Commonwealth Bank chairman Catherine Livingstone has dumped on the bank’s former board and executive team saying there was an overwhelming sense of complacency that developed under the previous chairman, forcing her to clean out the top brass and start afresh, the Hayne royal commission has heard.
Her evidence followed revelations from chief executive Matt Comyn that plans to jettison harmful commissions and faulty products were thwarted by the former chief executive Ian Narev who told him to calm down and “temper your sense of justice”.
Ms Livingstone said when she joined the board in 2016 there was a misplaced confidence at the bank where directors conducted only brief meetings, never asked for additional reports, waited too long for answers and accepted the assurances from management that everything was fine.
Ms Livingstone said the processes she encountered when she joined the board compared poorly with those at other boards, such as Telstra which she had chaired, and Macquarie Bank, where she was a director.
Since assuming the role of CBA chairman in 2017 she had embarked on a program which included extensive board renewal, a new chief executive in Mr Comyn, a new chief risk officer and a new chief information officer, she told the commission.
Ms Livingstone described a string of scandals at the bank that included a record $700 million settlement over a money laundering scandal as “a fairly damning chronology” of the bank’s behaviour and controls.
She agreed the board had been aware of the bank’s issues with AUSTRAC over the scandal since 2014. However, it wasn’t until she met with AUSTRAC in January 2017 that she began to understand the severity of the situation.
After six months as a member of the board and the audit committee she said was shocked by the lack of critical thinking she encountered.
“I was quite surprised by the lack of challenge” Ms Livingstone said. “I think the point that the prudential inquiry made about the follow-up of issues, I think the urgency there and the degree of follow-up, in general terms, was not what I had been accustomed to.”
When asked by senior counsel assisting the commission Ms Rowena Orr, QC, if she was referring to the speed at which the board worked she agreed. Ms Orr countered by asking Ms Livingstone how long it took her to form her views about the board’s relaxed approach.
“You can’t form judgments immediately on how a board functions after two or three meetings, usually. So in fairness, you would generally wait up to six months before forming a view,” Ms Livingstone said.
“You wait up to six months as a director of the board before forming a view on the operation of the board?” Ms Orr asked.
“Before forming a definitive view because you haven’t seen a full cycle of meetings, and activities of the board” Ms Livingstone replied.
Commissioner Hayne asked if the bank had considered introducing briefing papers such as those used for incoming governments.
“Well, is it not possible to apply something of that kind to the organisation of a board of an organisation as large and sophisticated as CBA Group?” Commissioner Hayne asked.
Ms Livingstone said that would be the practice in the future. She was also questioned at length about the failures of its intelligent deposit machine network which were operating in breach of the Anti-Money Laundering and Counter-Terrorism Financing (AML-CTF) laws.
Ms Orr revealed that the bank’s audit function had identified failures in reports to the board in 2013, 2015 and 2016 and assigned them an overall “red rating”.
“It’s the most serious rating you can have on a audit report … it would indicate the areas was not in a state of control,” Ms Livingstone said. The third of these reports was presented to Ms Livingstone as part of the audit committee on December 5, 2016.
The report would be one of three examined at a meeting which was over in less than two hours. Ms Livingstone said she was concerned about the assessment and did not accept the assurances from then chief financial officer David Craig that the problem was being addressed.
“There were always responses, ‘Yes we’re doing this, yes, we’re spending that money’. So those responses were taken as assurance that the issue was being addressed but I absolutely accept that was an inadequate conclusion,” Ms Livingstone said.
The report would issue red ratings which included the bank’s AML-CTF efforts and the fees-for-no-service issue which has claimed AMP’s CEO and chairman. Ms Livingstone said to her knowledge no board members asked for a copy of the relevant reports.
“A large number of AML/CTF issues continue to exist across the group … there are also a number of issues that remain from our 2014 AML/CTF audit, and repeat issues because necessary controls have not been suitably designed” the executive summary read.
At the time error rates in customer verification were running as high as 20 per cent in the business and private bank and 8 per cent in wealth management.
Ms Livingstone had some difficulty in distinguishing between board meetings held in October and December 2016 and at one point responded “Honestly, I can’t recall”. She agreed the board was not paying sufficient attention to non-financial risks and did not take the auditing of its AML-CTF compliance seriously enough.
Vertical integration a failure
Earlier in the day CBA CEO Matt Comyn completed giving almost 10 hours of evidence by describing the vertical integration model that saw the bank sell wealth management products as a categorical failure.
Ms Orr asked Mr Comyn if it would be possible for the model to continue in a way that was sustainable and did not pose risks to customers. Mr Comyn said it may be possible but that conflicts of interest would need to be managed better than they had been in the past.
Mr Comyn was also questioned about a handwritten note he took during a meeting with former CEO Ian Narev in May 2016. Mr Comyn was pushing Mr Narev to act on his recommendations to stop selling a junk insurance product.
Mr Comyn said they had a robust conversation and his attempts were rebuffed. Mr Narev told him to “temper your sense of justice” which he interpreted to mean back off. Mr Comyn says he was irritated by the remark and had been pushing to get rid of the products for several years.