Westpac chief executive blames bank's 'culture' for ignoring Asic – as it happened

We hear that Westpac and other banks are talking to Asic about a common industry solution to the fee for no service issues.

Hartzer:

It’s about a – as I understand it, because I think it’s still being worked through, is that there would be a common methodology for contacting customers, what the basis of evidence would be, how much information you need to gather, what to do when you couldn’t contact the customer or when you couldn’t contact the adviser, what the approach would be.

OK it looks like we’re going to close out on fees for no service.

Asic first contacted Westpac about the issue early in 2016. At the time, the bank believed the issue was likely limited to a small number “of problem advisers”.

Hodge asks, “is it the case that Westpac now accepts that belief was wrong?:

Yes, Hartzer replies.

Hodge: “And since the concerns were first raised in 2016, the scale of that fees-for-no-service problem it has become apparent has expanded significantly?

Hartzer: Yes.

Hodge: And Westpac didn’t, though, undertake a more expansive review after learning of the concerns in 2016?

Hartzer: Well, we gradually - we did. But it’s a problem that grew in our awareness over time and so the response scaled up over time.

It expects to pay out $106m in remediation to customers over fees for no service.

An economics course will eventually teach its students about the difference between a hypothetical “perfectly competitive” market with multiple players and price competition, and an “oligopolistic market” with a few large players and little price competition.

Australia’s banking system is an oligopoly, according to the Productivity Commission.

One of the classic strategic problems faced by firms in an oligopoly is the “first mover problem”. This refers to the logic they’ll employ to defend their behaviour.

For example, if oligopolistic firms are all ripping off customers with a particular product, none of them will want to be the first to stop doing so because they’ll lose market share and profits to their less scrupulous competitors.

We heard CBA’s chief executive, Matt Comyn, talk about the first mover problem yesterday.

And we’ve heard about it again today, this time from Brian Hartzer.

Check this exchange between Hartzer and Hodge:

Hodge: “The reason that Westpac didn’t want to simply move itself to give up flex commissions was because it didn’t want to be the first mover in the industry?”

Hartzer: “We didn’t think that making – being the first mover would actually achieve the elimination of flex commissions, because we didn’t think the others would change, if they weren’t required to.

Hodge: “But it would mean that you no longer would be paying flex commissions?

Hartzer: “Yes – and we felt that that would mean we were no longer effectively in the business.”

Hodge: “And it would mean that you would no longer be incentivising dealers to have a conflict of interest between themselves and the customer?”

Hartzer: “Yes.”

Hodge then asks Hartzer whether he still thinks it’s possible for a bank to operate a large-scale financial advice business “in a way that delivers compliant high quality advice?”

He says yes, but “the economics of doing that are getting very difficult”.

“Advice is inherently a challenging issue to monitor because you’re talking about a subjective conversation between two people at some point, investing inevitably has a level of subjectivity around it which can mean that with the best will in the world results don’t necessarily come out the way you expect them to,” he says.

“The standards of documentation and proof that we’re now as a general industry expected to meet are very, very high, and so the cost of training, hind-sighting, storing documents, auditing and the like is very, very high relative to the revenue associated with providing that advice.”

Hartzer admits he’s “disappointed” in the leadership of BT Financial.

Poor and inappropriate advice from financial advisors has been at the heart of many of the wealth advisory issues and Hartzer agrees that “in some respects” many of those problems were foreseeable.

Hodge asks, “do you have a problem, as the CEO, with the leadership of the senior leaders within BT over a number of years, given that all of these problems persisted within BT?

“I’m certainly disappointed,” he says. He says there has been “significant” remuneration consequences for the leaders at the wealth advisory company.

OK we’ve moved onto Westpac’s wealth advisory firm, BT Financal. The commission has heard issues around non-compliant advice and fees for no service across the major financial institutions.

Westpac has set aside $47m in funds for customers who received faulty advice as of September this year.

We’re hearing that Westpac has made a number of changes to improve their processes, but the risk profile is still currently outside of the bank’s “risk appetite”.

Yikes. Hodge gets cranky with Hartzer when he gives a “flippant” answer.

He asks, if it’s not a cultural issue at Westpac, what are the possible explanations?

“The pursuit of a commission on the car is one. Another is [it] was a very sad story of a woman who was really desperate to get a car, and he may have been just really trying to get her a car. So that could have been part of it.”

Hodge asks which is more likely: a dealer doing something in order to make a profit and get the commission, or engaging in fraud out of the goodness of their heart?

Hartzer responds: “I couldn’t say. I’m not a car dealer.”

Hodge doesn’t like that answer:

Does it seem to you that when Westpac is coming to design its systems and be involved with car dealers, which are its principal source of making auto finance, that it needs to actually think about things from the perspective of the car dealer?

Yes, Hartzer says.

So can I suggest the rather flippant answer which is you’re not a car dealer, rather ignores the position that you’re in, which is that you are dependent upon car dealers in order to make these loans for your profit?

The back and forth goes on before Hartzer says:

We – sorry, we absolutely have an obligation to think about the controls that need to be in place for car dealers in this position, given that they are representing us in – in providing that finance, and we’ve made a number of improvements to those controls since that time to address that issue.

This loan in particular was manually approved by a Westpac credit officer, and Hodge wants to drill into whether this and the previous credit card limit increase offers suggest an “inadequate culture for respecting the responsible lending obligations”.

Hartzer says an internal review did not identify any reward or remunerations issues, Westpac employees in these cases are not incentivised to approve loans.

Hodge: So does it follow, therefore, that the – whatever the failing is is simply a failing to have adequately applied the responsible lending obligations?

Hartzer: Yes.

Hodge: And does that suggest, then, the possibility that the problem, at least at the time, was an inadequate culture for respecting the responsible lending obligations?

Hartzer: I don’t think that follows.

Hodge: So what, then, is the possible explanation for why there was this failure to follow the responsible lending obligations?

Hartzer: So for our employees, the credit officer’s clearly made a mistake here.

Hodge: From your perspective, it’s just some mistake that was made?

Hartzer: That’s what it looks like to me.

Hodge: I see. And have you considered whether there might be cultural factors that contributed to the conduct?

Hartzer: We’ve considered it, but it’s not obvious that that’s an issue here.

Hodge: When you consider the two case studies from round 1, the credit card limit increase offers and the car loan, both of which involve Westpac taking a particular approach to the responsible lending obligations, does that suggest anything to you about the culture within Westpac in relation to responsible lending?

Hartzer: No, I think they’re different issues. Each of them.

OK, we’re moving on to Westpac and car loans. The commission previously heard about a Bank of Melbourne car loan granted to a woman in 2012. The commission heard Nalini Thiruvangadam earned $350 per fortnight and and $600 from Centrelink benefits

She was signed up to fortnightly car loan payments of $259.

Westpac gives out billions in car loans every year but the overwhelming majority of car loans on issue by Westpac ware initiated by dealers who can set higher interest rates on car loans to get larger commission.

Westpac – and Hartzer now – have acknowledged that the loan was unsuitable and that it breached its obligations under the National Consumer Credit Protection Act.

So, we’re told that Hartzer, in his statement to the commission, said the primary cause of the failure to heed Asic’s changes to unsolicited credit increase offers was “the way in which Westpac’s broader systems and culture addressed regulatory issues”.

He agrees with Hodge that “the culture” – particularly further down the chain – included a lack of appreciation for the significance of respecting the view of the regulator.

He says that’s changed since, but we’re also told that no one from the bank suffered any negative consequences as a result of the credit card increase issue because “there wasn’t a specific error by an individual”.

Hodge: And then when you’re explaining that this is why it wouldn’t be appropriate to take action against any managers or executives, that rather suggests that you’re saying it wouldn’t be fair to punish specific individuals involved in the decision-making and interaction with the regulator because they were acting within their authority in accordance with the culture of Westpac?

Hartzer: In effect, yes.

Hodge: And does that seem problematic to you, if you want to change the culture of the bank, don’t you need to apply remuneration consequences to employees who act in a way that you don’t want them to act?

Hartzer: Yes. Although I think we also have a – an obligation on ourselves as a company to make expectations very clear upfront, and I think that’s part of the issue here.

Hodge: Is your point it wasn’t clear at the time to employees that there was an expectation that they would respect the view of the regulator and, therefore, it’s unfair to apply remuneration consequences to?

Hartzer: I wouldn’t say it in such a sweeping way.

One of the most striking things about the banking royal commission has been the timeframe we’re talking about.

Remember how commissioner Kenneth Hayne asked the banks to cough up to every act of misconduct and poor behaviour they’d engaged in over the past 10 years?

That took us back to 2008.

Remember the global financial crisis?

That broke out in 2007-2008. That was when the arteries of the global financial system seized up and very nearly collapsed. We were all extremely lucky to avoid another global depression.

Yet here we are this year, hearing evidence about how – a handful of years after the GFC – the banks were ripping off customers, prioritising profits over people, and dismissing regulators

If the GFC wasn’t enough to get them to behave properly, to appreciate how lucky we all are, what is?

Hartzer is telling the commission about improvements at Westpac in engaging with the regulator, including a new agenda item in risk meetings.

Hodge wants to know who at Westpac knew about the Asic letter to the ABA. Hartzer can’t say why senior executives within the business weren’t aware of the letter and admits he hasn’t looked into why nobody at a more senior level in the bank stepped in.

Hodge: And if you haven’t looked into that, does that suggest that you haven’t necessarily fully investigated and understood what the problem was within Westpac at the time?

Hartzer: I don’t think so. I think that the steps that we’ve taken to strengthen the attention and the resourcing and the focus on regulatory matters would address that issue in any event.

Hartzer is telling the commission that Westpac has improved the way it responds to regulators but Hodge challenges him on his view of the unsolicited credit card increase issue.

Hodge: I get the sense that the point that you’re trying to make is you don’t necessarily even now accept that Asic’s view was right?

Hartzer: Right in terms of what?

Hodge: In terms of the application of the responsible lending obligations to credit limit increase offers?

Hartzer: Well, it [is] kind of moot because credit limit increase offers have ceased altogether.

Hodge: Yes. So I think by saying that you’re saying you don’t need to accept it any more because whether it’s right or wrong any more because it just doesn’t matter?

Hartzer: I haven’t spent a lot of time thinking about it because we stopped doing it.

So, in September 2012, Asic wrote to the Australian Bankers Association setting out its views about responsible lending requirements for credit limit increases.

Asic decided that a “base minimum level of inquiry” was asking individual customers whether they are employed and what their income is.

But Westpac didn’t make any changes because of, Hartzer said, a difference of opinion about its obligations. Westpac didn’t tell Asic that it didn’t agree with it on its obligations, and continued its practice of offering unsolicited credit increases.

While Westpac’s risk team thought the bank should fall into line with Asic’s requirements, in part because it would provide a better customer experience, that position changed after discussions with the bank’s product team.

Hodge:

Do you think it is a problem that risk had internally formed a view that it should change and alter its position to accord with what Asic wanted, but then after a discussion with product it changed that position?

Hartzer:

Strictly, to the answer to your question, no, because I don’t think that’s – so I do think there is absolutely an issue in the way we handled this with Asic and today we would handle it very differently. So I’m not meaning to argue that point. But I’m just struggling with the suggestion that there was an overruling in this ... you can have different points of view within risk ... It concerns me that we didn’t engage with the regulator when that point of view was pointed out, and that, to me, is where we clearly went wrong in this case.”

Hodge is going to start by looking at Westpac’s approach to credit card limit increases – the practice of sending unsolicited credit card limit increase offers to selected Westpac customers.

The commission has previously heard the bank did not comply with the corporate regulator’s position that banks directly ask customers about their employment status and income when offering them credit card limit increases.

We’re back from lunch. Brian Hartzer, Westpac’s chief executive, is in the stand. Senior counsel assisting the commission, Michael Hodge QC will take the reigns in this round of questioning.

Hartzer has been the managing director and CEO of Westpac since February 2015.

Let me tell you a quick story while we wait for the hearing to resume.

In 2016, the Turnbull government was fighting very hard to reintroduce a bill to parliament to force all superannuation funds to appoint an independent chair and fill a third of their board seats with independent directors.

The policy was pushed by the Financial Services Sector, a body that intensely dislikes the idea that industry super funds have strong union representation on their boards. It argues the boards should be opened up.

In late November of 2016, a forum was held in a theatre in Parliament House, and it was attended by representatives from the super industry, particularly industry super funds. Many of them had travelled from overseas for the occasion. Serious people. The type of people that invest billions of dollars in major infrastructure projects globally. They know how to handle money.

Anyway, Liberal MP Kelly O’Dwyer delivered a speech to the audience that had to seen to be believed.

I wish I’d kept a recording of it. It was a textbook example of misreading an audience.

She told the audience that superannuation funds – and by that she meant industry funds – were not governed to the same standard as major banks and life insurance companies.

It drew laughter from the audience.

“Are you serious?” one audience member said. “She’s got to be joking,” said another.

Peter Collins, who was a former leader of the NSW Liberal party and who had subsequently worked in the industry fund sector, told Guardian Australia that her comments were laughable.

He then said this:

If super funds had been responsible for systemic failures in financial advice, failure to pass on interest rate cuts, excessive executive remuneration and other forms of profit gouging by banks, there would have been a royal commission into super funds in a flash.

It is abhorrent and unacceptable in the minds of most Australians that the standards for super funds should be the same as those tolerated for the banks.

That was in 2016.

And with that CBA chair Catherine Livingstone is done with her evidence. We’ll break for lunch in a moment before the Westpac chief executive, Brian Hartzer, takes the stand at 2pm AEST.

First though, here’s a quick wrap-up of what we’ve learned this morning:

• The former CBA chair David Turner was asked to give back 40% of his pay from the final year on the board after a string of scandals and a damning Apra report.
• He said no, because he didn’t recognise in the Apra report the CBA board that he knew.
• Since the 2011 financial year, the CBA has never reduced an executive’s short-term remuneration as a result of a risk-related issue that had not yet been made public.
• The head of CBA’s wealth division had their executive bonus reduced by only 5% as a result of the Comminsure scandal.
• In the same year, the former CEO Ian Narev received 108% of his short-term target bonus, or $2.862m.
• At the beginning of the day, Livingstone told the commission she had put her “reputation on the line” by taking the CBA job.

Catherine Livingstone is being asked why Matt Comyn – who was head of the bank’s retail banking service at the time of both the mis-selling of consumer credit insurance and its anti-money laundering failings – was appointed chief executive.

What kind of message does that send, Rowena Orr asks.

The biggest reason he was given the job, the chair says, “is the way he stepped up at the time the Austrac proceedings were lodged”.

In fact, for me, the most telling thing was after the proceedings had been lodged, and I met individually with each group executive, and variously they came in either not having informed themselves or blaming other people. Mr Comyn came in and the first thing he did was apologise. Apologised to me, apologised to the board for what had happened, and his failings in that.

That sounds nice, but Orr reminds Livingstone that it isn’t an answer to her question.

She wants to know what kind of message it sent internally and to the community.

Livingstone says “the easy answer” would have been to appoint an external person.

But, perhaps distressingly, she tells the commission that “to find an external person globally at that level who has not been involved in some regulatory event is almost impossible”.

And I don’t mean that as a joke. So the message that it actually sent inside the organisation is one that these issues are unacceptable and we’re determined to fix them. That was the message it sent.

And what about the external message?

Well, the – the external message, in my view, was the same, in terms of what – the feedback I have had, that here is someone who is committed to dealing with the issues that have arisen. And I think, I would hope, that you’ve seen that in his evidence over the last two days.

Orr is hammering Livingstone over the CBA’s remuneration report, which she says does not make obvious how executive bonuses are adjusted for matters like poor risk management.

“I accept that that is not obvious and that is something that we should consider for next year’s report,” Livingstone says.

Now we’re on the remuneration report for the 2017 financial year.

It was delivered in July, only a few weeks before Austrac commenced civil penalties against the CBA.

Ian Narev, still the CEO, had recommended a 10% reduction for all group executives for long outstanding items and a further 10% reduction for certain group executives, including the now-CEO, Matt Comyn, in relation to anti-money laundering and counter-terrorism financing regulation.

But then Austrac lodged its proceedings alleging 53,700 breaches of anti-money laundering and counter-terrorism financing laws against the CBA.

So, when the board met in August, things had changed a little.

Rowena Orr asks Catherine Livingstone if she remembers the meeting. “Vividly,” she says.

“The discussion ... was to determine, in the light of what had happened, what the remuneration consequences should be, and how they should be delivered through the remuneration framework.”

The board decided that all the senior executives, including Narev, should have their short-term variable bonus reduced to zero.

The response from the executives varied:

Some were immediately accepting, some were angry, and others felt that because it had affected the whole group including people who hadn’t been there for very long that it wasn’t fair. But the point of the board taking this view was to emphasise the importance of collective accountability.

Narev, Livingstone says, “recognised that it was appropriate”.

But Narev’s long-term bonus wasn’t affected, and Orr wants to know why.

Given that at that time we were not fully aware of all the matters that were covered in the proceedings. So the view was that we should leave the long-term variable rem on foot in terms of the deferred rem, so that if there was a need for consequences further down the line, we would still have that option to exercise discretion then.

While Catherine Livingstone is being grilled by the commission, the Australian share market has taken a big dive amid a global stock sell-off.

Our man Martin Farrer has this report, which shows that a sell-off in tech, energy and banking stocks has sent the ASX200 plunging to its lowest point for nearly two years.

Just back on CommInsure.

We’re still wrapping our heads around the fact that the head of CBA’s wealth management division had their short-term bonus reduced by 5% – an offensively small 5% – after the CommInsure scandal.

The royal commission touched on this scandal two months ago, when it heard that CommInsure had rejected a woman’s insurance claim for breast cancer treatment by relying on an 18-year old medical definition of what constituted “radical breast surgery”, against the advice of specialists.

The woman had made her claim in August 2016 and her policy’s medical definitions had not been updated since 1998.

[As an aside, the CBA chief executive, Matt Comyn, finally admitted yesterday that CommInsure had deliberately not updated its medical definitions because it was prioritising “financial objectives” – could that be profits? – over its customers].

Anyway, the woman had been paying premiums for more than 20 years, and her policy included cover for malignant tumours with an exclusion for “carcinoma in situ unless leading to radical breast surgery.”

CommInsure tried to argue that the woman didn’t meet the policy definition of cancer because her carcinoma in situ and her treatment didn’t include radical breast surgery, insisting radical surgery only referred to re removal of an entire breast.

It ignored that fact that specialists advised that medical practice had moved on since the 1990s and radical treatment now involved radiotherapy and breast-conserving therapy and didn’t mean entire breast removal.

To make matters worse, CommInsure updated its cancer treatment definition in May 2017 but didn’t backdate the definition, meaning the woman was still ineligible.

To cut a long story short, CBA eventually had to pay the woman $170,000 after the financial ombudsman service got involved.

That was just one example of the types of thing that was going on in CommInsure. It led to a blistering Four Corners investigation.

Fast forward to today, and we heard that a CBA executive say their short-term bonus reduced by 5% as a consequence.

“A 5% reduction?” Orr asked.

“As I’ve indicated, that is patently inadequate and my board colleagues would recognise that today,” Livingstone replied.

Today. Two years later.

Bevan Shields from Fairfax has done the math on Ian Narev’s total pay packet in 2016. Nice work, if you can get it.

Now to Narev’s pay that year. The former chief executive recommended to the board that he receive 108% of his short-term target bonus, or $2.862m.

Orr appears fairly incredulous at this point:

“For this year, in which there were ongoing investigations into CBA’s life insurance business, known problems with anti-money laundering compliance, it was known that customers had been charged fees for no service, and it was known that consumer credit insurance had been mis-sold?”

“That’s correct,” Livingstone says.

Orr: “Do you agree that they were all things – that was the context for this recommendation by the chair of the board for Mr Narev to receive a short-term variable award of $2.862m?

Livingstone: “I do.”

Orr: “Do you have any reflections on that recommendation, Ms Livingstone?”

Livingstone: “As I’ve indicated, we have all reflected on these outcomes, and would regard them as inappropriate.”

We’re seeing a report from Ian Narev, the CBA’s former chief executive, about the 2016 senior-executive remuneration.

“I am not aware of any reasons why deferred [bonus pay] should not be paid in full to all relevant executives,” Narev wrote.

Narev recommended that all of the group executives receive a rating of “fully met” for dealing with risk. He recommended that none of them have their short-term incentive reduced for risk matters, and that each of them – aside from one executive on a different pay scheme – receive more than 100% of their target short-term incentive.

Orr wants to know what Livingstone thinks of that recommendation.

“Well, I think, as I’ve indicated, that there are individuals here for whom the level of award was not appropriate, in light of the risk matters which, as you’ve pointed out, were on foot in the group at the time,” she replies.

“Subsequently, one executive’s [bonus] award was reduced downwards, but even that reduction was patently inadequate for what was going on at the time.

Orr asks what a more appropriate “risk adjustment” would have been.

“Well, in some instances, I – probably 100% reduction, which is the approach that, as you know, we’ve taken subsequently,” she says.

It’s clear from the last couple of days that the royal commission has become very, very interested in way banks pay their staff and senior executives.

It’s all pointing towards the commission’s final report.

I’d wager that the final report will make serious recommendations to overhaul the financial industry’s remuneration practices.

Take this exchange from Rowena Orr, senior counsel assisting the royal commission.

Orr asked Catherine Livingstone why CBA bothered to pay its executives variable remuneration at all.

Livingstone’s answer was typical of someone on a board of a major Australian bank – it’s apparently all very complicated, we need to pay executives some fixed pay and some variable pay, a mix of short-term and longer-term incentives, to encourage them to meet certain objectives (ie to do their jobs).

Orr then asked Livingstone pointblank: “I want to ask you, Ms Livingstone, why you can’t achieve those objectives with an appropriate fixed salary and a consequence management framework and a promotion and reward framework?”

Orr could have added, “like in almost every other industry”.

Rowena Orr is taking Catherine Livingstone to the CBA’s 2016 remuneration report, released in August that year.

At this point both Asic and Apra were investigating CBAs life insurance business.

The CBA was also aware of the anti-money laundering and counter-terrorism financing issues with Austrac, the charging of fees for no service and the mis-selling of credit card insurance. Those issues weren’t public, and they weren’t mentioned in the executive remuneration report.

Before Orr even gets a chance to take her to the detail, Livingstone interrupts to say it was “inadequate”.

The bank’s chief risk officer, Ian Cohen, mentioned both the fee for no service and Austrac issues in the report, but wrote that he did “not believe there to be any risk issues or risk behaviours that would suggest [bonus pay] should be modified from that recommended based on other achievements or results”.

The board agreed.

Orr asks whether it was CBAs policy “to wait until a risk had eventuated publicly before imposing any sort of consequence for failing to manage that risk?”

“I don’t believe that was the intention, but it might be the impression created,” Livingstone replies.

She says the “process around the remuneration outcomes for 2016 was patently inadequate”.

Shares in Commonwealth Bank, which is the country’s biggest company by market value, have fallen 42c or 0.6% to $68.78c this morning amid a sharp overall selloff on the ASX200.

The stock has dropped 15% in the past 12 months as the bank has been buffeted by revelations of mismanagement at the royal commission.

CBA’s fall this morning is mirrored in the performance this morning of the ASX200’s financial sector, which is off by 0.64%.

So, short-term variable pay can be between 0% and 150% of executives’ fixed remuneration. Half is paid in cash, half in shares a year or two later. Long-term variable pay can be as much as 180% of the fixed pay, depending on performance.

26% of pay is fixed remuneration, 26% is short-term variable remuneration and 48% is long-term variable remuneration.

Rowena Orr wants to know why the CBA doesn’t just pay its executives a fixed salary and give them a raise if they do a good job.

Catherine Livingstone says it enables the bank to “discriminate between executives” based on performance. It also uses short- and long-term remuneration “to deliver consequences where that’s necessary”.

Orr:

Do you think there’s a perception among executives that unless they do something wrong, they should get their short-term variable remuneration, that is, they should get it for doing their jobs?

Livingstone:

I would argue, if you look at the results for FY17 and FY18, no executive in CBA would think that they would get their short-term variable remuneration just for doing their job.

Oh, fun. We’re on to senior executive pay. As well as their fixed pay, the bank’s top brass also receive “short-term variable remuneration” and “long-term variable remuneration”.

Rowena Orr describes short-term variable remuneration as essentially an annual bonus.

“We don’t regard it as a bonus,” Catherine Livingstone says.

At the heart of this questioning is a fairly straightforward question: did the CBA board do its job in questioning senior management over the litany of issues the bank was facing, including concerns by regulators?

Yesterday and today Rowena Orr has taken Catherine Livingstone to a “red” audit report about the Austrac matters. Livingstone, before becoming chair, heard a briefing about the report but did not request a copy.

And, heck, Livingstone tells Orr there would have been “no point” reading the report because management weren’t in a position to do anything about it.

There was no point, at that point, at that time, to drilling down into further detail because management could not respond.

They could not articulate the problem, nor the root cause. At that time, so that is towards the end of 2016, and I was going to take up the role of chair from 1 January 17, my intention was from January 17, when I was in the role of chair, that I would be in a position to take action.

Rowena Orr QC, the counsel assisting the royal commission, is grilling Livingstone about the board minutes from the October 2016 board meeting at which she says she questioned CBA managers over how they were handling Austrac’s concerns about anti-money laundering risks.

The minutes do not record that exchange. Livingstone insists she did raise it, and that board minutes don’t include every exchange “verbatim”.

Orr:

Do you understand that a failure to comply with the requirements in relation to the keeping of minutes under section 251A of the Corporations Act is an offence?

She is now taking Livingstone through subsequent board meeting minutes from December. They again show no board member challenging CBA management on the response to Austrac’s concerns.

Good morning and welcome to day three of the final week of the banking royal commission. We’ll start today hearing from the Commonwealth Bank chairwoman, Catherine Livingstone, who returns after giving evidence yesterday.

Here’s a quick mop-up of everything that happened yesterday if you’re playing catch up, then we’ll get straight into it. You can also read Gareth Hutchens’ piece from yesterday, including a call from the Reserve Bank governor, Phillip Lowe, for harsher penalties for bankers who do the wrong thing.

• Livingstone told the commission she had been “surprised by the lack of challenge” to management by the previous board, and that there was a lack of urgency in following up issues including the Austrac scandal.
• By November 2016, CBA had received three statutory notices from Austrac requiring the bank to provide information about its anti-money laundering activities. Livingstone told the commission she had raised concerns about the bank’s non-financial risk profile, but had received assurances from CBA management that Austrac “knew we were working hard” to reach compliance.
• She admitted the board had not taken the risks seriously enough, saying it had been an “inadequate response”.
• Earlier in the day we heard that the CBA chief executive, Matt Comyn, had numerous discussions with his former boss Ian Narev about the bank’s much-criticised credit card insurance products. Comyn supported dropping the products but was opposed by the bank’s wealth division. He told the commission he had been unable to convince Narev of his thinking.
• On one occasion, Comyn said, Narev told him to “temper your sense of justice”.
• About April 2015 the CBA introduced a “knockout question” for in-branch and telephone sales of its CreditCard Plus insurance product to stop the sale of the product to ineligible customers. But the knockout question was not introduced for online sales of the product for another two years, which Comyn says was a mistake.
• He admitted there were a number of examples in recent years where the CBA had prioritised financial objectives over its customers, including the fee-for-no-service scandal, and CommInsure.
• The CBA expects to pay about $15m in remediation to 64,000 customers over its CreditCard Plus Insurance, but an internal report prepared by Ernst and Young identified a further 27,000 “high risk” customers who had been sold the product.
• On the Austrac scandal, Comyn said he’d asked himself many times how so many had become so complacent about non-financial risk.
• He admitted the CBA had been “arrogant” in its past dealings with regulators such as Asic.