April 24, 2018 / 1:54 AM / a month ago

Australia's NAB reviews advice business as inquiry exposes misconduct

SYDNEY (Reuters) - National Australia Bank (NAB.AX) said on Tuesday it is reviewing options for its financial advice business, as a major inquiry into the country’s financial sector continued to reveal widespread misconduct by advisers with the big banks.

FILE PHOTO: The National Australia Bank Logo is seen on a branch in central Sydney, Australia, February 8, 2018. REUTERS/Daniel Munoz/File Photo

Andrew Hagger, a member of NAB’s 11-strong executive leadership team, said the bank was “continually looking” at its portfolio mix as he responded to questions at the inquiry about the future of its financial advice business model.

Facing mounting regulatory pressure and public disgust at their abuse of market power, Australia’s major banks are increasingly moving to exit non-core businesses with high compliance risks, such as wealth management.

“NAB is continually looking at our overall portfolio, but ... there’s no announcement to make here today,” Hagger told barrister Rowena Orr assisting the Royal Commission inquiry into the financial sector.

NAB’s wealth management assets are worth about A$4 billion ($3 billion), according to Citigroup analysts. NAB shares closed 1.1 percent higher on Tuesday while the broader market was up 0.5.

Commissioner Kenneth Hayne, whose recommendations at the end of the year-long inquiry could include tighter rules for financial planning, pressed Hagger about an internal NAB document from 2017 talking about the need to review the “business model associated with aligned advisers”.

Hagger said that legislation in 2012 designed to ensure financial planners acted in the best interest of clients had changed the “risk-reward equation” for NAB and made it less attractive for “big organisations” to remain in the business.

NAB has admitted to the inquiry that some of its advisers had engaged in dishonest and illegal conduct such as misappropriation of client funds. It has paid A$19 million in compensation to customers, Haggard said.

It has also admitted that for years it charged advisory fees to hundreds of thousands of clients without providing them with services or allocating them an adviser.

The inquiry has heard that such practices were rife throughout Australia’s financial industry, leading to calls for much higher penalties and tougher oversight.

The Royal Commission had previously heard that Australia and New Zealand Banking Group (ANZ.AX) had decided to sell its wealth management and advisory businesses after years of failing to ensure its advisers were acting in clients’ interests.

ANZ said on Monday it would book a loss of A$632 million on the divestment of two of its wealth businesses in 2017, which will be reflected in its half yearly results, due May 1.

Under questioning at the inquiry on Tuesday, ANZ head of wealth solutions and partnerships Kieran Forde admitted the bank had failed to properly investigate alleged fraud by one of its financial advisers because of concerns about potential commercial damage to its wealth management unit.

    Meanwhile investors continued to punish AMP Ltd (AMP.AX), the country’s largest listed wealth manager, after it admitted to the inquiry last week that it had lied to the regulator for almost a decade to cover up a deliberate practice of charging fees for no service.

    AMP shares closed 2.6 percent lower after hitting a 6-year low of A$4.03 earlier in the day.

    REGULATORY CAPTURE

    With revelations of bank wrongdoing making headlines almost daily, Australia’s corporate watchdog, the Australian Securities and Investments Commission, has been accused of being “litigation shy”.

    “Where it does go to court, it tends to have a fairly heavy emphasis on small fry,” Allan Fels, former head of the competition regulator, told ABC radio.

    ASIC representatives declined to comment.

    On Friday, the government vowed to double prison terms for financial crimes, dramatically increase financial penalties and ramp up ASIC’s investigative powers.

    Australian Competition and Consumer Commission Chairman Rod Sims on Monday lent his support to the push to increase penalties, saying banks should not be allowed to treat fines “as a cost of doing business”.

    In 2016, ASIC sued ANZ, NAB, and Westpac Banking Corp (WBC.AX) for rigging a key interest rate, one of the few times it has taken any of the major banks to court.

    It settled the case with NAB and ANZ without charging any individuals after the banks admitted the accusations.

    In January, it also filed a suit against Commonwealth Bank of Australia (CBA.AX) over similar claims. Westpac and CBA are still defending the claims in court.

    ($1 = 1.3151 Australian dollars)

    Reporting by Paulina Duran; Editing by Stephen Coates

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