The National Australia Bank (NAB)has received a $15 million fine from the Federal Court for its 19-year home loan referral scheme known as the Introducer Program.
The controversial scheme, which was terminated by the bank in late 2019, after increasing regulatory scrutiny, had allowed unlicensed and untrained “introducers” to earn a commission from NAB for bringing in customers who ended up taking out a home loan.
The bank had admitted to 260 contraventions of the Credit Act arising from the programme when it was taken to the court in August 2019 by the Australian Securities and Investments Commission (ASIC).
The $15 million is a lenient penalty that has factored in the cooperation of the bank with the regulator.
Justice Michael Lee pinpointed the inherent flaws of the program and the risks it posed to its customers.
“There were no uniform processes in the selection of the introducers, no requirement that they have any particular training and no minimum level of due diligence,” Lee said in his judgement on Oct 19. “There was also no relevant formal training for frontline bankers, including as to the nature of the information the Introducer could lawfully provide.”
“The programme at times resulted in the bank receiving information and documents about customers from financially interested third parties,” he continued. “At any one time there were hundreds to thousands of these untrained Introducers.”
Lee also noted that the scheme encouraged NAB bankers to rely on information and documents provided by unlicensed Introducers rather than dealing directly with the borrower, which meant that the NAB did not take reasonable steps to determine whether the loans were serviceable by the clients.
Despite Issues NAB Viewed Scheme A Solid Source of Business
The introducer program, started in 2000, was incredibly profitable for NAB. At its peak in 2015, the scheme had 5250 introducers who referred $8.3 billion in loans and were paid $47.5 million in commissions.
Whistle-blower reports in Sept. 2015 about introducers falsifying documents and banker misconduct forced NAB to initiate various internal investigations, including engaging accountancy firm KPMG in December 2015 to conduct an independent review.
The KPMG report identified serviceability issues for an estimated $50 million worth of loans and found that bankers were falsifying documents. It also warned that the program faced risks of being exploited by organised crime.
However, despite NAB reporting the breaches to ASIC in February 2016, which led to the launch an immediate investigation, by July of the same year, NAB still argued that the program was “ a viable and commercially solid source of business for the bank.”
Concerns Over The Adequacy of ASIC’s Investigation
In handing down the judgement, Justice Lee also expressed his disappointment with ASIC for failing to conduct an independent investigation on its own.
“I have a nagging feeling of disquiet that the true picture of the extent of the problems with the program is not being revealed because there was not a real regulatory desire to pursue a thorough investigation, ” he said.
He criticised the regulator for “the significant reliance on the internal work done by NAB in its investigations (by its officers or by a professional services firm it had engaged) as to where the problems were located within NAB and what went wrong.”
The judge also described NAB’s engagement of accounting firm KPMG to conduct the investigation as “sub-optimal” due to its commercial relationship with the bank and the fees incurred, questioning whether the regulator ought to step in and appoint a firm of its own choice.
Weakness In Consumer Protections In Financial Sector
Rob Nicholls, associate professor at the University of New South Wales told The Epoch Times on Oct. 20 that the Hayne Royal Commission had been shocked by the referral schemes in each of the big four banks and that NAB was just chosen by ASIC as an example.
While he believes the penalty reinforced the message of ASIC to banks, he echoed the concern of the Lee, saying the effectiveness of the message was compromised by the fact that it was an agreed settlement.
“That is, ASIC did not learn as much as it should have from the Hayne Royal Commission and NAB was fine to go along with ASIC’s conduct of the case,” he said. “If there had been no agreed settlement, the penalties may have been much greater.”
He also added that the case highlighted again the regulatory weakness in consumer protection, with ASIC having consumer protection responsibility for financial services while ACCC enforcing more effective consumer protection for all other goods.
The gap needs to be filled, Nicholls explained. “In my view, either ASIC should increase its focus on consumer protection and call out its need for resources to do this, or Treasury should make the policy change to hand this responsibility to the ACCC as a safe pair of hands,” he said.