these prevented it from identifying fraud, and has since revealed that, in response to such misconduct, the bank has “overhauled” its introducer program and has reduced its introducer numbers by almost 90 per cent.)
During the hearings on Thursday (22 November), the commission grilled the ASIC chair over the regulator’s perceived inaction over introducer loan fraud at the major bank.
Ms Orr asked the ASIC chair whether the regulator had “contemplated investigating NAB for its conduct in overseeing its introducer program”.
In response, Mr Shipton revealed that while “there was a contemplation” to investigate NAB for its conduct prior to the evidence being given to the royal commission during the first round of hearings, the decision to investigation the issue was made “only in the last couple of months”.
Mr Shipton highlighted “resource constraints” of the financial services regulator (suggesting that there were three times as many “sworn police officers” in the Australian Capital Territory than there were enforcement officers at ASIC), but refused to call the delayed response in taking action a “failing”.
He said: “[T]here was a number of other things going on at that time, and that’s why I was talking about resource constraints, and the regulatory decisions that we have to make. But I will most certainly say that we should have made that decision earlier.”
Mr Shipton added that the delay to take action earlier was “unfortunate” and “highly regrettable”.
He continued: “It was a reasonably held view at that particular point in time to make that decision. A reasonable regulator would make that decision. That doesn’t mean that I, myself, would have made the same decision, but what I am saying is that it was reasonable in the circumstances at the time.
“But it is not something that I would have decided myself because I believe that we should be acting quicker when it comes to financial institutions.”
Ms Orr outlined that NAB had lodged breach reports notifying ASIC that “multiple bank employees across multiple branches” in the Greater Western Sydney area were accepting false documents in support of loan applications and were falsely attributing loans as having been referred by NAB introducers in order to obtain commissions.
The counsel assisting said: “And you tell me that it was a reasonable decision, [that] a reasonable regulator would have made that decision despite NAB having given you that information in its first breach report and then lodging a second breach report with ASIC on 31 August 2016, which made clear that the conduct was even more extensive than that covered by the first breach report?”
Mr Shipton replied: “I do not disagree with the facts and I am disturbed and disappointed by the facts. That is why — you are right. I can’t make every decision, but that is why processes and decision-making structures are so important. And that is why I was explaining to you the difference between processes and decision-making structures and strategy. ASIC needs to do a better job on both. That’s my key point here.”
When asked why the regulator only decided to investigate NAB “a couple of months ago” when the evidence was laid before the commission in March of this year, Mr Shipton replied: “Because it was clear from the evidence that was put before the royal commission that this matter needed to be reviewed. And we made the right decision and I will grant and I will concede that that decision was made too late.”
He continued: “We need better decision-making structures and we need a better strategy.”
Ms Orr went on to highlight an email chain between two senior managers in the deposit takers, credit and insurers stakeholder team at ASIC in July of this year, in which queries were raised about why ASIC had not taken action against NAB — with Ms Orr noting that this was despite the bank having reported the breaches to the regulator two years earlier, as part of its legal obligation.
Mr Shipton retorted by saying that the regulator was investigating the individuals involved in the loan fraud and that conversations “then went more broadly to NAB, the organisation”.
“There was a conclusion that, as I remember, that came out of that which was to look not just at the individuals, but to look more broadly at NAB. And I concede that happened too late in the process, but is happening,” the ASIC chair said.
He continued: “I do recollect and can confirm that we are doing something, so that the ultimate decision was the right decision. And I agree with you that it was — it happened too late and we should have been discussing at a much earlier stage.
“In fact, I would say years before this, the potential wrongdoing by NAB.”
Mr Shipton concluded: “I think we should just put an element of caution of reading too much into this discussion (which was, albeit, at a late occurrence in the timetable), but, nonetheless, was not a fully informed one. And [note] that ultimately, when an informed discussion took place, the right decision was made and that was to pursue an investigation and not to pursue an enforceable undertaking.”
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is expected to discuss ASIC’s decision making and action around enforceable undertakings on Friday (23 November).
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.