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Standing Committee on Economics
06/10/2016
Annual review of Australia's four major banks

CAHILL, Mr Antony, Chief Operating Officer, National Australia Bank Limited

THORBURN, Mr Andrew, Chief Executive Officer, National Australia Bank Limited

Committee met at 09:15

CHAIR ( Mr Coleman ): I declare open this hearing of the House of Representatives Standing Committee on Economics for the review of the four major banks. The Treasurer has asked the committee to hold public hearings at least annually with the four major banks, focusing on: domestic and international financial market developments as they relate to the Australian banking sector and how these are affecting Australia; developments in prudential regulation, including capital requirements, and how those are affecting the policies of Australian banks; the costs of funds, impact on margins and the basis for bank pricing decisions; and how individual banks and the banking industry as a whole are responding to issues previously raised in parliamentary and other inquiries, including through the Australian Bankers' Association April 2016 six-point plan to enhance consumer protections, and in response to government reforms and actions by regulators.

I would like to outline a number of matters related to the conduct of today's hearing. Firstly, I would refer members and witnesses to the House resolution related to procedures for dealing with witnesses at page 126, paragraph (9), of the House of Representatives standing orders. The resolution provides that, should a witness refuse to answer a question, they should be asked to state the grounds on which they object. The committee may deliberate at a future private meeting on whether or not to insist upon an answer. If the committee does consider the matter in private, it may write to the witness with the outcome of its discussion.

During the course of the hearing, witnesses may be asked to provide documents at a later stage. If a witness subsequently refuses to provide documents, the committee may meet in private to consider the matter. Under standing order 236 of the House of Representatives, the committee has the power to compel witnesses to produce documents where the committee has made a decision that the circumstances warrant such an order. Should requests for documents arise during today's hearing, the committee will ensure that you are provided with written information related to those requests. I note that should any members have further questions that they would like to put to today's witnesses at the conclusion of today's hearing, they may put additional questions to the witnesses in writing and the witnesses are then required to respond in writing to the committee. I also note that the committee has the power to conduct additional hearings with bank executives as part of this inquiry.

I would also like to disclose that, prior to being elected to parliament in 2013, I was a member of the board of directors of Yellow Brick Road Limited. Yellow Brick Road is a financial services company that competes with the banks, particularly in the areas of mortgages and financial services. I resigned from the board on being elected to parliament.

We have witnesses present from National Australia Bank Limited for today's hearing. I remind you that, although the committee does not require you to give evidence under oath, the hearings are legal proceedings of the parliament and warrant the same respect as proceedings of the House. The giving of false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. I now invite you to make an opening statement.

Mr Thorburn : Thank you, Mr Chairman. Good morning everyone. I would like to make an opening statement and I appreciate the opportunity to do that. It will take about 10 minutes. It is a privilege to be before you today to talk about the profession and the business of banking. This is an important conversation. I am a proud banker, having worked only in a bank my whole career. It is a profession that must be based on trust, respect and integrity. Indeed, the banking and finance oath states: 'Trust is the foundation of my profession'. This was true when I started my career and remains true today. For bankers, trust is the currency that matters the most.

I am proud to be CEO of NAB, because the role of a bank is vital. At its core, it has the purpose to help people, to help businesses and to help the economy prosper. However, there have been some issues in our industry, and at NAB, which we cannot be proud of. I want to assure our customers, and you, that we are committed to facing into this so that we can be a stronger bank and a stronger profession.

Today I would like to cover three key areas: the different stakeholders banks have and the importance of maintaining a balance between them; how a bank balance sheet is structured and the flow-on to profitability and pricing; and building trust through action. A slide pack with further detail on these topics has been distributed to you and is also available to our customers and the community on our website, as is this opening statement.

Banking has been an important and trusted part of society for centuries, connecting those who need access to credit with those who want a safe place to invest. We have a huge responsibility to get it right for our customers. We are crucial to their lives and to helping the economy grow. Banking requires a careful balance of the needs of all stakeholders: home owners, businesses, depositors and mum-and-dad shareholders, as well as superannuation funds representing millions of Australian workers and retirees. More than five million Australians and Australian businesses choose to bank with NAB. They expect us to help them with some of the most important decisions they will make—decisions like providing finance for a home, saving for retirement and starting and growing their business.

Each month, NAB lends at least $4 billion to help people buy or renovate a property. As Australia's biggest business bank, we lend at least $2 billion a month to back Australian businesses, small and big, and we help secure finance for major infrastructure projects. NAB itself directly contributes much to the Australian economy. In the 12 months to March 2016, our business generated $17.1 billion in revenue. Of this, we paid $4.3 billion in salaries to 35,000 employees, $3.6 billion in expenses to our suppliers and $2.2 billion in tax. That left $7 billion. Of this, $2.2 billion was retained as capital to support new lending and to build the capital base of the bank, making it stronger and more resilient, and $4.8 billion was paid to our 584,000 shareholders; 95 per cent of these are Australians and the majority of these are working families or retirees who receive dividends either directly or indirectly through their superannuation funds.

Delivering quality and sustainable returns is essential to maintaining the confidence of global investors. Australia has a level of investment that exceeds our national savings, and accessing these funds is crucial to enable us to inject them into the Australian economy, enabling investment and economic growth. During the global financial crisis, we saw how important it was to keep these flows open, providing access to capital to allow us to continue lending to households and businesses. Today the Australian economy remains attractive by global standards. Confidence levels are encouraging, but longer term risks are emerging. The Financial System Inquiry made recommendations to ensure banks are unquestionably strong, even in times of financial stress, and to increase bank capital ratios. There is a cost to higher capital requirements, but the cost of not having a strong, safe and stable system—as we have seen overseas—is greater.

Banking in Australia is competitive. We are in a low-growth environment, and all the banks are working hard to win business, both deposits and loans, and this is good for customers. I know the parliament and the wider community are concerned about the relationship between the RBA cash rate and how we set interest rates. We have not been clear enough that our mortgage and other lending products are not, and have never been, directly linked to the cash rate. Many of you would recall that, from the 1990s to the GFC, movements in mortgage lending rates did correlate to movements in the cash rate. But we now operate in a low-rate environment, and other factors are having far greater influence.

Funding costs have fallen overall, but they have not fallen by as much as our lending rates. This has meant a reduction in bank margins. The accepted measure of bank margins—net interest margin or NIM—has been in gradual decline for at least two decades. Put simply, banks are now earning less than they used to for every dollar they lend. So why is NIM falling? On the funding side, one of the main drivers is the change in our funding mix, made up of customer deposits, short- and long-term wholesale funding and the equity our shareholders have given us. These funds are pooled and lent out to customers. Each funding type has different costs, and they do not move in sync with each other or the cash rate. New global regulations designed to further strengthen the banks mean we need greater levels of deposits and longer term wholesale debt because they are viewed as more stable. This has driven competition for deposits, and we are paying more to customers for term deposits relative to the cash rate.

The price of international wholesale funding is determined by supply and demand for Australian bank and NAB specific debt in the global market, not the Australian cash rate. On the lending side, competition between Australian banks has never been more intense, so borrowing rates have fallen faster than deposit rates. It comes back to getting the balance right between what we pay for funding and the rate at which we lend. This balance is dependent on attracting investment from savers, global investors and shareholders by offering them a fair return and confidence in the stability of the bank.

From my first days as CEO of NAB, I have said: 'Our future success will be defined by our culture and the leadership we deliver for our people and our customers.' Indeed, these were the words I used when addressing a Senate committee last year. This is a constant process and remains true today. To our customers, I acknowledge we have not always delivered as well as we could or should have. We must do better. My focus and responsibility is for improvement now, not later. Recent improvements in regulatory oversight have sought to give Australians greater confidence in their banks; however, the industry needs to lead with its own real and lasting reform.

CHAIR: Sorry, Mr Thorburn, I am just letting you know you have about two minutes remaining for your statement.

Mr Thorburn : Thank you, Mr Chairman. As chair of the ABA, I have worked with my counterparts and we have committed to making real changes together. In April this year, following extensive consultation, we launched a comprehensive reform package of six initiatives aimed at building further trust and confidence in our banks. This package has strong oversight from independent experts holding the industry to account and reporting on progress every 90 days.

At NAB, since 2014, our vision has been to be Australia and New Zealand's most respected bank. When you have 35,000 staff serving millions of customers, there will be mistakes made. We must acknowledge these mistakes and we must be accountable and fix them. If we want our customers to trust us, we have to do more to build that trust. I would now like to briefly, in closing, focus on three key areas of importance to this. On remuneration, customers need to be confident that every time they deal with the bank they are receiving products and services that best suit their needs. That is why the way we measure performance and pay our people reflects our focus of helping customers, and we have worked to get in place a balance, the right measures and the right safeguards. There is a range, but, across our workforce, 85 per cent of staff pay is fixed or base salary and the average potential incentive payments make up 15 per cent of total remuneration. For NAB executives, including myself, one-third of any incentive is dependent on whether our customers would recommend us to family or friends, and everyone at NAB has a balance scorecard which measures how they are contributing across four key areas: customers, risk, financial and people and leadership.

For 88 per cent of our people, they are on an incentive system that involves no direct product or sales targets. This includes 2,300 tellers in our frontline retail team who are not authorised to sell any lending products. We have 12 per cent of our staff on incentive schemes involving product targets and any payments are subject to various safeguards to protect the integrity of the system. I acknowledge more needs to be done in the critical area of product sales commissions and product based payments. We expect and welcome changes as a result of the review being conducted by Stephen Sedgwick on behalf of the ABA.

CHAIR: Mr Thorburn, sorry to interrupt, but we might bring your statement to a conclusion there because we are at time. I think you have provided this statement in writing to members, so—

Mr Thorburn : Yes, I have. Can I just do the final page, Mr Chairman? It will take me 30 seconds. I just want to wrap it up.

CHAIR: All right, yes. You can do that quickly, please.

Mr Thorburn : Thank you. Mr Chairman and committee members, our bank has a values led culture. Core to this is doing the right thing and having respect for people. I am proud of our 35,000 people and their commitment to these values. By living our values and listening and taking action, we are committed to building the trust of our customers and the community because, for bankers, trust is the currency that matters the most. Thank you, Mr Chairman. We now look forward to your questions.

CHAIR: In 2015 your bank told the Senate Economics References Committee that it had compensated more than 750 of your financial advice customers for a total of $14.5 million between January 2010 and September 2014. You have acknowledged that you dismissed 41 planners between 2010 and 2015 and, according to a report on this issue published in The Sydney Morning Herald, an internal NAB report said that financial planners had been suspended, terminated or forced to resign due to conflicts of interest, inappropriate advice, inappropriate practices or serious repeat compliance breaches. That same report states that there were cases where NAB planners had forged clients' signatures or manipulated clients' files in attempts at covering up poor advice. Those are extremely serious allegations. How did that happen? And what is being done about it?

Mr Thorburn : I think this is a very relevant and fair line of questioning, because our commitment as a bank—we have been around for 150 years, and MLC, which has been around for 120 years—we need to get this right. Our business relies on the trust and the confidence of our customers and building relationships with them. In the area of financial advice, we believe in advice. We think it is really important that customers, as the population ages, as the range of products and services opens up, get good, sound, professional and reliable advice from our bank.

So, what we said at the Senate committee was that in the five years leading up to that Senate committee we had compensated customers $15 million. We had gone through and found issues ourselves and had addressed them, and I think that is important—that we are constantly looking for issues and we are addressing them and compensating customers when necessary.

CHAIR: But you had 41 planners where the situation was sufficiently serious that you fired them. That is a significant number. That is not one or two rogue individuals; that is a significant number of planners.

Mr Thorburn : That is a significant number, and we acknowledged that and said that was not good enough.

CHAIR: And how could you allow that to occur in the first place?

Mr Thorburn : What we have done since then is that we have made a commitment to the committee that we would do five key things, and we are doing those things and we gave the update two weeks ago, and that has led to compensation of another 251 customers for $6½ million. Those five things were that we would write to customers where there may have been poor advice; that we would respond to complaints quicker—we were not dealing with them fast enough; and that we would bring far more independence into our process, so we have an independent customer advocate just committed to the wealth part of the business: Dimity Kingsford Smith. We also strengthened whistleblower and lifted confidentiality clauses that had existed. Finally, we said that we would report all planners who left, whether there were compliance or conduct concerns, to ASIC—not just some. And we wrapped around that an independent firm, Deloitte, to monitor our progress. So, I think we have learnt, and we have really improved the way we are doing business today.

CHAIR: Sorry—you have not addressed my questions, which was: how did it occur in the first place? How could a culture have been enabled to exist within the bank with such widespread wrongdoing? Whose fault was that?

Mr Thorburn : These 43 planners—the first group—were indeed not doing and living by the values of the bank. We had made very clear the way we want advice to be conducted, the way compliance should be done. And as we reviewed our planners, some were not doing that, and over a period of time there were 43 who left for that reason.

CHAIR: And they were all just off on a frolic of their own as rogue individuals, were they? You assert that the management of the bank was not responsible for that or it was not because of a culture within the bank?

Mr Thorburn : We did a review and we had an independent party come and do that review with us, and we concluded—and we stand by that—that it was not a systemic issue. I want to say that any customer who gets poor advice from us—and these planners did the wrong thing; we stand—

CHAIR: So, 43 of them all just independently, despite the efforts of the bank, went off and did the wrong thing and there was no culpability of the bank itself or the bank's senior management for that activity. Is that what you are asserting to the committee?

Mr Thorburn : No, the bank is certainly accountable, because they are our customers, and any wrong advice, we stand behind them, hence the acknowledgement of that and the compensation. I did want to just say that any customer who gets the wrong advice is one too many for me, so we need to address those. But we have 43 planners over a number of years. We have about 1,700 planners in our network. The vast majority of our planners are doing the right thing, and the vast majority of our 35,000 people are working hard to serve our customers. There is no doubt in my mind about the planners who are doing that.

CHAIR: How many senior executives have been terminated as a result of this?

Mr Thorburn : There has been a number of incentive reductions or nonpayment. There have been a number of compliance breaches around individuals. But I want to come back to the point—

CHAIR: No, if you will just address the question. How many senior executives have been terminated as a result of these behaviours in your wealth management division?

Mr Thorburn : I do not think there are any, but I will take that on notice and we can come back to you. But the main point here is that there was no systemic issue. We have individuals who were not playing by the rules and the values that the company set.

CHAIR: You said you had 1,700 financial planners, of which 43 have been terminated, so what is that? It is about 2½ per cent. That is one in 40. I would not say that was a black swan event. You have one in 40 people being terminated because of these very serious instances, and I think what you are saying to the committee is that no senior executive of National Australia Bank has been terminated as a consequence of that. Is that correct?

Mr Thorburn : That is correct.

CHAIR: And you think that is appropriate.

Mr Thorburn : We have done a thorough, comprehensive review. We have involved at least two third parties to help us with that. This has gone to our board a number of times. And we concluded and still believe it was not systemic. If there are systemic issues, I think that is a different matter, but what we have is managers in this part of the business who are managed on a balanced scorecard. In my opening statement I said it was customers, risk, financial, leadership in people, the values the bank overlay, compliance and conduct, and overall we believe they still met those. There were some other, monetary consequences, but we did not believe that it was appropriate that any individual was dismissed for that apart from the planners themselves who were clearly doing the wrong thing.

CHAIR: You are asserting that 2½ per cent of your financial planners were terminated for serious misconduct and that there have been some bonus consequences for some of your senior executives but that at an executive level that is it. No-one has suffered any more serious consequence than perhaps withholding some of their bonus. I think you might understand why the committee and the broader public might take exception to that as a response by the bank.

Mr Thorburn : I would just come back to my overall points. We take this seriously. A lot of this we found ourselves and addressed ourselves. We have people here—the planners who have left—who were either seriously breaching our own compliance standards or blatantly breaking the law. We have to put in place better systems to detect that, better training and better leadership, but, unfortunately, as long as banking has been in existence—and in other professions too—there were going to be some people that are not going to play by the rules that we all believe are right.

CHAIR: You mentioned leadership, but isn't a key aspect of executive leadership taking responsibility? Isn't the ultimate responsibility that surely there are some senior executives who are culpable for this behaviour? It seems to me that it is very convenient for the bank to say, 'Well, there are 43 rogue individuals, but the senior executive team is not in a material sense held accountable'?

Mr Thorburn : The senior executive team is held accountable for the overall performance of their job, and that is a broad set of requirements in their role. Because we concluded that this was not systemic, that it was individuals who were not abiding by the rules of the land and the rules of our company, there did not need to be more severe penalties. I think the people in this line of business definitely feel accountable and I think we were very disappointed. I think reputations have suffered: our bank and people in and around that part of the business. So I do not think it is just monetary.

CHAIR: I am sure the customers who experienced wrongdoing were disappointed too, but they have obviously suffered a significant consequence.

Mr Thorburn : And I absolutely understand that. I have met some of these customers. Our advice was poor and wrong and not right, and I have apologised to them. We will continue to implement our customer response initiative. We believe it is being led well, it is comprehensive, it is thorough and it is has got lots of independence in it. We are prepared to put out the progress we are making. So, as I look forward, I think we have learnt from this and we have significantly strengthened our controls and we have significantly strengthened our governance around this part of the business.

CHAIR: Yes. Speaking of controls, this is the same division—your wealth management division—which, as I understand it, had to pay compensation to 62,000 customers, over $25 million, due to basic errors in the calculation of their affairs, effectively. So it is the same division. I think you would accept 62,000 people is a large number of people. Has anyone been held responsible for that?

Mr Thorburn : I think, again, that was a different issue.

CHAIR: The same division, though, right?

Mr Thorburn : Yes, the same division. Yes, that is correct, but I think, in looking still at the overall business of that part of the business—the number of staff and the assets under management, which will be $180 billion, and the overall profitability of that business—we have had these isolated cases, we have owned up to them and we are addressing them.

CHAIR: But, beyond the retention of some bonuses, you have not held anyone within the executive management team of the wealth management division more responsible for any of these activities, including this breach affecting 62,000 customers?

Mr Thorburn : If you are asking about the dismissal piece, I will take that on notice too, if I could, on that particular piece, but I think my answer is broadly the same in response to your earlier question.

CHAIR: Just to put you on notice, the committee is writing to you seeking documents, particularly around the wealth management division and its treatment of customers, and documents related to board papers, internal investigations and so on. I want to move on to a number of more structural, systemic matters about the banking system and a number of matters that may be of interest to the committee in pursuing this inquiry, and I will run through these fairly quickly and then pass on to Mr Thistlethwaite.

One of the rationales for this inquiry being instituted was the repeated failure of the banks to pass on the RBA cash rates, and you have addressed your perspective on that issue in your opening remarks. You would be familiar with tracker rate mortgages, which are available widely in the UK, the US and most other markets, I understand, but not generally available in Australia. The value of those mortgages, of course, is that they enable a consumer to say, 'I will take the RBA cash rate, or whatever the benchmark is, plus X per cent,' and then, however the benchmark moves, that consumer knows where they stand. I take on board points about how there are other factors and so on, but the broader point is that it would provide a consumer with certainty, and that is something that I think could be of very significant value. So I have two questions, if you could just address them fairly briefly: firstly, why is it that these products are not available in Australia; and, secondly, would you object to or have any issue with regulatory action to require you to make those products available?

Mr Thorburn : I might get Antony to just cover this briefly, because we have studied this. We are familiar with it. They have been used in the UK in particular. But I will just make a brief opening comment, just to reinforce that, yes, the cash rate does not fund our bank. The cash rate does not fund our mortgage book; that is correct. Also, the issue with tracker mortgages is that, because of that, if there were too much business in that category linked to the cash rate, it would raise a very significant interest rate and funding risk for us, because our balance sheet, which is deep and wide, has $200 billion of offshore funds which are not linked to the cash rate. So, if we had too much business and it were not priced correctly in the tracker portfolio, we are raising a significant risk for the bank. I would just say that as an opening, but perhaps Antony could speak on trackers themselves in answer to the chair's question.

Mr Cahill : Technically the product could be offered within the Australian marketplace. As Andrew has pointed out, our borrowing rates are not indexed against the cash rate. So, if we were to offer a lending product such as a tracker mortgage which was indexed against the cash rate, we would need to ensure that there was a sufficient premium or buffer between the lending rate to the customer and the cash rate itself. That would mean that the rates that we would be able to offer a tracker rate to a customer at, in all likelihood, would be significantly higher than the standard variable rate that we are able to offer today. So technically the product could be offered in the Australian marketplace. Our view is that the rate that we would be able to offer that product to our customers at to ensure that the risk was appropriately priced into the product, as Andrew has pointed out, would mean that the product would potentially be significantly higher than our standard variable rate products.

CHAIR: Why don't you give customers the option, and why are banks in other markets able to cope with this issue?

Mr Cahill : In terms of giving customers the option—

CHAIR: Because any benchmark you use presumably is imperfect. No benchmark is going to be 100 per cent. But in other markets banks have managed to get their heads around this and have provided this product for consumers for whom perhaps this is a very important issue, and they want certainty. Why is it not possible to make that product available and then consumers can choose whether they want the rate tracker or they want the variable rate. It seems to me that this would address a lot of the uncertainty in the market.

Mr Cahill : The product could be offered in the Australian marketplace. In terms of offering customers certainty, fixed-rate mortgages are probably the most appropriate way for customers to secure certainty at the moment in relation to their mortgage borrowing. From our perspective—

CHAIR: Isn't that for customers to decide? I mean, shouldn't you be offering a multiple range of products to allow consumers to decide what it is that they are actually seeking? There is no question that there are significant numbers of consumers who want certainty in relation to any RBA cash rate changes. They do not currently have that. It is unclear to me why the bank is not able to simply offer that product. Obviously, it is a commercial matter for you as to the exact rate at which you seek to provide it. It is entirely unclear why it cannot be provided.

Mr Thorburn : We could offer the product. We simply do not believe that commercially there would be significant demand for the product in the Australian marketplace. So, as you have pointed out, we clearly look at the marketplace and we seek to supply the products to our customers that they demand. So, if we felt that there was significant demand the product—to your first specific point—technically the product could be offered.

CHAIR: I want to ask you about account portability and open data. The UK regulator, as you know, has mandated that by 2018 the UK banks are required to effectively open up APIs to enable consumer data to be accessed by competitors, start-ups and other banks, obviously with the consent of the consumer, and obviously there are privacy issues that you will no doubt address in your answer. But the UK regulator has said that this is good for consumers and has mandated that it should be done. Do you have any issue with the Australian regulator if the committee were to recommend that ASIC be given a mandate to open up data to improve this whole area of account portability and switching, which has not worked well for consumers in the past? Would you seek to stand in the way that or would you support it?

Mr Thorburn : I would like to expand on the answer, but the short answer is that we would support it. Perhaps, Antony, I could cover the account portability and you can do the data one.

Mr Cahill : Yes.

Mr Thorburn : Overall, we welcome competition. That is how this bank has survived and competed for 150 years. And now we have new competition—FinTecs that are coming at us—and we welcome that, too. We have to lift and get better, and that is good for customers. So, in principle here—no problems whatsoever. On the point of account portability, we welcome that, too. Actually, I think the work that is being done as part of the new payments platform, which will go live at the end of next year, will seamlessly and easily allow that to occur for customers. So actually I think a lot of the mechanics and the investment that the banks are spending on the new payments platform will enable account portability by the end of next year to actually occur, and we welcome that.

CHAIR: If you could address the data piece, Mr Cahill.

Mr Cahill : In terms of account portability, if I could just expand on that slightly to ensure that that is understood by the committee members, the new payments platform will be coming on-stream next year. That is an investment overall by the industry of around about $1 billion to enable that to happen. There are two components of this. Firstly, the ability for a customer to open a new bank account with a financial institution today is now extremely easy, with most providers enabling customers to do so through digital platforms, in addition to go into branches or doing it over the phone et cetera.

One of the traditional issues for customers has been not necessarily moving bank accounts but is in relation to direct debits or credits going into and out of that particular account. The new payments platform will provide all Australian consumers with an alias ID—they can use their mobile phone number or an email address—and they can associate that alias ID with their bank account. So, Mr Chairman, if you had a bank account with another bank today and you came to NAB—and we welcome you to come to us—you would be able to go to the new payments platform and go to your alias ID and change your account number. None of your direct debits or credits would then need to be changed, so that should be largely resolved.

CHAIR: Yes. The governor addressed this issue in the Reserve Bank hearing a couple of weeks ago. That is welcome, but there is obviously the issue of people wanting to get rid of their bank more easily as well. That is where the account portability comes in. In relation to the data question, it is good to hear that you are open to that. We have talked a lot about remuneration and incentives in these hearings and it is so important to link incentives to outcomes. If we all acknowledge that opening up data is good for stimulating competition, getting a better deal for consumers and enabling people to switch more easily, would you as the chief executive be open to providing a specific financial incentive to your senior IT executives in particular to work constructively with ASIC on the opening up of the bank's data for the purpose of increased opposition?

Mr Thorburn : I think there are a lot of things that are in executives' and people's basic jobs which we do not necessarily have to incentivise. We expect them to do it, and so—

CHAIR: But, with respect, I think the banks have not demonstrated a willingness to open up data in this manner in the past. If you as the chief executive are saying that you think it is a good thing, that it would be good for consumers—and obviously your published values focus on the importance of the centrality of the consumer—presumably it would be entirely consistent with that for you to provide a significant financial incentive to your senior IT executives to open up that data for the benefit of consumers.

Mr Thorburn : Let's do this in two parts. Antony, I think you should talk about what we have done with data, because actually I think we already have a very good record of leading in this space—a 'listen to what I do' type concept. So we are already doing things in this space. Then I will come back to the IT piece.

Mr Cahill : In relation to data sharing, the top principle is absolutely that we welcome competition. In terms of data sharing, if that can generate better outcomes for customers, we would support that in principle. So I would point the committee to the fact that at the moment we as a major bank are currently participating in the comprehensive credit reporting regime. We are sharing our data currently in private mode with the bureaus. So we are ensuring that our systems and our approaches will be ready to participate in that regime as we go forwards. That is clearly an area where there is significant focus in the industry at the moment—in relation to sharing customer data to effectively generate more competition and provide better outcomes for customers. So we are participating in the credit reporting regime.

In relation to opening up our data more broadly, and in actual fact sharing customers' data with other institutions, we agree with that in principle. The key question for us is ensuring that the correct protocols and security regimes are in place. From our perspective, trust is the key thing that we have with our customers. If we were to lose that trust in a data breach or a privacy breach, then we would take that very seriously.

CHAIR: Indeed, and nobody on the committee would be suggesting any different. Obviously the privacy of consumers is paramount. The UK regulator has concluded that those issues can be addressed. Whilst it is interesting to express in principle support, what matters is performance. That is why I asked the question, Mr Thorburn, about whether you would be open to providing financial incentives to your senior executives, particularly within IT, to ensure that this actually happens.

Mr Thorburn : The first thing is behaviour does count—you are absolutely right—but we are actually really active in the CCR space at the moment with data sharing. So we are involved and doing it quite actively. But let me take on notice—

CHAIR: I have asked you probably three or four times now and you have not addressed the question. So do I take that as a no?

Mr Thorburn : No. I am committing to you that, in the case of account portability and data sharing, we support it. I would like to take on notice the best way for me to lead our company to make sure those two things happen. You are asking for a very specific piece and I am committing to the principle.

CHAIR: If you could come back to the committee specifically on the issue of what the bank will do on that, and particularly how it will provide incentives to its senior executives to make this happen, that would be good. I am going to pass out to Mr Thistlethwaite. I note that Mr Conroy is not with us today and, as a consequence of that, I am going to provide some additional time to both Mr Thistlethwaite and Mr Keogh to ask you questions.

Mr THISTLETHWAITE: Mr Thorburn, in your opening statement you mentioned some issues in the industry and at NAB which you cannot be proud of. We are getting a similar theme from you, NAB, from the Commonwealth Bank and from the ANZ yesterday. The key difference I note, however, is that the CEOs of ANZ and the Commonwealth Bank have apologised to their customers and to the Australian public for their actions. I have not heard an apology from you today. Do you feel that there is no need to apologise for the actions of NAB in respect of some of your traders and planners in recent years?

Mr Thorburn : No, not at all, because our company has been based, all through its history, on getting the relationship with customers right so there is trust and confidence. When that does break down—and it has from time to time—that is one too many for me. I have apologised to the customers, particularly in the financial advice part of the business. I have met with a number of them, and when I read and hear the stories I am extremely disappointed. So, as I sit here before you today, I have apologised and do so again.

Mr THISTLETHWAITE: Thanks. As part of ASIC's wealth management project they have issued temporary or permanent banning orders against at least five NAB financial planners in recent times: Hardik Bhimani, Gerard McCormack, Shane Thompson, Mark Tidbury and Alfie Chong. Can you outline for us the circumstances that led to these individuals being banned.

Mr Thorburn : We did receive letters from you and some of your colleagues in relation to those five planners. I replied on Tuesday. In essence, just for the benefit of the remaining members of the committee, I said that we were not able to provide all the information that you had requested in the time frame and there were some confidentiality and privacy issues in relation to it anyway. But I can make a couple of overall comments. The first is that, of the five you mentioned, four were in the original 43 that we talked about as part of our Senate appearance last year. One has been subsequent. Of the five, with four we found the issues ourselves. As part of our commitment to immediately advising ASIC when planners leave the bank when there are conduct or behavioural issues, we have been doing that. I think they are the key points I would like to make about the five.

CHAIR: Could I interrupt for one moment. Mr Thorburn, you have just said that you effectively have not responded to a particular query from Mr Thistlethwaite. The committee will be writing to you in relation to a range of matters that we will be seeking further information on. We will be coming back to you shortly in relation to a number of these matters.

Mr Thorburn : Thank you, Mr Chairman.

Mr THISTLETHWAITE: Has your organisation contacted all of the clients that were working with these planners?

Mr Thorburn : I would need to take that on notice because I think in a couple of the cases we wrote to every client, yes. With a number of others I think we did smaller samples because we looked to see whether it was going to be predictive, or likely that it happened. I could take the specific question on notice.

Mr THISTLETHWAITE: Wouldn't it be prudent to write to clients of those planners? If I were a client of one of those planners and I read in the newspaper or in media reports that they had been banned for unethical conduct or breaching laws, I would be quite upset, particularly if I did not get any communication about that from the bank that I was a client of.

Mr Thorburn : I will just go back one step and assure you of something, and that is that I am, and we are, committed to having trust with every single client of our company. I have no interest, as a proud banker—and I am honoured to be the CEO of this bank—to cut any corners, sir. If I could just make that commitment first.

On the five: with two, we wrote to every single client; with two we wrote to specifically impacted clients. We looked at similar clients with similar products and similar structure in their portfolio and we wrote to specific clients where we felt there was similarity. With one, there were no financial consequences for clients anyway, so we did not need to do that. Of the five cases, in four there was limited compensation; in one it was quite significant. But we did write to all for two and to specific groups for two as well.

Mr THISTLETHWAITE: Did you review all of the client files associated with these planners?

Mr Thorburn : For two of them, we wrote to every single one. For the other ones, we looked at the clients, the types of products and services they have—the similarity with the clients where there has been an impact—and we have written to those. We have been more targeted. But we continue to scan; we continue to learn; we are improving our systems and data. I can assure you that, when we feel there are any concerns, we will be going back to clients again.

Mr Cahill : Mr Thistlethwaite, it may be worth pointing out as well that we are liaising with ASIC on all five of these cases to ensure that we are taking the appropriate steps. To Andrew's point, in relation to those five planners, in terms of losses suffered by clients, 90 per cent of the losses suffered by clients were in relation to one planner. We have undertaken a thorough investigation and we are working closely with the regulator.

Mr THISTLETHWAITE: You have mentioned trust quite a bit this morning as the foundation of banking. Even if there were not financial losses for some of these clients, wouldn't it be prudent to simply inform them that one of the planners who works for your organisation that they have been dealing with has been banned by ASIC for breaching laws, breaching codes of conduct and, I imagine, breaching your internal procedures, to let them know about that? I find it quite amazing that some of those clients may not have been contacted by your organisation.

Mr Thorburn : Could I take on notice, Mr Thistlethwaite, the specific piece, because we may need to do certain things once they are banned? I do not know the specific answer to that, but I do want to assure you that we take this absolutely seriously. I think we have significantly improved our governance and controls and the consequences for people and we have written to all, in the case of two, and in a very disciplined and targeted way for the other two.

Mr THISTLETHWAITE: Perhaps you could take that on notice. That would be one of the issues.

Mr Thorburn : Yes.

Mr THISTLETHWAITE: You mentioned that some of them had received compensation. Could you tell us how much the total compensation package was for the cases involving those five planners?

Mr Thorburn : I think it was $892,000, but, as we have said, the vast majority, which amounted to around $800,000, is due to one planner.

Mr THISTLETHWAITE: Who in your organisation is responsible for reviewing these types of cases and putting in place practices to ensure that these things do not occur again?

Mr Thorburn : The executive at the top is accountable for that whole business. It is important that that does exist, because they lead and run this business. But we do have very specific and dedicated technical people who are in a specific area who are scanning, doing data runs and looking at unusual trends and unusual advice for particular types of clients. So I think we are getting a lot more advanced in detective and predictive type controls. We do have a team that reports on that and that comes up through the business and we do get access to that information quite openly in senior ranks in the bank to see what that is saying.

Mr THISTLETHWAITE: Does it go to the board level?

Mr Thorburn : This topic on NAB Wealth, given the issues that have raised here, has been very well covered, attended to and governed by the board. As to that particular part of updating them and advising them of what that unit does and what it is finding, yes, that is part of that briefing process.

Mr THISTLETHWAITE: The chairman referred earlier to the case of the 43 planners who had been dismissed for misconduct. Again, have you reviewed all of the client files in respect of those cases?

Mr Thorburn : On the 43, yes, we wrote to all the customers.

Mr THISTLETHWAITE: Okay. And you reviewed the files as well with respect to their conduct?

Mr Thorburn : I would have to take the specific bit on notice. I think the whole customer response initiative of us finding the 43 and compensating over five years leading up to 2014—$15 million—we were doing that actively and willingly, and we have subsequently made a number of other commitments. All I say, Mr Thistlethwaite, is to assure you and to show by action that we want to get this right.

Mr THISTLETHWAITE: Were any other staff associated with those planners sacked as well or was it just the planners?

Mr Thorburn : The planners were the culpable parties, really. Again, I think in response to the Chair's earlier question, we have had some other consequences for other people in the bank, but I think the planners were the ones who were the active personal participants in these wrong behaviours and activities.

Mr THISTLETHWAITE: When they were identified, was that reported to ASIC?

Mr Thorburn : I think this is one that—as part of the Senate inquiry, we made it very clear that we were now going to report every single planner who left where there was a compliance or conduct breach to ASIC, and we have been doing that since that time.

Mr THISTLETHWAITE: Did that include those 43?

Mr Thorburn : For the 43, we reported what we thought we needed to report for breaches that had occurred, but there were definitional type issues, and I think those came out when we were around the Senate inquiry. Since then, we have said, 'Look, we want to make it 100 per cent clear,' so everyone who has left since that time, since early 2015—this is the nine—we have reported to ASIC.

Mr THISTLETHWAITE: So in the 43 that were dismissed by your organisation, it is possible that some of them have not been reported to ASIC?

Mr Thorburn : They will know about those now. They would know the individual and—

Mr THISTLETHWAITE: But were they reported by your organisation to ASIC?

Mr Thorburn : They will know about those now, for sure. But at the time—

Mr THISTLETHWAITE: How will they know about them if you did not report them?

Mr Thorburn : We did not report them at that time. That was the bit that we said, 'Okay, let's be very clear on this,' about. We have various breach rules that are and were in existence, and we were reporting what we thought was appropriate to report to ASIC at the time of the 43, in the years leading up to the Senate committee. We have just said now, without any shadow of doubt, any who do leave because of compliance or conduct reasons, we will report them all to ASIC, whether it meets our particular hurdle or not.

Mr THISTLETHWAITE: Do you know if ASIC has taken any actions against those 43?

Mr Thorburn : I would have to take that on notice.

Mr THISTLETHWAITE: If you could do that, that would be helpful. Are there any more cases that you are currently reviewing at the moment?

Mr Thorburn : Our commitment to get this right for customers so that they can rely on our advice is strong, so we will be monitoring every day the advice that has been given by our planners in our network. So I—

Mr THISTLETHWAITE: Are there any cases of people currently under review?

Mr Thorburn : I do not know of any, but all I am saying is that there will be monitoring going on all the time and there may well be some that we are investigating. When you have a group of 1,700 planners that is—but I do not know of any today.

Mr THISTLETHWAITE: Would you admit that, up until that point where you identified those planners, your internal monitoring processes and checks and balances were not appropriate and up to scratch?

Mr Thorburn : I think that is absolutely one of the reflections that we took. We have since then really improved—and invested more in—compliance, detective controls and systems. Yes.

Mr THISTLETHWAITE: Can you tell us how you do that now? What is the difference?

Mr Thorburn : The first thing is that where we have seen bad practices by planners we have been able to build some detective controls that run across our system, so that when advice is being given we obviously see all the plans, we see the type of clients and the type of products that are being advised, we have additional checks and balances, we have more people doing compliance reviews, and we have invested in systems to help us monitor that more remotely but more actively. I think we have definitely stepped that up because we have learnt from those years leading up to the 43 and the $15 million. Today, I am really confident that we are doing a lot more and we are doing the right things to protect our clients and to protect the reputation of our company.

Mr THISTLETHWAITE: Has the institution of the Future of Financial Advice reforms made a difference in terms of your practices and those integrity checks that now have to be undertaken as part of the law?

Mr Thorburn : I think it has, absolutely. I think that has helped, because now obviously FoFA has brought focus onto getting this right to the long-term; it has brought more transparency and more accountability. Particularly around incentives, there were quite a few changes made as part of FoFA that obviously all our planners are now compliant with.

Mr Cahill : Mr Thistlethwaite, in relation to the 43, I can confirm all 43 names have been discussed in depth with ASIC, and, of those 43, not all of them were actually breaches that were reportable to ASIC. We had conduct concerns around a number of those individuals, but we took the opportunity to have the conversation with ASIC.

In terms of the broader question to Andrew: I think, yes, we put more checks and balances in place but also lifting standards for our planners in terms of educational standards, the ongoing professionalism with the industry, changing remuneration, appointing Professor Dimity Kingsford Smith—these have all been things that we believe are ensuring that our customers get the right advice. But where we do not do the right thing, they clearly see that they have an avenue and an opportunity to communicate with us.

Mr THISTLETHWAITE: Thanks. So, in respect of FoFA, you said that it has made a difference and it has been a positive development. It would not be wise then for the government to be trying to water that down, would it?

Mr Thorburn : What are you referring to there?

Mr THISTLETHWAITE: To water down the effectiveness of the Future of Financial Advice reforms, in particular the best interests test that applies in that legislation.

Mr Thorburn : I think it is important that the bones and the principles of the changes that have been made around FoFA are absolutely maintained. I am not close enough to the specific details that you may be discussing or not. I think it is good to see parliament focusing on it and focusing on things like superannuation and making sure that that is appropriately debated and discussed. I think the topic is the right one for you to be considering. But I think FoFA has helped as part of a much broader set of changes that we have made in our business as well. It has helped the industry.

Mr THISTLETHWAITE: Thank you. I just want to move on to some issues associated with remuneration structures and targeting customers. Do you use the Veda credit bureau to obtain information relating to customers?

Mr Thorburn : Antony, you might answer that.

Mr Cahill : Mr Thistlethwaite, we do work with Veda in relation to customers in terms of credit scoring; yes, that is correct.

Mr THISTLETHWAITE: Do you use that information about customers who are seeking loans with some of your competitors?

Mr Cahill : We have been undertaking some work with Veda—not for consumers—and we have been working through that over the last few months; yes, we have.

Mr THISTLETHWAITE: Can you be a bit more specific there. Do you use that information to actually target some of your customers who may be going to other competitors to look for loans?

Mr Cahill : We use that information to have an opportunity to have a conversation with our customers. The reason being, Mr Thistlethwaite, is if we believe our customers have a need for additional banking services or products then we feel it is an opportunity for us to have a conversation with our customers.

Mr THISTLETHWAITE: What form does that information that you get from Veda about those customers take?

Mr Cahill : I could not provide you with the precise information at this point in time. I would have to take that question on notice.

Mr THISTLETHWAITE: Could you take that on notice and provide us with some of that information.

Mr Cahill : Yes.

Mr Thorburn : Mr Thistlethwaite, can I come back to a broader point on your question here. We have a lot of clients. We value them. We want them to stay with our bank and do more with us. When we hear or see conversations or data that is causing us to say there is an opportunity or there is a risk, I think we should act on that. Now, the question is how we act on that. The way we do that needs to be professional and respectful. If a client tells us that they do not wish to discuss it or it is not appropriate, then we would absolutely respect that.

Mr THISTLETHWAITE: But it is highly likely that you are using that information to target your customers, particularly maybe to sell them some of your products, particularly credit products, insurance products, superannuation products, loan products, and, on occasions, they may not be in their best interests.

Mr Thorburn : We will come back on the specific point, as Antony said, around how we use it. But let me expand on this then. Our commitment and goal to customers, Mr Thistlethwaite, is to understand their needs, understand their circumstances and as professionals, as bankers, give them the right advice and the right product and service—full stop. We have no interest in giving our clients products they do not need. That is our commitment as professionals to what we do.

Our job is to sit down with our clients, particularly in the business space, understand their business and understand their risks and help them navigate through that and give them the right products and services. That way not only are we doing our duty of honour as bankers but we earn the respect of our clients and they trust us. We have no interest in giving our clients something they do not need or credit they do not need or anything like that.

Mr Cahill : It is very much in relation to the information we would receive. It would be understanding from Veda that one of our customers has had a conversation with another bank or financial institution. We have no visibility of the precise conversation or what was happening et cetera. Going to Andrew's point, we believe it is our duty to have a conversation with our customers around if we can help them or if there is an issue where we have failed them and they are seeking to leave us.

Going to the chair's point earlier in relation to data sharing, we work extensively with FinTecs at the moment through NAB Labs, our innovation area. I think this is one of the areas that is starting to develop in terms of customers and the use of data, both in terms of being proactive in ensuring you are putting the right products and services in front of them and in terms of having the right conversations with them. And we would always absolutely maintain and deliver against our responsible lending obligations.

Mr THISTLETHWAITE: Call me cynical, but I think that is a lot of spin. Really it is about an opportunity for your bank, isn't it? You see an opportunity to sell a particular product to a customer that you may have an existing relationship with and you know that because you used information that is available through a credit source agency and you target that customer. I do not think the Australian public would be too pleased if they knew that was going on. They would not be too pleased with the tactics of your bank. But I am not saying you are the only bank that does this; all of you appear to do it. Some would say, 'Well, I can make my own decisions.' Why do you not trust your customer to make their own decisions? If they have decided they want to source a product with another bank, why do you then have to target them? Why can't you just leave them alone and allow them to enjoy that other product?

Mr Thorburn : I think we will have to come back to you on the specifics of how we are using this. But when you say that it is spin and that our intentions are to do what—

Mr THISTLETHWAITE: And I say that because you have all given us the same answer—

Mr Thorburn : Well, you are talking about—

Mr THISTLETHWAITE: that it is about the customer's welfare. We want to make sure the customer is better off. But really it is just an opportunity to sell more products.

Mr Thorburn : The purpose of why we deal with customers is important to identify, and our purpose is, first and foremost, to ensure that our client gets the right advice and the right product and service to help them. The reason for that is it is the customer whom we serve. That is the role of the bank, and our reputation as a company, over 150 years, has been built on doing that right every single time, and if we do not we address it and learn from it.

When you talk about the motives being maybe to sell, you are referring to our 35,000 staff who are doing this every day and doing it for a really good reason: to try to help our customers. In so doing, as our customers do more business with us, our bank grows. But how we do it and why we do it is important, because it is serving the client first that is our most important principle.

Mr THISTLETHWAITE: I think you are right. It is how you do it, and I do not doubt that the Australian public expect you to try to sell your products. But it is a fact that you use their personal information, particularly about engagements with other institutions. In many respects, they may wish to keep that private, particularly if they are a small business that might be seeking credit from another organisation. But you get that information from an external organisation and use it to target them and to sell them your products. If the Australian public knew that was happening on a daily basis, they would not be pleased. We all experience it when we go into your branches, because it is never just about doing our banking; it is also about—'Can I sell you a credit card?', 'Can I interest you in a different superannuation fund?', 'Have you got enough life insurance? If not, here's how you get more.' It is the fact you are using information provided by external sources, about private transactions in some respects, that people do not like.

Mr Thorburn : We will come back to you on that point on the use of that data, as we have said we will. But I do assure you that if our clients say that is not what they want, we cease immediately.

Mr THISTLETHWAITE: Does your bank have a remuneration structure that incentivises your staff in selling products to the customers? I think you referred to it as a balanced scorecard. There is an element of that that relies on sales of products and referrals of products to customers, isn't there?

Mr Thorburn : Yes. Perhaps I could outline what we do here. The first thing is that we have a comprehensive and constantly improved remuneration and pay system, because we need to be certain that it is right for the times and that it meets the criteria of serving customers better. So the first thing we have is a balanced scorecard. Everybody in the bank has a balanced scorecard. That is, your day job comprises you serving customers—and different jobs have different ways they do that—and every job has risk management elements, every job has financial elements, and they all differ depending on the job, and then leadership and people. They are the four quadrants.

The risk one is a requirement that you must meet to go to the next stage. That is sort of a super-asterisk, because we believe that everybody is a risk person in the bank; everyone must understand the risks in their business, identify them, mitigate them and manage them. So, that is the first thing: a balanced scorecard, that you have to get it all in balance. The second thing is that, on incentives, I mentioned in my earlier comments that overall 85 per cent of pay that our people receive is fixed. We have 15 per cent that is an incentive structure. But of the 15 per cent, 88 per cent are on incentive systems where there are no direct product targets.

Mr THISTLETHWAITE: When you say 'direct product targets', that could mean indirect product targets—in other words, referrals—couldn't it?

Mr Thorburn : It could mean—in the financial part of the quadrant everybody will have different sorts of goals, depending on whether you are business banker or a corporate banker or a retail banker or indeed somebody in a call centre. So yes, but it is in the context of getting four things right. But we have 12 per cent that do have direct product targets, and we really believe that those need to be constantly reviewed, and as part of the ABA initiatives—the six initiatives that the industry announced on 21 April—that is No. 1 on the list: for the industry to work together. Hence the work of Stephen Sedgwick, an independent person we have brought in, to review, with the banks and our banking willing participants, to make sure that they are appropriate. So, it is timely, and we are working on that.

But even in the case of the 12 per cent, we have safeguards in place. So they still must meet their balanced scorecard. They all are subject to deferral. If they meet the deferral hurdles in the bank they are deferred for a year. That allows us—they do not receive all that incentive immediately in cash; some is deferred, and we constantly are looking at ongoing conduct and behaviour to make sure that there is nothing that comes out subsequent, and if it does we claw back that additional amount that has been deferred. We also have assurance processes around their conduct. Everybody is assessed against the five bank values and the behaviours that we require, and there are a lot of compliance checks as well. These incentive schemes go all the way up through the executive and to the board and are summarised—about who is being paid and why they are being paid and how much they are being paid. So, we do have a small proportion who are on direct sales targets. They are part of the ABA review. But we do have a couple of very important checks and balances in that process—namely, the balanced scorecard and then the safeguards that we have.

Mr THISTLETHWAITE: Can you tell us what the financials include?

Mr Thorburn : In the financial quadrant it will depend on the job, but it could include home loan balances, it could include deposit balances, it could include fee income, it could include expenses, if you are running a business unit. It will be those types of financials. If you work in finance it will include things like funding or treasury items or capital items. So, it depends on the job.

Mr THISTLETHWAITE: Typically, a bank teller would have targets that they would have to meet per week for these financials. Is that correct?

Mr Thorburn : With the tellers, these are important roles for us because they are talking to customers a lot. These are our real front-line people, and I am proud of them. We have got about 2½ thousand in our bank, and they do a wonderful job. They are often the first person our clients see. What we encourage them to do is to listen to what our clients are saying—to engage but to listen. If they believe there is an opportunity to help our clients with a financial need, it is their opportunity to then talk to them and refer them to one of our specialists. That process I just outlined is important, but our tellers do not have any sales. They don't do selling. They are there to process transactions, do referrals and, importantly, to listen to clients.

Mr THISTLETHWAITE: I am advised that tellers' weekly targets are for two referrals per day over a week that should include one home loan, one wealth plus credit card, insurance or a personal loan. Does that sound about right?

Mr Thorburn : I don't know the specific numbers but that doesn't sound unreasonable.

Mr THISTLETHWAITE: What happens to someone if they don't meet those targets?

Mr Thorburn : The first point I would make is that in our economy all businesses need to be competitive. They need to have people who are hungry, who want to improve and serve their clients better. That is called competitive business and Australia going up the GDP per capita ranks. I think that is how it is going to happen.

Mr THISTLETHWAITE: Mr Thorburn, you call it 'hunger'; the Australian public would call it 'pushing products on them that might not be in their best interests'.

Mr Thorburn : That is not what we want. My point is that—

Mr THISTLETHWAITE: You have got a target that they have to meet each week of trying to push one home loan, one wealth plus credit card, insurance or a personal loan. How is that in the consumer's best interests?

Mr Thorburn : It depends on how it is done. Our tellers are seeing maybe a hundred clients a day—more probably. They are having the opportunity to talk to people, many of them, and we require and really talk to our tellers through our managers coaching program about how they do that. The goal isn't to be selling; it is to be listening to clients, and where we see opportunities to refer them to a specialist. In—

Mr THISTLETHWAITE: My point is this—I am sorry to cut you off; I am running out of time—if it includes those products, particularly a credit card, and if the teller has met their targets on all the other things but they have not met their target on a credit card and someone comes in who might be seeking a personal loan for $10,000, this teller is then incentivised to try to divert that person into a credit card when it might not be in their best interests. They might be seeking a personal loan, but because the teller has not met that target for the credit card that week that is naturally where their interest is going to go. It is only natural. If there is a performance based pay element associated with that, I do not see how it is in the consumer's best interests.

Mr Thorburn : There are two things I would like to say. The first is that our tellers have a balance score card.

Mr THISTLETHWAITE: We have heard that.

Mr Thorburn : Right. So they have got to get all four right. That is the key point. The second point is that in our bank we have service measures under the net promoter system. Daily, certainly regularly during the week, our branches receive feedback from our clients who have gone into that branch about the experience in that branch. That is then discussed every day with our branch staff, with our manager. So what we are getting feedback on is live, real-time examples. If we are hearing feedback that one of our people is not doing that right or the client is unhappy then we have to adjust, because our goal here is to have satisfied clients.

Mr Cahill : Mr Thistlethwaite, it might be worth pointing out as well that this year in NAB's enterprise bargaining agreement we have moved away from performance based pay increases for all of our customer service and support staff. So for all those group 1 and 2 employees, the tellers, we no longer have performance based pay in place. All of those individuals now receive a standard three per cent per annum pay increase.

Mr THISTLETHWAITE: So there is no performance element at all?

Mr Cahill : Not in relation to their pay increases. In terms of the question you asked Andrew, this provides us again—

Mr THISTLETHWAITE: But for some element of their pay there is a performance base element?

Mr Cahill : Not in terms of their base pay. There are referrals in place—referral targets—but, again, that gives us an opportunity to have a conversation with those staff.

Mr THISTLETHWAITE: They can win additional remuneration on top of their base pay if they meet these targets?

Mr Cahill : They can receive a small incentive in relation to that. For those individuals—in actual fact for the vast majority—it is less than $800 a year.

Mr THISTLETHWAITE: I have run out of time.

Ms BANKS : Mr Thorburn and Mr Cahill, thank you for joining us. Mr Thorburn, the first I want to go to your vision and strategy. Clearly, as you said in your letter and on your website, you want to be the most respected bank. Your vision and strategy includes the words that:

To achieve this…

To achieve being the most respected bank—

…we and all of our people will live our values: This starts with having a passion for customers, respect for people, being bold, having the will to win and doing the right thing.

The definition of the word 'bold' is: a person or action, showing a willingness to take risks, confident, courageous, daring, intrepid, brave, valiant, fearless, unafraid and undaunted. In the context of the scandals that have gone on in NAB and in the context of all of the inquiries have gone on and the bad things that have happened to customers, do you think it is an issue to be telling your employees in your strategy—which is directly linked and must be an integral part of your risk management portfolio—to be bold?

Mr Thorburn : I think the values of the company and the culture are critical, so thank you for asking about these. These values have been in place for two years. We believe in them and we came up with them in working with our people to get them. Of course, there is a balance. There is some tension in some of the behaviours around those five values; but to be successful, growing company there is always that tension. I would say in answer to your question about whether the boldness has led to the scandals, I do not think it has been that at all. I think it has been the respect for people piece and the passion for customers that has not been—

Ms BANKS: To that point, can I ask: is there a reason you have included every other word of your values, every other principle of your values, in your introductory letter here today, but you have taken out the phrase 'being bold'? Did you write this speech or did your corporate affairs people?

Mr Thorburn : No, I definitely wrote that speech.

Ms BANKS: Did your corporate affairs people review it? Did anyone advise you to take out the words 'being bold'?

Mr Thorburn : No. Can I say, I—

Ms BANKS: It was just a thing you forgot about? A key element in your strategy that you forgot to include in your letter to us today? Is that—

Mr Thorburn : I very happy talk about the 'bold' bit. In the opening statement, which I just made in time, I could not cover everything. I stand by the value to be bold, and I would like to expand on why we believe that is important. The first thing is that we have 35,000 people and we want them to be bold in their conversations with one another and with their managers, because that brings new ideas and, when they see things that are wrong, we want them to be bold in raising them. The second thing is—

Ms BANKS: May I just say: do you think that is made clear to your employees? Do you not think there is a risk that employees would misinterpret being bold, such as your financial planners? You are clearly a sales and marketing guy from a sales and marketing background. I understand completely that being bold means being innovative, new and having the brand new thing, et cetera, that is going to grow the business. I get that, from a commercial perspective.

But for a business that is in the context of serious financial scandals and a clearly flawed risk management process, where there are many gaps, my question to you is: do you think it is appropriate? Will you revisit this as a communication strategy? Clearly, in your role as the CEO, your key role is to articulate a clear vision and strategy to your employees. Do you accept, out of your thousands of employees, that many of them would misinterpret or interpret the words 'being bold' as being like a rogue or forging signatures, a la the financial planning scandal? It is pretty simple question; it is a yes or no answer.

Mr Thorburn : No.

Ms BANKS: Do you accept that some people would misinterpret it? You have to clearly communicate it articulately to, what is it, 47,000—

Mr Thorburn : Thirty five thousand.

Ms BANKS: Thirty five thousand employees. Don't you think, out of that 35,000, that some of them would misinterpret being bold—particularly those in the commercial space, who are striving for promotion and growth, et cetera? Yes or no? Do you think they would misinterpret it?

Mr Thorburn : I think the way we have communicated through the organisation has been that we have defined bold in a way that does not indicate that. We adopt our a leader-led approach; in other words, it is people watching their leader. I think we do need an element of boldness, but it needs to be in the context of the other values. The other point that I was going to make about being bold is that it is not just encouraging people to raise things in the bank; our bank and banking is under extraordinary threat from new players—new FinTec and technology players—and we do need to be bolder about investing in new products and services, particularly in the digital space, to actually combat that. I think, Ms Banks, this may be an inadequate answer for you, but I have been around our company—

Ms BANKS: Sorry to interrupt, but the answer is fairly easy.

Mr Thorburn : and, actually, I have not heard them being misinterpreted.

Ms BANKS: It is a yes or no answer. Do you think some of your employees could misinterpret the words 'being bold' to mean being noncompliant or stretching the envelope?

Mr Thorburn : I do not think so because we have a—

Ms BANKS: Not a single one of your 37,000 staff would not think that that is what it is? Okay. Let's go to your risk management framework. Clearly as CEO your risk management framework is linked to your vision and strategy. How involved do you get in your risk management structure and portfolio? What is your involvement? For example, because, as we know, the cycle of risk management is identifying risk and then installing the mitigation plans, do you have risk management workshops as a board where you spend a whole day identifying the risks? Do you lead those programs yourself or do you leave it to your risk officers and your lawyers?

Mr Thorburn : No, I lead that myself and the board is actively involved. Perhaps I could just expand on how we do that. We do have a very clear, consistent risk management framework in the bank with first, second and third lines of defence. We have very clear expectations that everybody must know. They must identify a document and mitigate the risks in their job, and they are part of the business.

Ms BANKS: Does that include you? Do you draft up and identify the risk? Do you go through a risk management workshop yourself with your leadership team?

Mr Thorburn : Yes, absolutely we do. In the last month, because we have a September balance date, we went through our new financial year risk appetite statement, which is very comprehensive and which sets out where the main risks are, how we are going to identify them and how we are going to manage them. I chair our group risk committee and I attend all our board risk committees with our chief risk officer. Our board risk committee is one of the most active, detailed and focused committees in our board. We have a group risk committee nine times a year and it goes for three or four hours. I chair that, and the mandatory members are the executive leadership team plus a couple of other key role holders. I think risk is one of the most important parts of my job. I believe I am actively involved. I role model it and I not only participate in those committees but also actively help shape our risk culture and our risk appetite.

Ms BANKS: Shouldn't the risk leadership team be a mirror image of your senior leadership team? Or do you not include the commercial guys because they are too busy running the business?

Mr Thorburn : I think this is the first, second and third line of defence. The first line is our bankers—that is what we call first line. They are the most—

Ms BANKS: I am talking about you and your senior executive team. With respect, three hours would not be enough for an organisation of your size. Do you sit down as the risk management team and go through not only your risk appetite—we know you have a very healthy risk appetite—but also your risk identification factors?

Mr Thorburn : Yes, we do. We do that very comprehensively and—

Ms BANKS: Do you all engage in the training? When was the last time you personally and your leadership team were trained by your risk officers in ethics and risk management?

Mr Thorburn : We have had numerous, what we call, risk tutorials this year and our executive team go through, as do our board risk committee members.

Ms BANKS: On a mandatory basis?

Mr Thorburn : Yes.

Ms BANKS: Does that cascade throughout your organisation—throughout all 37,000 employees?

Mr Thorburn : I think the principle does, Ms Banks. I think we have—

Ms BANKS: The principle does. My question is: does that cascade and touch all your employees?

Mr Thorburn : Yes, it does.

Ms BANKS: So every single NAB employee would go through a risk and compliance training program?

Mr Thorburn : Yes.

Ms BANKS: Okay, thank you. I just want to talk about the issue of time because, as you would appreciate, for customers, time is of the essence, particularly for aggrieved customers. At the Women in Banking and Finance lunch in Sydney last year, in response to questions about the fallout from the financial planning scandal, you said: People are people. … there will be greed and there will be deceit. Those are things we have to say are … unacceptable.

And then you go on to say:

It probably takes five, 10 years in an organisation of our size to get true integrity and consistency.

It takes five to 10 years? Are you hiding behind the largeness of the bank to say, 'It's going to take us a bit of time to get this right'? What does that statement mean?

Mr Thorburn : I think, from my experience in banking and talking to other executives in other industries, to truly, deeply change the culture in large, complex institutions takes a number of years. I believe we have made it very clear and started the journey around what we want our culture to be. It is focused on customers, it is focused on earning their respect, and it is focussed on understanding and managing our risks. We have introduced balance scorecards for every employee. We defer parts of their incentive. We have five key values—the most critical one is passion for customers. We have leadership development and training that is clearly focused on developing our leaders to do the right thing and to do it every time. I believe, Ms Banks, we have made that step. We are making good progress with very specific things, but it will take time for us to fully have the culture we want. That is an ongoing, daily process through behaviour and leadership.

Ms BANKS: Do you accept that there are other organisations of equal size to, if not greater than, the National Australia Bank that are not saying, 'It will take time to get up to speed,' and that are already up to speed in terms of a sophisticated risk management framework? Highly regulated areas such as the pharmaceutical industry have an external tribunal watchdog as well. Do you accept it is the case that the banking sector does not have that sort of 'hygiene factor'—an external tribunal—to keep them honest?

Mr Thorburn : I believe our bank is in one of the most regulated and most complex parts of the economy. It is very transparent. We have had some issues that we have had to deal with, so we have had to face into aspects of our culture that we need to improve. We are not backing away from that. I think we have made really good progress about helping change our culture and making it clear what we expect from people and the checks and balances that we have in that process. But it will take some time. I believe we are relentless about that, we are focused on it and we always keep coming back to the one key aspect, which is serving customers so that they can have trust in us.

Ms BANKS: Just coming to that, I notice you have made quite a big thing of writing to customers apologising and that you write to every customer who is hard done by. Isn't that after the event? I mean, that is after the event. Frankly, if I have lost money out of the bank's negligence or, indeed, forgery—we are talking about serious issues here where your employees forged clients' signatures—and you send me a letter in the post saying, 'Sorry—we screwed up again,' do you think that is sufficient for your customer?

Mr Thorburn : Are you referring to financial planning in particular?

Ms BANKS: Absolutely.

Mr Thorburn : The first thing is that, over the five years leading up to the Senate inquiry, we—

Ms BANKS: It is a simple question. Do you think just sending a letter is sufficient—yes or no?

Mr Thorburn : That was not all we did.

Ms BANKS: Okay.

Mr Thorburn : As I outlined before, in the five years we had found issues we compensated clients $15 million and we dismissed planners. We have stepped up again with five key commitments. So I think there is a range of initiatives that we were doing and that we are now doing even more of to show that we are serious about this. The fact that two weeks ago we said that there was another $6.5 million and another 251 clients who we compensated shows we are prepared to be transparent around this.

Ms BANKS: Finally, you are no doubt going back to the question of time, Mr Thorburn, which we believe is of the essence. The coalition government certainly believes that from an Australian consumer and banking customer perspective, an aggrieved customer perspective. You are no doubt aware that Bill Shorten and the Labor Party are calling for a royal commission, but you and I and your legal teams and, indeed, the legal teams of the other big banks would probably be aware that the lawyers would be the only winners in a royal commission. It would go for ages—years—and take a lot of paper and different things, and in the end the consumer, the person we are here to represent, the person I am here to represent, will fall through the cracks.

So, to that point, that is why we are suggesting that an independent tribunal be perhaps set up under the auspices of ASIC or, indeed, the ACCC. The ACCC and the TGA, for example, apply clear hygiene factors and oversight and have interventionists powers over other businesses. No doubt you would incorporate that into your risk management framework. Would you agree that that is a good process?

Mr Thorburn : I think when customers experience hardship or difficulty or there are complaints that they want to raise, those need to be dealt with really well. That is our role to do that. I saw this week that our financial ombudsman complaints this year have dropped 64 per cent and our hardship complaints going to file have dropped 56 per cent. I think we are doing a lot of this right. But we have said, as part of the ABA initiative, and separately, that we would be absolutely prepared to work with government to make sure that high standards are in place so that it is easy to customers when they have issues and grievances to be dealt with. So, absolutely, we would.

Proceedin gs suspended from 10:46 to 10 : 56

CHAIR: We will resume the hearing. I give the call to Mr Keogh.

Mr KEOGH: Thank you. For the record, I will disclose that my wife holds some accounts with your bank. Can you explain to me the cost base of the ATM network?

Mr Thorburn : I think Antony is best to explain that, seeing as he runs it.

Mr KEOGH: It is a pretty critical part of infrastructure for most bankers on a daily basis.

Mr Cahill : In terms of the main contributors, it is clearly the cost of the machines themselves, the leasing and the installation costs of the ATMs. They are not all in branches. You see a significant number now in other locations. There are the technology costs of actually running the network and then also the cost of keeping the ATM supplied in terms of cash et cetera. Finally, we have the monitoring systems that, effectively, ensure that the network stays up. They are the broad costs.

Mr KEOGH: So it is a reasonably fixed cost per ATM at least: variable based on whether you have to restock it a lot if it is used a lot, but otherwise it is a reasonably fixed cost base for the ATM network?

Mr Cahill : Not necessarily. Allow me to give you some information. Two things are happening. One is the functionality of the ATMs is starting to significantly change. There are very basic ATMs and there are more expensive ATMs that different institutions buy. Probably the second major difference in the cost is actually the location of some of those ATMs.

Mr KEOGH: Sorry; when I say fixed, I mean the cost of having the ATM network does not change much based on the number of transactions.

Mr Cahill : In terms of volume usage? The main cost would be how often you would have to refill the machine.

Mr KEOGH: Yes. And so you are able to work out basically what the cost is on a per-transaction basis?

Mr Cahill : We would have a broad view, yes.

Mr KEOGH: What is it?

Mr Cahill : I do not have that precise number with me. I would have to take that on notice.

Mr KEOGH: Do you have a sense of what the marginal additional cost is when you have a user from another bank use your ATM?

Mr Cahill : I do not have that number with me. I would have to take that on notice.

Mr KEOGH: Do you know how those marginal costs or fixed costs have changed over the last five years?

Mr Cahill : What I do know is that the usage of ATMs is dropping significantly in the Australian population. Australians are migrating away from cash, as we are seeing in many other developed economies, and we are seeing increasing usage now of debit cards and, increasingly, digital wallets and other forms of cash or monetary exchange.

Mr KEOGH: In 2013 you increased—I do not know how you would call it; I think some people call it a foreign transaction charge—the charge that you pass on to a customer from another bank to use your ATMs. It was a 33 per cent increase from about $1.50 to $2. What was the justification for that?

Mr Cahill : The team would have looked at the cost that they were incurring, the fact that the usage of the machines is declining, that it is a competitive environment and whether it was a fair and reasonable fee. I believe that we still offer one of the lowest costs in the market for the use of our ATM machines.

Mr KEOGH: I think it is interesting to see that the increase in fee sort of moved you into line with your major competitor banks. It seemed to look almost a little opportunistic to say, 'Well, everyone else is getting away with $2, so we might do that as well.' Given that you are saying that this is a result of, as the RBA have noted, a decline in usage of ATMs across the board, are you flagging then that, as that continues to decline, you would anticipate that those costs will increase?

Mr Cahill : No, we are not flagging that at all. I am very clear around provisions around price signalling and what we can and cannot say. But, putting that to one side, the key for us is to ensure we are providing the products and services for our customers, that we are providing the right machines and that we have an up-to-date fleet that is deployed into the marketplace. As usage drops, we are seeing the revenue that we are collecting across the ATM network steadily decline. So I think all financial institutions over time will continue to re-evaluate not just the cost but how many ATMs Australians actually want to avail themselves off. This, I think, will continue to shift as we move forward.

Mr KEOGH: You just mentioned how many ATMs people try to avail themselves of. Would you see a time where the number of ATMs that you have in your network declines?

Mr Cahill : Not necessarily, but we will continue to re-evaluate it. I think it is a very significant, stark shift that we are now seeing as customers continue to migrate away from cash.

Mr KEOGH: Would you consider that there is a bit of a community service obligation, almost, on you as a bank—as a big bank in particular—to provide a certain geographical coverage for your clients in terms of ATM provision?

Mr Cahill : For our customers, absolutely, and we are very proud of the ongoing alliance that we have with the rediATM network. We actually have one of the broadest ATM fleets available across Australia for our customers. Clearly we want to ensure our customers have access to cash, and I think it is important that that is the case, but we do continue to re-evaluate how many ATMs we have in the fleet. That is a slightly different question.

Mr KEOGH: So there is an open question as time moves on.

Mr Thorburn : Can I just add to what Antony is saying. This is another example of where you need to offer this service but customers are using different means: mobile devices' ability to transfer, tap and go, debit cards and—

Mr KEOGH: I do not dispute that there are other ways.

Mr Thorburn : So there is a different trend.

Mr KEOGH: I suppose what I am getting at is not the trend. We have seen a consolidation of bank branches. There are fewer bank branches across the board. It is harder for people to get access to cash that way directly from their bank, so the importance of ATMs has increased significantly. As you flagged, the features of ATMs have been increasing, which is a good thing, but in a way it is compensating for a reduction of availability of branches. So I am just raising the concern. If you have removed one and placed more reliance on other forms, including ATMs, is there a risk, almost, that as ATM use declines you will follow a trend which can leave some customers—not all but maybe those that are less technologically savvy—without an option to use?

Mr Thorburn : Yes, and I think that is something that we will just have to keep in balance. I understand your point. We respect it. We have to be competitive. We have to offer different payment mechanisms, and I think now, as customers are using retailers for cash-out and things like that, it is really changing the whole cash economy, and the way that people are paying now is changing a lot. But I respect your point that we have to have a balance here so that we do not disadvantage some customers significantly in the change.

Mr KEOGH: Mr Cahill, you referred to always assessing the revenue base. I presume the revenue base on ATMs is essentially the fees that you are charging to non-NAB customers. Is that amount that you charge worked out based on the cost of running the entire network, or is it a cost to recover just the marginal additional cost of servicing non-NAB customers?

Mr Cahill : With the ATM fleet, the ATMs that we provide our customers, we talk about activity-based costing within the bank. When we think about our products, the costs of those ATMs are actually charged back to the various products across the company: our transaction accounts, our credit cards et cetera. So, in the internal accounting area, effectively we will look at all of those products, to cut it short. It is not just—

Mr KEOGH: So, with products that are using your ATMs, you defray that cost across both your own customers and non-NAB customers.

Mr Cahill : Yes, we do.

Mr KEOGH: Do you do that on a proportionate basis of estimated use of the network?

Mr Cahill : I would have to come back to you on the precise accounting methodology that is used.

Mr KEOGH: Are you saying that therefore that $2 charge is reflective of the marginal additional cost to you for providing that service to a non-NAB customer?

Mr Cahill : No, I am not saying that. I am saying I would have to talk to the team who have worked out the marginal cost. They would have an understanding of that. But what I can say is that we believe the fee is fair and reasonable. We believe that customers of other institutions have access to their ATMs. Customers are increasingly moving away from ATMs and, as Andrew has pointed out, customers are now also using supermarkets, for example. He mentioned they take cash out et cetera.

Mr KEOGH: No, I understand all of the options. I just want to understand that cost base. But I will flag that I would like to put all those questions for you to take on notice, because that would be useful information for us to have.

Mr Cahill : I am happy to do that.

Mr KEOGH: I will move on. APRA recently required the banks to tighten some of their home lending requirements to de-risk that market segment, and the IMF has also recently expressed some concern about the levels of private debt globally, and specifically in Australia. Do you see a proactive role for the Australian banks and particularly yourself, obviously, given the concentrated nature of the Australian banking sector to take some action around this?

Mr Thorburn : I think this question of indebtedness and what a customer can afford is a very important one. We obviously have aspects like the responsible lending code, but we have our own commitment to being good bankers, to making sure that clients who take on debt understand it and can afford it. Whilst the household indebtedness is rising, and we look often at the indebtedness, we also have to look at their assets. The wealth that households are holding has gone up—

Mr KEOGH: I am glad you have gone there, because what I was going to go to next is: would you agree that it is in the bank's interest to avoid financing effectively a housing bubble, because of the losses that would be suffered by the bank, let alone its customers, as a result of that when it bursts?

Mr Thorburn : Well, our interests are in helping our clients and the economy grow sustainably, and there have been a lot of questions around a so-called housing bubble. I would say, though, that across Australia there are many house prices in capital cities outside New South Wales and Victoria where prices are going down, and in parts of country Australia I never hear about a housing bubble. It is clearly centred around Sydney and Melbourne—growing population, where jobs are, some infrastructure blockages which mean that people are wanting to be within a reasonable distance of the city. That is why apartments have been developed. We are very aware of this. We monitor this very closely. We are cognisant that we are in a very low interest rate environment. But when we talk to our clients we have a rate of 7.4 per cent that we assume. It is not what they are paying. Most of our clients on home mortgages are paying less than five; we assume it is 7.4. We also have a serviceability buffer to be built in, and if there is an interest-only component we calculate it on basically a principal and interest basis. So, we are really wanting to make sure that we are disciplined to protect our bank, and that includes the staff and shareholders, but also to protect individual borrowers.

Mr KEOGH: And there are also other measures, of course, that you can look at when assessing the viability of a loan, like LVR and how much deposit people are putting in and the likelihood of the house being able to hold the value that is on paper right now. I suppose what it leads me to—and you made the point—is that with housing prices there is great inflation in New South Wales, and Sydney in particular, and some parts of Melbourne, but not in other areas. How does the bank see its role, then, in dealing with—this is an issue for the RBA when it is rate-setting, but it is also an issue for you where you have probably some more sophisticated levers around how you fund people buying into a hyperinflated market in Sydney versus a falling market in Perth, for example, where maybe some more liquidity would be helpful.

Mr Thorburn : We look at individual clients. We build in the buffer. We build in the minimum rate for everyone. And we really look at—the big driver is—their capacity to repay and cash flow, to make sure that they have the income source that is not overly leveraged and that can actually sustain payment of the interest. That is the key one we look at. We also look at LVR, because, from a portfolio perspective, we do not want to get in our housing book lumpy parts that are high risk. But actually in terms of new business, we have only a few per cent that is above 90 per cent, and our average LVR across our whole portfolio today is around 44 per cent. So the bank, in a sense, is really making sure that we are not leveraging and that we are looking at individual clients and making sure that they have the capacity to repay the loan before we approve any loan.

Mr KEOGH: Do you have any concern about markets where you might be seeing what looks like a housing bubble—you will have technical default in terms of the value of the underlying secured asset—if that bubble bursts?

Mr Thorburn : We have quite a sophisticated, advanced risk management monitoring system. We have around 50 high risk postcodes in Australia today that we monitor very carefully. These are where there has been high supply of apartments, unemployment is going up, mining towns, in Queensland and Western Australia in particular, and we even have restricted lending into those spaces—we are a lot more cautious about those.

Mr KEOGH: Those criteria all seem very reasonable, but do you look at where money going into a market—Sydney was the one you identified; I think everyone is aware of it—could be creating not a problem now with high unemployment, or current oversupply, but if that keeps heating up there comes a point where there is a bit of a burst of the bubble, so are you looking proactively at where you might almost be part of creating a problem for yourselves later?

Mr Thorburn : We have to balance a few things here, because we have clients coming to us who are in good jobs, who have got 30 or 40 per cent equity and are wanting a loan—

Mr KEOGH: To be clear, I am not saying don't lend, I am just asking whether you are looking for that risk in what you are doing.

Mr Thorburn : Absolutely we do and hence, for example, in the apartment market in Melbourne and Sydney we have pulled back our lending and our LVR restrictions to about 60 per cent in those inner-city postcodes where we have large amounts of apartment development. So absolutely we do think through scenarios in those higher risk areas.

Mr KEOGH: To what extent are you are exposed to this big apartment overhang in Melbourne, as a bank?

Mr Cahill : As Andrew said, this area is enormously important for our company, for our shareholders and for our customers, because we need to ensure that when they are borrowing it is appropriate for them, that they will be able—

Mr KEOGH: My question was to what extent do you feel as a bank exposed to the overhang of apartment supply in Melbourne?

Mr Cahill : I cannot give you the precise number in relation to Melbourne but what I can tell you is that in relation to inner-city postcodes where we are particularly seeing concern in terms of apartments is Sydney and Melbourne. Less than 10 per cent of our total housing book is in relation to those inner-city postcodes.

Mr KEOGH: Do you have a picture of to what extent Australian banks are exposed to that overhang in Sydney and Melbourne?

Mr Cahill : We do not, but we have lots of discussions with our economics area and we are trying to gain an understanding of how much of these apartments, in particular, is being financed by Australian institutions and how much is being financed by offshore banks. I am sitting down with some of the major property developers in Melbourne in two weeks time to have a conversation, because it is not clear to us exactly how that plays out. Obviously only we have access to what we are currently financing, but it is a low portion of our housing book. It is less than two per cent of our housing book in those inner-city postcodes.

Mr KEOGH: So you have identified this seems to be a reasonable amount of funding, and I understand you do not know exactly what proportion, is coming from overseas banks. Do you have an idea of the geography of where those banks are largely based?

Mr Cahill : There are views but it would not be appropriate for me to talk about—

Mr KEOGH: Would you give me your view?

Mr Cahill : Views that we hear would be predominantly banks that would be located within Asia.

Mr KEOGH: Any particular areas of Asia?

Mr Cahill : It is a variety of countries.

Mr KEOGH: Money from Asian banks is coming in and funding a lot of that housing development is your feel for it?

Mr Cahill : There is a view that they are funding some of it; I cannot say whether it is a majority or minority or how much. All I can talk about today is NAB's exposure, and it is less than two per cent.

Mr KEOGH: Is that a regulatory gap in the market in terms of that money flowing in and potentially overinflating prices in the market?

Mr Cahill : There are two questions—one is how much money is coming in for the commercial financing of these developments and how much money is coming in in terms of the residential borrowers who ultimately buy the apartments. There are two questions there. As you would be aware, many of the Australian banks in recent weeks or months have changed their criteria as well in relation to non-resident lending. I think appropriate action has been taken by the Australian institutions.

Mr KEOGH: So you think it is more about funding the developments themselves, so creating oversupply might be the effect of this money coming in?

Mr Cahill : In terms of supply, particularly in those two areas, to Andrew's point, we think about customers and there is still very much a view that there is a shortfall of housing particularly in Sydney, for example. So there is ongoing demand for apartments and housing in Sydney. So the fundamentals are still there.

Mr KEOGH: In Melbourne, though?

Mr Cahill : In Melbourne, again, we are not seeing any significant overhang at this point, so we are watching the market closely, and we have not seen any significant movement in values at this point, in terms of apartments. In terms of the time line for these developments, typically it is a two- to three-year time line. I think many of the developers now are constantly reassessing themselves: is it appropriate to continue with those developments? I think the market will work that through, but we are watching the situation very closely.

Mr KEOGH: I will just wrap-up here because I know we are pushed for time. One of the terms of reference for this committee relates to the Australian Bankers Association's six-point plan. Point 6 states that the banks are in support of the industry funding model for ASIC—basically, a user-pays model, which was floated back in early 2014, I think. That is when it resurfaced. Was your bank in support of the approach of a user-pays model for ASIC at that point?

Mr Thorburn : I think so, but I would have to take that on notice. It would be going back in time. The point here, as part of the ABA initiatives, and a broader point, is that we support, encourage and want strong regulators in Australia. I think we have them. That has helped the industry, with other aspects as well, to be in really good stead today. We wanted to be really clear, as part of the ABA, that we support ASIC as a strong regulator. We note they have additional resources. We support that. They have a very important role to play.

Mr KEOGH: So what is the basis of supporting a user-pays model? It strikes me as a little odd that an industry has decided voluntarily that it would like to start funding a government function.

Mr Thorburn : I think that was part of the recent discussions and this has been part of the ASIC review of the way they have been operating, so I do not think there has been a significant change.

Mr KEOGH: So what is the basis? You have said that you think ASIC is doing a good job and you want to support ASIC, and you have said, 'We want to provide more money to ASIC,' by basically paying them as a part of industry, funding them as part of industry. Why do you want to be involved in funding them?

Mr Thorburn : One, I think that is the process that has been in place, and, two, I—

Mr KEOGH: What do you mean by 'that is the process'? This is a new funding model for ASIC, so I am asking why you support that new funding model, which would effectively cost you more.

Mr Thorburn : I will have to take on notice the industry funding model and the mechanics and the timing.

Mr KEOGH: But even conceptually, why? You are one of the ABA's key members. It has a six-point plan. It is part of the terms of reference here. What is the basis of you supporting a user-pays model or an industry funded model for ASIC?

Mr Thorburn : We think it is important that we have strong regulators and ASIC, I think, have been doing a lot of work in the financial services space around dealing with some of the issues we speak about.

Mr KEOGH: So you support a user funded model for ASIC because you want a strong regulator?

Mr Thorburn : I do agree with that point.

Mr KEOGH: So is the implication of that that, without this user funded model, ASIC is not as strong a regulator as it needs to be in your view?

Mr Thorburn : Mr Keogh, I cannot answer that. You would have to put that to ASIC. My commitment is—

Mr KEOGH: No, I am asking about your view. The ABA has said, 'We want to see an industry funded model for ASIC.' You have said that part of that, from your point of view, as your bank, is that you want to see a strong regulator. That leaves me with the view that you are saying that there are aspects that you think need to be improved in what ASIC does.

Mr Thorburn : ASIC, I think, over time have got extensive responsibilities. They are fulfilling them in the way they believe is right. We respect that, even though we have some current disputes with them about some aspects.

Mr KEOGH: I might get you to take on notice the basis of why your bank has supported this ABA position, that there be funding, because that is not articulated in the plan. That would be useful for us to fully understand the basis of that and what you see that might change, in the way ASIC does its job in the future. I will ask a final question and it comes from a lot of the issues that have been raised—in particular, what has happened with the 43 planners and who was responsible for that. You noted that no senior management have been removed, or at least you are not aware of any that have taken, if you like, full responsibility for what has happened. I am interested to know what your view is in relation to what the UK Financial Conduct Authority has been doing in changing regulation in the UK: the introduction of their senior managers' regime, having rules on individual accountability, a remuneration code and, in particular, where senior managers of banks or financial institutions have to identify: 'These are the senior managers who are responsible for each part of our operation. They are responsible for the conduct of the employees under them, and there are certain laid-out articulations of who is responsible for what and what they are responsible to do. Those senior managers need to make sure that those people are regularly reviewed and that they are capable and competent to do that work on an annual basis.' What is your view of that sort of regulatory approach being introduced in Australia?

Mr Thorburn : The first thing is that I think we have to look at the way the banking industry overall has performed and been governed. It has been through various crises globally in the last 20 years and withstood them all. Even at the peak of the GFC—

Mr KEOGH: The banks still exist, and that is very good; but we have had with every bank that has come before us—and I am sure Westpac after us—examples of where we have had these issues with financial planners that have been banned, that have been suspended, that have been removed, seemingly, without any senior management responsibility being taken for that conduct other than occasional clips or some short-term incentives. So I am interested to know whether you think a regulatory regime, which imposes direct responsibility on identified senior managers, would be a good idea?

Mr Thorburn : I think what we have today are senior managers in our bank who take risk and conduct and their behaviour and accountability seriously.

Mr KEOGH: So, that is a 'no'; you do not want to see a statutory regime that does that?

Mr Thorburn : I think the other point to note is that the UK banking system and its performance in the last 10 years compared to ours is like chalk and cheese, and the response from the government and the regulator has been proportionate to that. There were banks in the UK who failed, who had to be recapitalised by taxpayers, and you would expect out of that from the community and from the government of the day that there would be a review and more specific and onerous requirements.

Mr KEOGH: Is that an argument that you are putting forward that says: until we do have a big problem—I am not saying we do not—then you do not need to apply a tighter form of regulation on these matters, on who is responsible, until something really bad happens, instead of being proactive? This was a risk in another group of banks and financial services. It is broad. It is not just banks; this applies to financial services generally.

Mr Thorburn : I am not saying that. You have to look at the record of our industry over a couple of decades and you have to look at the most extensive review in the last 15 years—the Financial System Inquiry—which was comprehensive, thorough, from respected members of our business and financial community. That basically concluded our industry is strong. In fact, it said the banks should be unquestionably strong. If you look at capital, funding, asset quality—

Mr KEOGH: This is not about that issue, though.

Mr Thorburn : I believe we are. I think we should note that scheme. I am not saying we should ignore it. But I am saying we have a good record; we have good checks and balances; we have good governance; we have good regulators. Our banks have high capital and have been lifting those capital ratios. We are unquestionably strong. I do not think we should be in any way complacent. All I am saying is that transferring a scheme that has been designed to solve a very different problem and putting it on our banking system would not be wise.

Mr KEOGH: With respect, I do not think you can say that over the last decade there have been no problems. We have spent most of the day speaking about exactly those problems. But my time is up, so—

CHAIR: Thank you, Mr Keogh. Mr Buchholz.

Mr BUCHHOLZ: Thank you, Chair. Mr Thorburn, you are fortunate in your timing, given that you have had the privilege of being able to see our line of questioning to the previous two witnesses that have come before this committee. I suggest you may have a sense of what my line of questioning may be, as I have taken a dogmatic and singular approach on a particular issue that I think affects a great number of Australians and your clients. We can do this the easy way or we can do it the hard way, but I have three very simple questions: do you have an appetite to reduce credit card interest rates? If so, by how much? If so, when? I just hope that your responses assist me with the easy way.

Mr Thorburn : That is the first question—around credit card interest rates?

Mr BUCHHOLZ: No. They were the three. Do you have an appetite to reduce credit card interest rates—that is one. Second: if so, by how much? If so, when.

Mr Thorburn : Mr Buchholz, I think we should talk about credit cards. I understand why you raise that, and why the community raises questions when it sees high interest rates, but could we just take a little time to unpack it—and, Antony, I will get you to add some important points of detail. The credit card market in Australia is large and well developed. It is an unsecured product—

Mr BUCHHOLZ: And highly profitable.

Mr Thorburn : and our losses in that portfolio are one of the highest losses—

Mr BUCHHOLZ: And factored into the rates.

Mr Thorburn : in our portfolio. It is also worth noting that almost a third of our clients are paying our low-rate card of 13.99 per cent—

Mr BUCHHOLZ: And the default rate on the cash advance on that low-fee card is—what?—19.74 per cent. No; in addition to that, on your cash advance it is actually 21.74 per cent on that very card. You can keep going.

Mr Thorburn : Thank you. So we have 60 per cent of our clients, and we have a third paying 13.99 per cent. Those who are not paying interest are benefiting from up to 55 days interest-free credit. Also, with cards there are a lot of other benefits in the premium product, which Antony will expand on, including insurance, rewards, loyalty points and, obviously, the ability to use your card around the world. So I can understand why you raised this point around credit cards, but I think there are some points. Very few people are paying the highest rate, and if they are it is attached to a premium product. Finally, in Australia we have got one of the most advanced and competitive credit card markets. It is very easy to shift to a new card. We have 70 providers of cards and 200 different cards at last count. So it is a very extensive, easy to switch, competitive market. But I would like Antony to cover, particularly, the premium piece before we come back to your further questions.

Mr Cahill : In relation to the premium products, Mr Buchholz—and I know you have had discussion with two other witnesses in the prior days—within our customer base 70 per cent of all of those customers in any given month would pay off their full balance. There has been a very significant shift, in line with the discussions we were having with Mr Keogh, in terms not only of ATM usage reducing but also of customers' use actually switching away from credit to debit. These trends are coming through very significantly. In terms of the composition of our product suite, as Andrew has pointed out, more than a third of all of our customers now have our low-rate card, rather than what we would class as a premium-rate product with the additional features associated with it. In regard to your specific question, I think I would come back to having a conversation or wanting to talk about ensuring that you price appropriately through the cycle. The fact is that in Australia at the moment we are seeing relatively low default rates and loss rates on the product, compared to what we would expect through the cycle. In relation to the product itself, it has one of our highest loss rates of the products that we provide—

Mr BUCHHOLZ: And you factor that risk into the rates.

Mr Cahill : So we did take that into account—

Mr BUCHHOLZ: I would challenge that that is one of the most highly profitable segments of the business. Is that correct?

Mr Cahill : No, that is not correct.

Mr BUCHHOLZ: Does your credit card business make a profit?

Mr Cahill : Yes, it does.

Mr BUCHHOLZ: Once you have considered your cost of funds and your risk, is the spread of margin in there greater than in many other product lines that you offer? I do not want you to compare your credit card business to your mortgage business, because you could say, 'Our variable rate in a mortgage is five per cent and so our margin on that is less.' From a silo perspective, are you suggesting that your credit card business is not as profitable as it should be?

Mr Cahill : I am suggesting that the profitability of credit card business has fallen significantly in the last five years. I do not expect those trends to reverse. The changes that we have recently seen to interchange as well—which, again, I am sure you are aware of—have changed the economics of the product, and on a through-the-cycle basis I do believe that the pricing and the returns on the product are appropriate.

Mr BUCHHOLZ: You touched on some historical data. I have some data here from the RBA. It dates back as far as September 1996 and it gives me a monthly conversion across a number of products. I will go to the lending rates on personal loans and credit cards against the cash rate. And I understand that the cash rate is not the singular factor in determining the cost of a product but it has a bearing—you spoke about the historical journey. We are at roughly sevens in 1997 and the credit card rate was 16.75 per cent. I think your spread then was 9.75 per cent. As we went through to the late 1990s it dropped down to around five per cent and your credit card rate dropped down to the mid-15s. As we rolled into the early 2000s the cash rate dropped to around the fours. The industry dropped to around 15.8 per cent. From 2004 to 2007 we saw it hit the mid-fours and then pop back up to around the mid-sixes. And we started to see the credit card rate trajectory back up to around 18 per cent. This is all available on the public record. To get to the end of it, we now have a cash rate of 1.5 per cent and a spread of 18.25 per cent, the largest recorded since September 1996, according to data from the Reserve Bank. And you are suggesting that that is okay given that, in your opening comments, you said 'trust was the currency that mattered the most'?

Mr Cahill : In relation to the points you have made, I do not have the information going back to 1996. But what I would draw the committee's attention to is that, between 2012 and 2016, there has been a very significant shift in customer behaviour. In 2012, in any given month 56 per cent of customers would not pay any interest; today it is 61 per cent. That is customers who might be using their credit card, availing themselves of a free line of credit and repaying within one month. That has had a very significant impact on the economics of credit cards.

Secondly, we have seen a very significant shift to low-rate products. Again, the effective interest that is being earned in any one month is not actually guided by the pure interest rate. The third part is a significant change in interchange rates. We have seen a gradual and reasonably significant reduction in interchange rates. So the actual economics of the product are not directly linked to the cash rate. In actual fact, the cost of funds is circa 20 per cent in relation to the total cost base of cards—and we discussed that with the Senate committee last year.

Customers do not purely buy our product on price—and we have seen that. If it were the case, our customers would only buy low-rate products. They do value the additional product services and features that we offer. So I think these things need to be taken account. What we pride ourselves on is offering choice. If any of our customers has taken out one of our higher rate cards, we make it extremely easy for them to switch to one of our low-rate products. There is no fee for doing that. If any of our customers decide that a credit card is not appropriate for them and they want to pay down that debt and no longer avail themselves of the product—at times customers do find themselves in that situation—we will place them into a personal loan so they will then gradually pay down that debt. I think it is important that you are responsible with credit cards, that you provide choice, that you provide the products and services that customers require. Over the course of the next two years we will be investing $200 million into our products to try to ensure that we have one of the best product offers in the world, not just within Australia. That is going into our digital offers, ensuring that customers have control over their products and services.

Mr BUCHHOLZ: Can I take either of you gentlemen back to the comment around the profitability of the credit card segment of your business. I do not want to delve into areas where you are unable to answer because of confidentiality or commercial in confidence—I get that. I assume the credit card segment was profitable, but you are creating an image for me that it is not profitable. Do you want to expand on that?

Mr Cahill : It is profitable.

Mr BUCHHOLZ: I wanted that in Hansard.

Mr Thorburn : I think we should be clear on that. It is a profitable segment—no doubt about that—but it has also reduced in recent years and it is under pressure. As I think Antony has said, most of those who have the premium product are paying off their balances every month. If they do wish to switch out of that, we are very happy to do that.

Mr BUCHHOLZ: When I mentioned earlier on that it was highly profitable, I thought you took objection to that line or comment. Do you agree with me that it is?

Mr Cahill : My response was that it is a profitable product. The product is becoming less profitable. The discussion that is also important is that pricing needs to be appropriate to reflect the risk on the product and through the cycle. From our perspective, certainly when we undertake our modelling, if and when we see a change in the broader economy which is likely to have an impact on the product, we could see that product sustain significantly lower profitability or even move to a loss in certain circumstances.

Mr BUCHHOLZ: From the witnesses that have come before us, there has been a common thread that it is an extremely competitive market and bankers are looking for market share. Has there been any modelling done by your bank to suggest that, if there were to be an immediate reduction in credit card rates, that would give you a competitive advantage in attracting greater market share? I understand the issue about it being easier to migrate, but you are migrating from 21.74 to 21.23 in the comparative cash advances on low-rate cards.

If you are talking to your clients on a regular basis, which you have alluded to doing, have you ever had a conversation with them to ask, 'You're paying 19½ per cent—would you be happier to pay 15 per cent?' and assessed their response to that? People in the street are telling me about this. Even on Gruen last night—you know the show on marketing—Todd Sampson was saying that he had done some work for banks and it was important to choose which one early in the piece. But the theme with the banks was that they wanted to be liked by the public. The question was brought about by some of the social missions that banks undertake over and above or outside their core duties. He suggested that they wanted to be liked. Wil Anderson's response to that, immediately and unprompted, was, 'If they want to be liked, they should just drop their credit card interest rates.'

So it is not just a line of questioning that I am pursuing today. I am offering that as a general commentary. If you are not hearing through your 30,000-odd staff that people want a reduction in that value line, why is it that we are getting to the stage where I am trying to assess whether or not there is an appetite from the banks to reduce that?

Mr Thorburn : I understand why you raise it and I have heard it, because of the amount. But we are also saying there are very few people who pay that. We would willingly switch them to a low-rate card.

Mr BUCHHOLZ: Then where is the risk?

Mr Thorburn : All I am saying is that we give people choice. If people have a premium card with the other benefits from that—not just the price, as Antony was saying—people are willing to stay there. But we are happy to move them to a lower rate card. In relation to the pricing decision and why everyone does not just lower the rates, leaving aside the price signalling concern, the market is competitive. So, if there is an opportunity, a player may do that.

But I would also point to a bigger picture, and I mentioned it in my opening statement. Bank margins, of which credit cards are part, are under real pressure. Over the last 20 years, the margins at our bank have halved. So the lending rates are really not compensating for the higher funding costs that we have experienced in the last three or four years and in the last 20. So it is a very competitive market. When you have a bank like ours, which is still strong today and has had a halving of margins in the last 20 years, that shows there is real competition in the market.

Mr BUCHHOLZ: To wind up, can I deduct from our line of questioning today that you have zero appetite to address the high rate of interest on credit cards?

Mr Cahill : My response—and I will answer because I run the product, but I am sure Andrew will have a view—is that we are in the business of providing our customers the products and services that they desire. We clearly price those products and put the features and benefits to them when we think that makes sense to customers. I would again come back to the point I made earlier: if customers wanted a product based only on price, every single customer that came to us today would take our low-rate card. The fact is that one-third of our customers—and we are very transparent with the different products and services that we have, and the features and benefits—are now saying that that is the right product for them, but two-thirds are choosing to take the premium products or the low-rate products.

We are always in the business of trying to win new customers, and part of that is price. We continue to look at this marketplace because we think it is a product that is useful for customers, and we want to ensure they have the right product in their hands. Andrew, I am sure you might have a view, as well.

Mr Thorburn : I agree with the essence of what Antony said.

Mr BUCHHOLZ: Thank you, gentlemen. Mr Chairman, can I flag that I will be pursuing documents from the banks in and around a bit more transparency in this matter.

CHAIR: Okay.

Mr BUCHHOLZ: We will not let this one go.

CHAIR: Thank you, Mr Buchholz. We are going to go now to Mr Bandt.

Mr BANDT: Since 2007 the bank donated about $1½ million to the Labor and Liberal parties, and you have recently stopped that. Why did you make those donations, and why did you stop?

Mr Thorburn : We had been making donations as part of our involvement in the wider democratic process. Our board made a decision to change that, and it was a full discussion. The board made that decision, and I was part of that as a member of the board. The reason why we felt that a change was needed comes back to the point around wanting to be respected as a bank and as a company, and for us to make sure that our community and our customers do not see conflict.

I think the things we are doing around remuneration are other examples of that but, in essence, we felt that the donations we were making to political parties was being misconstrued, misinterpreted, incorrectly. To be clean, direct and decisive, our board decided to stop making such political payments, or payments to political parties, at Commonwealth, state and local level.

Mr BANDT: You say it was being misconstrued or interpreted incorrectly. Can you give me an example of how that was happening?

Mr Thorburn : I think that, in the community, there are concerns around whether the banks are giving money to political parties for receiving particular hearings or benefits. Our bank is a large bank. We have a lot of very capable people. We have good relationships with all political parties anyway, so we are going to use our credibility and strength and currency as a bank—not have it potentially misconstrued that payments are being made for any untoward reasons.

Mr BANDT: Have you had any feedback from Labor or the coalition since you made that decision?

Mr Thorburn : I think one of the things we have done over the last couple of months has been to communicate to those parties. I did not do that personally, but I understand that they have noted that and accepted that as a decision that our board has made. We conveyed that clearly and in a timely way, with a clear reason why.

Mr BANDT: Thanks. Moving on to something else, you would have heard that the banks that have come before us have faced, and you today have faced, questions about what is going on in their wealth arm, and some of the significant problems have been problems that have occurred in the wealth arm. Your wealth arm is fairly sizeable. Can you very briefly tell us how important it is in terms of profit to your business, and some of the entities that are involved in your wealth arm—just a brief snapshot?

Mr Thorburn : Our wealth business is a very significant business for us, partly because we see it as part of the future of Australians saving more through superannuation and getting good advice around how to allocate their investments. MLC, which is one of our major brands that does this, has been doing this for 120 years, so we believe this is very important for those reasons. I have mentioned some numbers today on the record—1,700 planners and about $180 billion of funds under management. That is less than 10 per cent of our total group profit.

Mr BANDT: When you gave us numbers earlier on about remuneration structures for staff, was that the whole group? Did that include your wealth arm or was that just within the banking operations?

Mr Thorburn : No, that does include our wealth arm as well.

Mr BANDT: Within the wealth arm is the weighting of payment that are based on bonuses or meeting targets higher than in the rest of the bank?

Mr Thorburn : It will depend a bit on the role, but I would not think it is significantly different to like roles in the bank.

Mr BANDT: You were asked some questions by the chair about the circumstances that led to a number of financial planners being terminated or having left and you referred to an internal report that you did that led to some of those decisions. When was that the internal report completed and considered by management?

Mr Thorburn : For the record, we had been compensating customers as a result of things we had found over a number of years. When there were wider industry concerns, in 2014, we commissioned a separate report led by the head of that business, Andrew Hagger, and it came up through to our board. That was around mid-2014—July/August 2014.

Mr BANDT: It was not until February that that report became public? Is that right—January 2015?

Mr Thorburn : I think that is right but—

Mr BANDT: And it was not you who publicised it. It was a whistleblower who leaked it, wasn't it?

Mr Thorburn : I do not know who leaked it, but it was an internal document that was very comprehensive and had gone through all the right committees and board subcommittees of the bank. It had been authored by us and was a very open, comprehensive review of what we had done and what we were doing to address these issues. And, yes, in February 2015, or thereabouts, it ended up in the public domain.

Mr BANDT: I want to put you that there is a common pattern developing and I want to lay out how that common pattern appears and invite your response to it. It seems now, after several days of this hearing, that the pattern is this: something goes wrong in the wealth creation arm—sometimes it involves fraud and sometimes it involves selling products to people that get them into trouble—and the bank does not publicly confess. That is left up to whistleblowers or journalists. The CEO fronts up to this committee and tells us that something went wrong and they wring their hands, but back at the ranch the same people are in charge of the wealth-creation side of the business and we are left with no guarantee that it will not happen again. It seems that the problems all stem from the same source: you are inherently conflicted. The wealth management arms of your business are about making as much profit as possible, including from those who are customers in your deposit arm. My question is this: given that this pattern seems to be recurring why shouldn't we consider fixing the problem at its source and separating the deposit-taking arms from the riskier wealth-creating arms?

Mr Thorburn : My goal is to lead a business that looks after customers, gives the right advice—and that they trust us. I am holding the baton that others have held before me and I will pass on to others. I want to make this bank stronger, more respected and more trusted during my time. That is my commitment and that is a commitment shared by our board and executives. In relation to your particular points, the first thing is that we had addressed these issues ourselves and we had compensated customers—as part of our normal business, doing what we should do—$15 million leading up to the broader public conversation. Two weeks ago we made another public statement as part of our customer response initiative and gave an update. So we have been quite open and transparent around this. We said that there are another 251 customers whom we have compensated to value of $6.5 million. Also, since early 2015, as part of an earlier conversation we had here, we have advised ASIC of planners where we have had additional compliance or conduct concerns, and we have let them know. We are on the record, as part of our wealth business and as part of our wider ABA initiatives, as saying that we need to publicly indicate people in our industry who do not fit, who do not have the right behaviour, and build a register of them so that it is more transparent.

Finally, our planners have, first point, a best interests duty of care to their clients. Their first duty of care is to their clients to make sure that they get the proper advice.

Mr BANDT: Would you be happy about that being reflected in law across the board, in all aspects of your wealth management division?

Mr Thorburn : The best interests duty?

Mr BANDT: Yes, with the kind of rigour that we saw in some legislation that was repealed.

Mr Thorburn : I think that on the planners' side it is good that it is codified and is strong and clear. If you look at the banking and finance oath you will see the commitments that have been made there are quite strong as well. I think anything where individuals volunteer to say, 'This is a code of behaviour that I believe in personally,' is the most powerful, but I do think that the steps in recent years to lift the expectations of planners and their professional qualifications are important.

Just in closing, I think there was just one other thing that you raised that I would like to cover. That is the splitting up you talked about. My view is that we are in the business, as a bank, of looking after clients and giving them financial advice. We believe in that, we think it is really important, and we think we do it, on the whole, well. When we do not, I will be the first person to be accountable and say we need to fix that, because it is not in our best interests as a bank that we do not have the trust and confidence of our clients. But with the trends that are likely to continue—volatility in international markets, an ageing population and the state's lack of ability to provide pensions at the level that people desire—Australians need to save more. There is a complexity of products, and it is important that people get the right advice. I think our bank is in a very good position to do that, with the scale, the resources, the transparency, the systems and the accountability that we have in place.

Mr BANDT: But at the end of the day vertical integration is the reason that you are sitting here, isn't it?

Mr Thorburn : I think I am sitting here because the community, through parliament, wanted to have a conversation with us about a range of things, including funding, conduct, interest rates and a range of things that your colleagues have been asking us about today.

Mr BANDT: When you say to us that the answer is for those in the wealth management and wealth creation arm to continue to be allowed to be self-regulated, and we have seen scandal after scandal that only come to light when whistleblowers raise them, and we find out the same people are still in charge, can you understand why some people are not satisfied by that? Can you understand why we might want to continue to push for a royal commission to understand and satisfy ourselves that things are actually changing on the ground and that we will not just have repeated appearances and assurances that things are going right, yet back at the ranch the same people are running the show?

Mr Thorburn : I can understand why you say that and why that has been raised, although I think we have done the work to be transparent around this: the five commitments we have made, the public updates we are giving, the independent customer advocate we now have in place, Dimity Kingsford Smith, who is available to clients who want to talk with her and to challenge the process. We have strengthened whistleblowers. Indeed, our planners do not just advise on and sell our products. They are able to choose from a wider range of non-NAB, non-MLC products, and indeed they do. So I understand why you have the emotion in your voice about it. I understand that, because when I have met with some of the clients that we have not done well for I am ashamed. I understand there are some of those and I cannot accept what we did there, but overall we have a lot of our people doing the right thing, and I think that is good for Australians.

CHAIR: Mr Bandt, I will just ask you to come to your concluding question please.

Mr BANDT: Thank you, Chair. Mr Thorburn, do you think housing is overpriced?

Mr Thorburn : I think we had a wee bit of a conversation about that before, and I think we focused on Sydney and Melbourne because that is where we have seen the price inflation, although if you go back—

Mr BANDT: You think housing in Sydney and Melbourne is overpriced?

Mr Thorburn : No, I don't think so. It is something that we are aware of and there will be pockets where there will be some concern, but I talked about the disciplines we have in lending, the way we monitor from a risk perspective, where we are lending and making sure our clients only take on debt they can afford. The overall picture is that we are dependent on the economy, and our economy, thankfully, is strong and has had 25 years of positive GDP growth. We have unemployment falling a wee bit. We have very low interest rates. So I think if the default case applies, which is reasonable growth over the next few years, it is going to mean that employment levels are going to be strong. That is the key indicator, Mr Bandt, I look at to indicate concerns—unemployment, and at the moment it is holding.

Mr BANDT: I think it will come as a surprise to a lot of the people who are currently in jobs that they would consider to be reasonably well paid in Sydney and Melbourne who cannot break into the housing market that you do not think housing in Sydney and Melbourne is overpriced. We might want to explore whether the bank gets a benefit from being able to write additional mortgages of increasingly larger size. I fear my time may have run out.

CHAIR: We will now go Mr Hogan.

Mr HOGAN: Thank you, Mr Thorburn and Mr Cahill, for being here today. My first question revolves around market competition. I make an observation, which I have made over the last couple of days, which is that I believe the previous Labor government's ill-designed government guarantee deposit system around the time of the GFC greatly advantaged you and the other three major banks. You were charged 70 basis points for the guarantee. The smaller banks in the industry were charged double that at 150 basis points. Indeed, there were financial institutions, like Mortgage Trust, which were not guaranteed at all. I had two in my region, Main Investments and East Coast Mortgage, who were providing great competition to you that had to shut their doors for not being included in this scheme. I think this has drastically reduced competition in the sector.

I also make the point that some countries did this differently, where smaller banks and bigger banks were charged the same rate and non-banks were also given the guarantee for mum and dad investors. In that vein, I want to hold up a chart—and I appreciate that I am a fair way away from you—that shows the mortgage lending spread. This was given to us by CLSA. It shows the spread of the mortgage rate less the cash rate. It started at 500 basis points back in the early nineties, and obviously with the increased competition from people—and we well know how that worked with Aussie Home Loans and others, which have now been absorbed by the major banks—that margin decreased to around 200 basis points. More recently, it has gone from 200 and crept back up to around 300 basis point. I make the claim that this is because of less competition, because of some of the reasons I have outlined. What have you got say to that?

Mr Thorburn : Thank you, Mr Hogan. I will start and Antony can perhaps talk about the housing product specifically in Mr Hogan's question. The first point I would make, Mr Hogan, is that I have been in this industry for 30 years. It is more competitive today than it has ever been.

Mr HOGAN: Why has that rate gone up?

Mr Thorburn : We have 23 million people in Australia. We have four large, strong banks. We have a number of regionals. We have a number of foreign banks and other credit unions who provide really good competition. The best thing I can tell you to illustrate the competition is our margin. Our overall margin over the last 20 years has gone from 3.9 per cent and it has halved today. That is an extraordinary number. That is total cost of funds, because we do not fund off the cash rate. All the sources of funding: we have $200 billion of funding that comes from offshore; it does not work off the cash rate. And then we have all our lending income, and that has shrunk dramatically and continues to be under pressure. Over the last four years, it has gone down by another 30 basis points. So, to me, the best proof of 'is competition working?' is how many people are playing and what has happened to their profit margins? In our case it has halved. I think your reference to the cash rate is not the best rate to reference to, because we do not fund our mortgage book off the cash rate.

Mr HOGAN: I take your point. The second question I have is about the bank account switching service, which was introduced also around the same time. It requires banks to process transfer requests. This is obviously about when you are not happy with your bank, so you want to switch all your accounts to another bank. It required that to happen in five business days. My understanding is that it is taking the major banks 30 to 60 days to process this. How long is it taking you?

Mr Thorburn : I do not have that number off the top of my head. I would have to take that on notice. Do you have that here?

Mr Cahill : No, I do not.

Mr Thorburn : We can get back to you on that.

Mr Cahill : I think the NPP will certainly very much change the playing field in terms of how this works.

Mr HOGAN: The allegation obviously is that the major banks, as a standard, are stalling in doing this and could do it much quicker, but obviously are trying to talk the customer into staying with them rather than going. We have recently legislated, as you would be aware, on farm management bonds. So when farmers have inconsistent cash flow, the banks have so far have—and you also have—refused to offset this against farm loans. Why is that?

Mr Thorburn : Again, I do not know the specific detail of that one. I can come back to a broader point here. We have been banking farmers in Australia for over 100 years. We are the largest agribank in Australia today. We have 500 dedicated agribankers who are specialists in their field and passionate about it. I am very proud of them. The do a very good job. We have been active supporters of the Farm Debt Mediation program. We would like to see that extended across national boundaries, because we think it is a very effective way of dealing with difficult circumstances when farmers do get into some stress. But I would note that we really have a very good client base. We have around 22,000 agriclients in our portfolio. At the moment, we have less than a hundred files that are in our 90-days past due. That is a very small percentage.

Mr HOGAN: Look, obviously, farmers are doing reasonably well now. Prices are up, which is good. I am sure many of your 500 agribusiness service people out there would be telling you or would know that their clients would love their farm management bonds to be able to be offset against their loans. Could you come back to us on why you are not doing that?

Mr Thorburn : Yes. I will do that next week, because I am spending three days in Queensland with our agribankers. I will be able to call you by the end of the next week—

Mr HOGAN: Wonderful.

Mr Thorburn : and tell you the answer to your question personally.

Mr HOGAN: Thank you. On my last question, I asked this to Mr Elliott yesterday. Mr Thorburn, I will offer you the same question. Besides potentially yourselves and your immediate family, there is no-one in this country who does not think we should be sitting here with the four major CEOs of the four major banks grilling them, basically. There would be many people who would want us to be giving you a very hard time. Why have we got to this place, do you believe?

Mr Thorburn : I believe we have got to this place because, over time, people in the community have become concerned about a number of the things that you have raised today. I understand that and I respect that.

Mr HOGAN: But why have we got to the stage where we are so concerned? Why do you believe that so many people are unhappy with the major trading banks?

Mr Thorburn : Because of the issues that have been raised today: interest rates, cultural aspects and financial planning issues. I think those are the reasons why. Now, I welcome being here today because in my time—I am a proud banker—it is the first time I have had three hours to actually talk about my profession. We have actually got some time to actually have a longer conversation. I think today, in the media and the community, people want short answers and sometime short answers are very difficult and so a longer conversation is important. One of the things I think we are having a longer conversation about is how is it that the banks are not passing on the so-called cash rate reduction. What I have tried to do—and I think colleagues have tried to do—is say that we do not fund our mortgage book off the cash rate. That is the example of perhaps some information and education which is now allowing facts that are breathing, which will hopefully will mean that we can go forward as a stronger profession and improve our trust and relationship with our clients and the community at large.

Mr CRAIG KELLY: Mr Thorburn, I would like to just quickly ask you some questions on the proposed changes to section 46 of the Trade Practices Act, now call the Competition and Consumer Act. Firstly, do you now have, or have you ever had, a substantial degree of market power?

Mr Thorburn : Our bank?

Mr CRAIG KELLY: A substantial degree of market power in any market, as a substantial degree of market power has been defined by the courts under section 46 of the Trade Practices Act.

Mr Thorburn : I am not familiar with the particular definitions. I would say we have a 15 per cent market share in mortgages. We have around 20 per cent in business banking. Our largest competitor in housing is double our size. In mortgages, we have almost 50 per cent of new business being conducted by mortgage brokers. So it is a very competitive market.

Mr CRAIG KELLY: So you do not have a substantial degree of market power?

Mr Thorburn : No. I am leaving aside your definition. I am just saying that, when you look at the numbers we have, one of our biggest competitors is nearly twice our size.

Mr CRAIG KELLY: Does the bank have any opinion on the proposed changes to section 46 of the competition act?

Mr Thorburn : I cannot answer that now. I am happy to take a considered response and come back to you.

Mr CRAIG KELLY: Okay. Unfair contract term legislation was introduced by the government which takes effect in November. Have you reviewed any of your lending terms to small business because of that legislation?

Mr Thorburn : There is a lot of legislation that we have to comply with and there are a lot of changes in that legislation. Again, how we have treated that is not a question that I can answer immediately. But, if you would allow me to, I am happy to take that on notice and reply specifically to your question.

Mr CRAIG KELLY: Thank you. I want to talk about late payment fees for credit cards. I will give an example. If someone with a $1,000 credit limit, $500 outstanding and a $25 monthly payment due is late with that payment, what penalty fee do you charge them?

Mr Cahill : I will answer that. We charge the customer $9. We offer a free service of SMS alerts to all of our customers that they can set up where they will receive an SMS a couple of days beforehand to ensure they can avoid those fees. We currently charge our customers $9.

Mr CRAIG KELLY: Is that $9 substantially less than other banks? I understand that the ANZ was previously charging $35 and is now charging $20.

Mr Cahill : I cannot quote the numbers of the other institutions, but I do believe that we charge one of the lowest fees.

Mr CRAIG KELLY: Is that $9 the same amount irrespective of the size of the credit card debt?

Mr Cahill : Yes, it is. It is a $9 fee.

Mr CRAIG KELLY: Irrespective of the—

Mr Cahill : It is a flat fee.

Mr CRAIG KELLY: My other question goes to interest rates that small business are paying. You said before that the best measure of a competitive market is the margins. I think I have quoted you correctly there. It is true that the banks' margins have come down overall over the last 20 years. However, if I look at lending to small business from the RBA rates, I see it is the exact opposite. I see that the margins have actually increased. In fact, looking at the spread between the cash rate and the variable lending rate residentially secured to small business, that margin has actually doubled over the last 20 years. What do you put that down to?

Mr Thorburn : The small business market is a really important market for us to acknowledge, because most businesses in Australia are small businesses and we are the No. 1 business bank for them. This is a business we love, and we have a lot of great products and services to offer people because this is the backbone of the Australian economy.

But on pricing I would say that if you look at small business loans secured by residential real estate you will see that that rate is only 50 to 100 basis points higher than owner-occupiers would pay. So owner-occupiers will be paying five per cent or probably less. Small businesses will be paying maybe up to six per cent. So it is not that different.

Unsecured loans are quite different because obviously the bank does not have access security and there is higher risk anyway for the cash flows from these businesses. We love these businesses, but the failure rate is also a lot higher. So we are charging 13 per cent to 14 per cent to small businesses, which I think is not unreasonable given the risk. Remember that we have to allocate twice as much capital to a small business loan compared to a mortgage, and the default rates over time are twice as high as a mortgage rate. Given all that, I think those rates of six per cent—or 13 per cent for unsecured loans—are quite appropriate.

Mr CRAIG KELLY: If someone came to you with a business proposal which you thought was half reasonable and had been residentially secured, what is the current rate they can get from your bank?

Mr Cahill : We would charge 5.59 per cent. That is our rate for that loan. Against the housing loan, the most comparable product would be an investor interest-only mortgage, because a lot of those small business loans are evolving loans. So it is a difference of nine basis points. In terms of the information Governor Lowe gave you, I think he was giving you full information of all types of lending. So, if we are specifically talking about small business by residential property, it is nine basis points difference.

Mr CRAIG KELLY: Which you are saying now is, for yourselves, 5.95 per cent?

Mr Cahill : Yes, 5.59. And to Andrew's point, statistically we see, even where we have residential backed security for those small business loans, significantly higher rates of default against those loans, and in actual fact we hold double the amount of capital.

Mr CRAIG KELLY: I have one other question on the potential of a banking tribunal. A lot of the evidence we have heard here about bad behaviour in banks, unconscionable conduct, breach of contractual terms by the banks—basically every single bank has come in here and apologised. Isn't that because the legal system we have at the moment currently is not working, that a consumer or a small business that has experienced wrongdoing by the bank simply cannot go through the existing court processes to have their case or their issue determined by a court, because of the risk of an adverse cost on a technicality or the simple high cost of our legal system?

Mr Thorburn : I think you raise a good point, because for small businesses—these are people who are running their business during the day and night. They do not have the time to go through long processes, and I think this is an area where we as a bank need to improve to make it easier. I welcome that, although I would note, in reference to earlier comments, that the number of complaints that we have that are going through to the Financial Ombudsman Service have fallen by 64 per cent, down to 700, this last year. So, we think we handle complaints well. Most of them are handled by our bankers and do not need escalation. But to have only 700 in total going to the Financial Ombudsman Service—

Mr CRAIG KELLY: But ultimately they rely on the goodwill of the bank rather than the chance that someone has a disagreement—the opportunity for someone to actually bring that before a court of law for a decision. Obviously it is impossible for a small business or a consumer to take that to the Supreme Court.

Mr Thorburn : Yes, and I acknowledge that is a complex and time-consuming issue for small businesses, and we would welcome working with government and other parties to enhance that process.

Mr EVANS: In answer to Mr Hogan's last question about why we are here, one of your peers yesterday said that the reason for these hearings is that major banks had lost touch with their customers. Do you agree with that?

Mr Thorburn : I think there are some cases—and it is the ones we talked about—where we have not taken the time to really acknowledge the issues and to be able to explain them and have a conversation about. So I think yes, in some areas, we have lost touch about the sensitivity and emotion and the way people feel about it, yes, in some areas.

Mr EVANS: I noted that in your response you talked about communication and the education sort of aspects of that. In the retail sector or in small business where I am from, if you lost touch with your customers or you did not communicate properly with them you would end up going out of business. How has your market share changed over the past 10 years?

Mr Thorburn : I think I will get Antony perhaps to cover the key product lines, but I would say that it is our commitment to make sure we stay in touch with customers. That is why, in my incentive scheme, in our senior people's incentive scheme and all the way through, we have this balanced scorecard with the customer at the front and centre, the introduction of this new net promoter system which daily gives feedback to bankers. We are all measured on that and we are all interested in and committed to listening to customers. And I think the way we handle complaints, in relation to my answer to Mr Kelly's question—the number of complaints we are getting we are handling better. So I think we are listening, and I think our product market shares I will let Antony handle, but certainly in our business area, which is where we are No. 1, we have managed to really hold strong against a lot of competition.

Mr Cahill : Broadly speaking, we are the largest business bank. Certainly during the GFC we increased our market share, and a big reason for that was that we were able to continue to lend, and I think that has been a big part of the discussion today—that we were able to secure funds, we were able to continue lending to Australian businesses as we went forwards, and being there for our customers was incredibly important. Over the last seven or eight years it has been incredibly competitive and our market share has been broadly flat. In some areas of corporate and institutional banking—

Mr EVANS: Broadly speaking, market share is either stable or a little bit up?

Mr Cahill : In business banking, yes. And in our retail banking area we have gained market share in some areas. Again, we made some very specific decisions there. We are the only bank that offers a zero-fee transaction account. We changed many of our products and services. We changed lot of fees that we charge customers. We invested heavily into our distribution network. So we have gained some market share, but it is incredibly competitive.

Mr EVANS: Do you think your customers generally have the same power to switch, or choose, as customers in, say, retail, hospitality or other small businesses?

Mr Thorburn : I think this has improved a lot in the digital era. Clients now have the ability to get online and open a transaction account within a matter of minutes. And with mortgage brokers now having really risen, they are getting that competition and choice. The next big step, which will help that, is the introduction next year of the new payments platform, or NPP, which will mean clients will be able to not just switch banks but change all their debits and banking transactions very easily. That will make a significant difference.

Mr EVANS: I note that you told the committee chair earlier that you do strongly support the concept of open data and account portability. But hasn't NAB expressed concerns or even opposed those concepts previously?

Mr Thorburn : Our commitment today is to portability of accounts. We absolutely support that. We have the facility for our clients to open online transaction accounts in a matter of minutes—we are making that easy. In response to Mr Buchholz's question, we are allowing clients to shift to low-rate products. On data sharing, we are now actively involved with CCR in sharing in private mode. So I think we are demonstrating by what we are doing that we are committed to these things. Antony, is there anything you want to add on Mr Evans' question?

Mr Cahill : In relation to account portability what we have said—and I continue to say it—is that we want to ensure that customers can move financial institutions if they wish to do so. The idea of account portability has been looked at a number of times previously. We had this discussion with the Senate committee last year. Allowing for account portability—that is, allowing the BSB and account number to move from one bank to another—would be incredibly expensive and technically very complex. Our belief is that the NPP initiative will allow customers to move far more easily. So, yes, we want to allow customers to move. My personal belief is that it is now very easy to open a new transaction account, and NPP will allow customers to move—rather than account portability, which was spoken about a number of years ago.

Going to your point on open data: again, at a top level, we support competition and innovation. We are investing heavily in innovation and working with many FinTecs today. A key point I would make is that we have to ensure we have the right safeguards in place, and the right protocols, and that customers fully understand what data is being shared.

Mr EVANS: I think we all accept your views around data security. The UK is about to do it and has set some very tight time lines around it. If they can do it in the UK, with an apparently weaker banking system, surely our banks can do it just as quickly. Will you give a commitment to support open banking if the government decides to proceed down that path and we actively cooperate to make it work?

Mr Thorburn : My view would be that we would absolutely actively consider any proposals that are put forward.

Mr EVANS: In regard to positive credit ratings and other customer data like that, do you fundamentally believe that that kind of data is your data, or is it your customers' data?

Mr Cahill : In relation to the CCR initiative, that is the customers' data; it is also our data, but fundamentally it is the customers' data. We are positioning ourselves to participate in the system. We have said very clearly that we believe everybody should participate in the system. We are actually working with the industry and we have our systems and we are participating in private mode.

Mr THISTLETHWAITE: I want to follow on from my line of questioning earlier about remuneration structures. Does NAB utilise leaderboards or use its retail network at the local area market level to publish a leaderboard which ranks individuals and how they are performing in terms of their sales targets and how the branches are performing?

Mr Thorburn : We do in our branches and our business centres, and I have been into many of them. We have boards to bring people together to stand in a daily huddle and focus the conversations around how the business is going. We often call them customer experience boards, so the focus is on customers' experience. I know, having seen many of the boards and what is on them, there are a range of indicators in there. So, yes, it does have referrals, growth in the business like lending and deposits, but it also has the customer feedback from yesterday's NPS—the verbatim feedback that clients who visited yesterday have given the branch overnight. There are many compliance and risk indicators in there—things like data quality, getting the clients' details right so they are accurate. Those things are in there as well. So it is quite a balanced and comprehensive board. It does not focus on any one particular aspect.

Mr THISTLETHWAITE: But it also publishes each individual's sales targets as a percentage of the target, doesn't it?

Mr Thorburn : I think it would have in there some individual accountability and transparency, and I think that is how a business should run. It depends on what—and I know that they are measured on a range of things, not a narrow set. The second thing is that the role of the leader in that branch is to coach and help their people to be better. So, where people are doing well, there is encouragement and there is a transfer of, 'How are you doing that?' to other members, and, where there are people who are struggling, a leader's job is to help them get better, not to shame them.

Mr THISTLETHWAITE: So, if they are struggling and they are not meeting their targets, does that include perhaps using that information to put them on a performance improvement program?

Mr Thorburn : The performance improvement program is something that comes quite a way down the process, and what a leader should do is look at the balance scorecard. How is the individual doing on customer, risk, financial, and leadership and people—working with colleagues? And then they should be sitting down with them regularly. We have something called monthly reviews, where every leader should be sitting down with their people and talking about their performance and their development needs. The role of a leader is talk about that, but in the context of the total piece, and help them through it.

Where people are not meeting standards on their balance scorecard, we would expect—and I think all businesses should—that there is an intervention. We call it a performance improvement plan, but it should be for good, to help people.

Mr THISTLETHWAITE: And that performance improvement program can include warnings about behaviour and ultimately dismissal, can't it, if they do not improve?

Mr Thorburn : Yes, that is true, but I think all businesses in Australia would have that sort of discipline, and that comes at the end of a long process of coaching and counselling and helping people to get better.

Mr THISTLETHWAITE: Can you inform the committee what your base level of remuneration is, please.

Mr Thorburn : My base remuneration is $2.3 million.

Mr THISTLETHWAITE: And additions for short- and long-term objectives?

Mr Thorburn : Yes, there is a similar number for short-term incentives and a similar number for long-term incentive. The short-term incentive is dependent on me meeting my balance scorecard, and a third of any incentive payment will be based on our customer experience, where our customers actually are telling us how they rate us. Fifty per cent of any incentive I get will be deferred for two years—one year and two years—and it is deferred in bank stock. It is not accessible to me then as cash. And the long-term incentive is based over the longer term, four years—our shareholders through dividends and share price getting appreciation in that compared to our competitors. So it is very much a long-term incentive that relies on our bank doing well consistently over a number of years.

Mr THISTLETHWAITE: Do any of those incentives include the profitability of the bank?

Mr Thorburn : Yes. One of the important points is that the bank's profitability is maintained at a certain level.

Mr THISTLETHWAITE: Your first-half results for this year show a $1.7 billion loss. Some of that is reflected in the sale of the Clydesdale Bank. Would that affect your short-term incentive?

Mr Thorburn : We have not done this year's incentive yet, but the board will go through a thorough process on mine. But that was a little different because that was really the loss on sale of a long-term asset; it was not cash profit. And we had signalled this very clearly to the market over the last 18 months—that we were going to be exiting that business. That is one of the important balanced scorecard assessments that our board will make of me: how well that transaction was done.

Mr THISTLETHWAITE: The final issue I want to deal with is the bank bill swap rate. NAB is involved in the action that is being taken by ASIC in the courts regarding the bank bill swap rate. I think you were involved. They commenced proceedings against NAB on 7 June this year. But UBS, BNP Paribas and Royal Bank of Scotland have also been involved in actions with ASIC. All three of those organisations admitted fault and accepted enforceable undertakings and, in the case of Royal Bank of Scotland, they conducted an internal review which did find that there was potential manipulation by their traders of the bank bill swap rate, and that had an effect on their derivative positions. Has NAB conducted a similar internal review, as to these allegations, in your organisation?

Mr Thorburn : I would like to be very cautious here because this topic of BBSW is in legal proceedings, but we have reviewed extensively our position and what happened, including all of the conversations and the activities of people involved going back many years. I think I probably should close on that point, apart from saying that we have a disagreement with ASIC on it and now it is going through legal proceedings to resolve it.

Mr THISTLETHWAITE: Was the review conducted internally or was an external organisation appointed to review the issue?

Mr Thorburn : I think we have definitely done it internally, and that includes what we call our third line of defence audit and risk people. It has gone right through to the board. I am pretty sure we have had external parties involved in that process, but it has been a very transparent, comprehensive process that has been considered not so much by the executive but by the board, given the significance of it, and it has been very comprehensive going over a number of years.

Mr THISTLETHWAITE: Did the board consider just accepting an enforceable undertaking, as the other banks have done?

Mr Thorburn : Those banks were in different markets—they are global banks—and there are different circumstances. I think, Mr Thistlethwaite, I would like to leave it at that point, because it is subject to an ongoing legal action.

Mr THISTLETHWAITE: Okay.

CHAIR: Mr Thorburn, I just wanted to test something that I had raised with the other chief executives about this issue of competition and effectively removing any unnecessary barriers to people who want to compete with you in the start-up process. This issue is about the fact that it had become your prize deposit-taking institution; you cannot have one person or one entity own more than 15 per cent of the bank; and also the fact that you are required to have $50 million at the point at which you go forward to APRA seeking approval. Some people argue that that inhibits new competitors in setting up, effectively, to take you on competitively. So, if the committee was of a mind to ask APRA to review those provisions so as to increase the capacity for new businesses to set up in this area, what would be your view on that?

Mr Thorburn : I would not, obviously, have any objection to you doing that, but I would say: there should be high standards and a high bar for actually setting up a bank, because a bank does very important things, and there are various risks and they need to be understood and managed and to have the right capital, and it is really important. So I do not think the current numbers are inappropriate at all.

In addition, I think we have over 150 ADIs already in Australia. So I am not sure that adding more of them is going to bring the competition that you referred to. The competition is working, because our margins have halved in the last 20 years. Finally, where the competition is coming is more in parts of our value chain and particular products and services that our clients have, particularly in business, where they are able, through venture capital and technology, to offer services to them that break down the overall relationship with the bank. That is happening quite readily in our country, and you can see the FinTec hubs that are being set up. We do not walk away from that. I think that is good competition and, in fact, we have our own—Antony referred to them—NAB Labs. We have our own NAB Ventures fund, where we are investing in small tech start-ups too, because we want to learn faster. So that is what I would say in response to your question.

CHAIR: I was interested in your exchange with Mr Kelly about section 46 and competition law generally. I am interested in your understanding of the competition law and its impact on the bank. You are the fourth largest bank and, I think, also the fourth largest company in Australia by market capitalisation. Have competition law issues not come across your desk to the extent that you are familiar with them? If so, does that suggest that they need to be further strengthened?

Mr Thorburn : No, we believe that market competition in the financial services market in Australia is strong, and we are seeing that with the number of players and the margin reduction. In terms of me thinking of our bank and competition, as I think I have said in response to your colleague's question, I do not think it has been any more intense and competitive than at any time in my career. I think it is heightened, and I do not expect that that is going to be reduced. I think it is just going to continue to get tougher, and the balance we have to strike between different stakeholders as we manage risk and as we innovate is going to be a real challenge.

CHAIR: You do not perceive that you have market power in the manner in which Mr Kelly suggested?

Mr Thorburn : I do not, because in key products it is easy to do business online, it is easy to open accounts and it is easy to switch between products, and the new payments platform will bring a new level of portability that we have not seen before. Also, I would say that, where you have a market of 15 to 20 per cent, I do not think that would indicate any excessive power or leverage, especially when, in the mortgage business, our largest competitor is almost twice our size.

CHAIR: Thank you for your attendance. That concludes today's hearing. The committee secretariat will be in touch with you in relation to any matters arising out of today's evidence. You will be sent a copy of the transcript of your evidence, to which you can make corrections of grammar and fact.

Proceedings suspended from 12:32 to 13:16