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Banking royal commission: CBA and Westpac bosses to give evidence – live CBA chair admits board and management failures at banking royal commission – live
(35 minutes later)
Shares in Commonwealth Bank, which is the country’s biggest company by market value, have fallen 42c or 0.6% to $68.78 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.
Orr is now taking Livingstone to a letter she sent to the Apra chairman, Wayne Byres, in February this year. You may remember that Apra released a report that was critical of the CBA’s previous board earlier this year.
In the letter Livingstone wrote that the board “has a duty to inquire and interrogate; management has a duty to inform and disclose, and these two aspects must result in a meeting of the minds. This contextual aspect of governance is receiving explicit attention.”
Orr asks Livingstone to reflect on the period prior to the Apra report, and whether the board had “failed in its duty to inquire and interrogate”.
Livingstone: “I think it’s – it is correct to say that there was not enough challenge and that would be through inquiring and interrogating of particular matters, yes.”
Orr: “So the board did fail in its duty to inquire and interrogate?”
Livingstone: “It didn’t adequately address the duty, yes.”
Orr: “And do you think that management failed in its duty to inform and disclose?”
Livingstone: “Yes. I think that’s correct.”
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?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.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.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.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.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.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”.The minutes do not record that exchange. Livingstone insists she did raise it, and that board minutes don’t include every exchange “verbatim”.
Orr: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?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.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.
Catherine Livingstone has begun with a statement about what she did as a board member in the lead-up to the Austrac scandal.Catherine Livingstone has begun with a statement about what she did as a board member in the lead-up to the Austrac scandal.
We heard yesterday that by November 2016, CBA had received three statutory notices from Austrac requiring the bank to provide information about its anti-money laundering activities. In June this year the bank paid $700m to settle civil proceedings relating to breaches of anti-money laundering and counter-terrorism financing laws.We heard yesterday that by November 2016, CBA had received three statutory notices from Austrac requiring the bank to provide information about its anti-money laundering activities. In June this year the bank paid $700m to settle civil proceedings relating to breaches of anti-money laundering and counter-terrorism financing laws.
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 that the board had not taken the risks seriously enough, saying it had been an “inadequate response”.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 that the board had not taken the risks seriously enough, saying it had been an “inadequate response”.
She has told the commission this morning that the response she received from management had confirmed her concerns that “management at that time did not have the capacity to respond to what was clearly an escalating, significant and serious systemic control challenge”.She has told the commission this morning that the response she received from management had confirmed her concerns that “management at that time did not have the capacity to respond to what was clearly an escalating, significant and serious systemic control challenge”.
“They did not have the capacity either because they couldn’t or wouldn’t,” she said.“They did not have the capacity either because they couldn’t or wouldn’t,” she said.
She said that when she became chair in January 2017 she “understood very clearly that the degree of diligence that would be required from me would be greater than anything I had undertaken to date in my career and that it would take years.She said that when she became chair in January 2017 she “understood very clearly that the degree of diligence that would be required from me would be greater than anything I had undertaken to date in my career and that it would take years.
“Unfortunately that judgment was borne out by subsequent events. I put my reputation on the line [by] taking up the role of chair of CBA.”“Unfortunately that judgment was borne out by subsequent events. I put my reputation on the line [by] taking up the role of chair of CBA.”
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.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.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.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.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”.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.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”.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.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.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.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.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.He admitted the CBA had been “arrogant” in its past dealings with regulators such as Asic.