Consideration
80 NAB accepted that the contraventions were serious, however argued that the contraventions were not egregious and, on balance, were at the lower end of the spectrum of seriousness, given their nature and likely client impact. NAB made the following points:
(a) first, only about 5% of the 445 contraventions of s 962P arose in circumstances where no fee disclosure statement was given; around 95% of the contraventions arose in circumstances where the client was provided with a fee disclosure statement, but either the statement was not provided within the time prescribed by s 962G of the Corporations Act or it did not correctly set out the ongoing fees paid by the client and/or the services received (or entitled to be received) by the client during the statement period (s 926H);
(b) secondly, of the 150 fee disclosure statements provided to clients that did not accurately refer to the amount of fees clients paid in the relevant statement period, 78 (or 52%) involved discrepancies of 10% or less as between the annual fee amount included in the fee disclosure statement and the fee that ought to have been included. The median fee discrepancy for such fee disclosure statements was approximately $220;
(c) thirdly, many fee disclosure statements did not satisfy s 962H(2)(a) in circumstances where the amount stated in the fee disclosure statement was greater than the amount in fact deducted from the client's account. It was submitted that a fee discrepancy of this kind may reasonably be expected to have led clients to be more, rather than less, circumspect about continuation of their advice arrangement (and thus cannot be assumed to have inhibited the objective of the fee disclosure statement provisions to facilitate the engagement of passive fee payers);
(d) fourthly, a number of fee disclosure statements did not satisfy s 962H(2)(a) only because they included the amount of fees that had been received and processed in NAB's systems during the relevant statement period, instead of the amount that had been deducted by product issuers from the client's account during that statement. The Court was taken to client 401 in Schedule A to the agreed facts, as an example where, at the time that the fee disclosure statement was generated, the client's monthly payment of $110 had been deducted from the client's account, but not yet processed in NAB's systems and the fee disclosure statement recorded that the client had paid fees of $1,100 during the relevant statement period when in fact the fees paid were $1,210;
(e) fifthly, for a number of clients the fee disclosure statement was inaccurate because of a temporal misalignment between the period covered by the fee disclosure statement and when the service was provided. The following two examples were specifically mentioned:
(i) the first example was given of a client who had received financial planning advice from NAB Financial Planning in November 2015, including a written statement of advice dated 24 November 2015. The client subsequently entered into an ongoing fee arrangement with NAB on 7 December 2015 and pursuant to that arrangement, were entitled to receive an annual review of their financial position. On 15 November 2016, the client received an annual review and, on the same date, NAB Financial Planning issued a fee disclosure statement to the client. That fee disclosure statement is the subject of contraventions by NAB of s 962P of the Corporations Act and s 12DB(1)(a) of the ASIC Act in this proceeding, because it incorrectly stated that the annual review had been delivered "during the period covered by this statement", referred to as 11 November 2015 to 10 November 2016, when the review was provided five days after the statement period; and
(ii) the second example was of a client who, in May and June 2015, received financial planning advice from NAB Financial Planning, including a written statement of advice dated 17 June 2015 and subsequently entered into an ongoing fee arrangement with NAB on 22 June 2015. Pursuant to that arrangement, the client was entitled to receive an annual review of their financial position, which was provided on or about 30 August 2016. On 23 June 2016 NAB Financial Planning issued a fee disclosure statement to the client, which is the subject of contraventions by NAB of s 962P of the Corporations Act and s 12DB(1)(a) of the ASIC Act in this proceeding, because the fee disclosure statement stated that the annual review had been delivered "during the period covered by the statement", referred to as 23 June 2015 to 22 June 2016. Thus, even though the client received a review in accordance with their ongoing fee arrangement, the information was incorrect because the review was provided after the statement period on or about 30 August 2016.
81 Annexure B to NAB's submissions contained six further examples of circumstances of contraventions of s 962P of the Corporations Act and s 12DB(1)(a) of the ASIC Act, taken from 35 randomly generated subject clients. In summary, in each instance the client had an annual review in accordance with the client's ongoing fee arrangement, but the fee disclosure statement given to the client incorrectly stated that the review was conducted within the statement period when: in respect of client one, it was conducted two days after; in respect of client two, it was conducted 16 days after; in respect of client three, it was conducted six days after; in respect of client four, it was conducted three days after; in respect of client five, two fee disclosure statements are the subject of contraventions - the 2016 statement was incorrect because the annual review was conducted one day after the statement period and the 2018 statement was incorrect because the annual review was conducted 15 days after the statement period; and in respect of client six, the annual review was conducted four days after.
82 NAB submitted that whilst the contraventions should not have occurred, viewed objectively, they were not such as substantially to impair the client's entitlement to receive the information required by the FOFA regime or otherwise impede the client's ability to make a fully informed assessment of the performance by NAB under the ongoing fee arrangement. It was submitted that provision of a document styled as a fee disclosure statement, even if it does not precisely meet all the criteria in s 962H(2) and/or is provided late, at least has the capacity to remind (potentially disengaged) clients that they are paying ongoing fees for financial advice; and to prompt them to consider whether to continue their advice arrangement.
83 ASIC argued that the civil penalty contraventions were very serious in nature and justified a penalty of $40 million. ASIC's submissions in support were, in summary, that:
(a) the root cause of the civil penalty contraventions was NAB's compliance deficiencies over the relevant period and its slow, piecemeal and inadequate steps to address them, notwithstanding that NAB was increasingly on notice that it did not have adequate documented policies, procedures and systems in place to monitor the provision and accuracy of fee disclosure statements;
(b) the compliance measures established and maintained by NAB were grossly deficient, said by ASIC to by reason of the bank's historical under-investment in its operational risk and compliance framework, which is inexcusable given NAB's size and available resources (being the fifth largest listed company by market capitalisation in Australia); ASIC argued that the penalty should not be so low as to provide an incentive for under-investment in compliance by being merely a cost of doing business;
(c) despite NAB's knowledge in 2013 that some clients had been charged ongoing fees without receiving services and the knowledge of the NAB's senior management by no later than 31 May 2018, and NAB's board, by no later than September 2018 there had been, and continued to be, systemic failures to deliver timely and accurate fee disclosure statements to numerous, yet unidentified, clients; NAB continued to charge ongoing fees, although it was unable to be satisfied whether or not services had been provided and did not know whether it was entitled to charge for such services; the knowledge of senior management was said to be especially significant, because over half of the prohibited charging contraventions occurred between 31 May 2018 and 4 February 2019, when NAB continued charging ongoing fees to clients without ascertaining whether it was entitled to do so;
(d) the contraventions occurring after 31 May 2018 were committed while slow and inadequate steps were taken to diagnose individual breaches, without adequate regard for the risk of continuing breaches;
(e) by reason of the contraventions arising from systemic defects and NAB's knowledge of them, the civil penalty contraventions were not the result of negligence or carelessness;
(f) ASIC argued that NAB's conduct in taking fees without knowing whether it was entitled to do so was not ethically sound and it was admitted by NAB that its conduct contravened s 912A(1) by failing to ensure that financial services were provided efficiently, honestly and fairly; and
(g) NAB had previously engaged in similar conduct.
84 NAB took issue with ASIC relying on the facts that gave rise to the admissions of the contraventions of s 912A (which is not a civil penalty provision) as aggravating factors to justify a higher penalty, arguing that the Court's task is to decide the appropriate penalty for the contravening conduct and it is not open to ASIC to encompass conduct not alleged to have given rise to any contravention for the purpose of justifying a greater penalty. That submission is rejected in part. Whilst it is clear that the Court must, in fixing the penalties, only assess the appropriate penalties for the contraventions the subject of the proceeding, and not penalise NAB for conduct not found in the contravening conduct (ASIC v AMP (No 2), [162]), it does not follow that the facts which gave rise to the contraventions of s 912A must therefore be disregarded. Such facts may be taken into account insofar as they are a feature of the contravening conduct, which informs the nature and seriousness of the contravention.
85 I would not characterise the contraventions at the egregious scale of seriousness, however I also do not accept that the seriousness of the contraventions can be downplayed by the matters to which NAB referred. First, NAB accepted that the civil penalty contraventions arose, at least in part, from deficiencies in NAB's systems concerning the generation of fee disclosure statements that were not remedied as quickly as they ought to have been. The cause is a relevant contextual consideration in evaluating the appropriate penalties for the civil penalty contraventions because the civil penalty contraventions cannot be characterised as isolated or rogue incidences, but happened in circumstances where NAB failed to have robust compliance processes and systems in place. Secondly, the seriousness of the conduct must be viewed in light of the statutory purpose of the disclosure obligations under div 3 of pt 7.7A. NAB argued the explanatory memorandum to the Bill that introduced pt 7.7A expressly recognised that fee disclosure statement breaches are likely to be "relatively less serious" than, for example, a breach of the best interests duty 2012 Explanatory Memorandum, 1.51. The 2012 Explanatory Memorandum also recognised that a "disproportionate and unjust result" could arise if fee recipients were required to repay clients who had continued to receive services after the automatic termination of an ongoing fee arrangement; and confined the refund obligation to cases in which the fee recipient knowingly or recklessly contravened s 962P (s 1317GA) (2012 Explanatory Memorandum, 1.30). ASIC does not contend that NAB knowingly or recklessly contravened s 962P, however it does not follow that the civil penalty contravening conduct should be viewed on a lesser scale of seriousness. The fee disclosure statement obligations under div 3 of pt 7.7A of the Corporations Act are specific consumer protection measures enacted for the safeguard of the interests of clients subject to ongoing fee arrangements and they are strict obligations, underscoring the seriousness of the contravening conduct. NAB's failure to have robust compliance measures in place to ensure compliance with its disclosure obligations impaired its ability to ensure compliance with its div 3 obligations, and was a cause of the contravening conduct subsisting over several years.
86 The seriousness of the contraventions is also not diminished, in my view, because the admitted contraventions concern a comparatively small number of clients relative to the applicable client base. Nor do I consider it correct to describe the breaches as "technical", as submitted by NAB. The point is that the affected clients were entitled to expect that they would be given timely and accurate fee disclosure statements and that NAB would not deduct fees it was not entitled to charge, and it is not apt to describe the breaches as "technical". The seriousness of the civil penalty contraventions lies in the fact that the statutory objectives of the disclosure requirements, in the case of those affected clients, were not met. NAB submitted that it should be taken into account that the evidence did not substantiate that any of the affected clients were influenced to continue their ongoing fee arrangements or that any of them suffered material loss and damage as a result the non-compliant fee disclosure statements that were issued to them. However, the seriousness of the civil penalty contravening conduct is not mitigated because no pecuniary loss or damage has been shown to have been suffered by any of the affected clients. The recent comments of Allsop CJ in Australian Securities and Investments Commission v Australia and New Zealand Banking Group Ltd (No 3) [2020] FCA 1421 regarding the norms which apply to Australia's banking industry by virtue of its prominence in Australian commercial life are apt. The Chief Justice observed at [13]:
The importance of the banking system in Australian social and commercial life need only be stated. Reliance by customers on the integrity and good faith of their bank is at the heart of social and commercial life in this country. It is highlighted in general life from advertising by banks and by community expectations. Despite all other features, the banker and customer relationship is at the heart of the economic system. It is a relationship based on contract, but, as the Code of Banking Practice reveals, it is founded on trust and good faith in a commercial sense.
Those observations were made in a different context, but have resonance for this case where there is also the potential for harm in a loss of confidence in the reliability and accuracy of fee disclosure statements, the very purpose of which is intended for the safeguard for clients.
87 There was no suggestion that the contravening conduct involved any element of dishonesty or exploitation and this is not a case of intentional breach of obligations. Nor did ASIC allege that the contraventions were deliberate or committed knowingly. ASIC did however, submit that the conduct was systemic, avoidable, not merely mistaken, and it persisted after May 2018 after the awareness by the business and senior management of the serious risks of the non-compliance and commission of these contravention. ASIC submitted that NAB "courted the risk of contraventions" by continuing to charge ongoing fees up until February 2019 to post-FOFA clients who had not entered into a new ongoing services arrangement since February 2018. There is force in ASIC's submission. In ACCC v Reckitt (at [136]) it was held by the Full Court that the defendant (Reckitt) had "courted the risk" of contravention in the sense that its contravening conduct was objectively reckless -
It knew all of the facts that constituted contraventions. It knew that others with an interest in or responsibility for consumer protection considered the marketing misleading. It knew exactly why those others had reached that view. It knew that the facts the others had assumed for the purpose of reaching that view were true. This is more than sufficient to conclude that [Reckitt] courted the risk of contraventions.
The Full Court regarded Reckitt's persistence in its conduct knowing and being made aware of undisputed facts and circumstances from which it should have been aware that it was contravening the Australian Consumer Law as a significant aggravating factor in the assessment of penalty. NAB's conduct was not in that class; however, it seems to me that NAB "courted the risk" of contravention in two ways: first, by failing to establish and maintain adequate compliance measures; secondly, by continuing to charge ongoing fees after May 2018, as by May 2018 (at the latest), senior management in NAB were aware there were deficiencies in its processes and controls in providing and monitoring the accuracy of fee disclosure statements, and also knew that some clients had not received a compliant fee disclosure statement, yet it continued to charge clients ongoing fees without ascertaining whether it was entitled to do so. Although the magnitude of the issue of defective fee disclosure statements was not then known, NAB ought to have been apprehended that it was likely that some of the clients to whom it continued to charge ongoing fees had received defective fee disclosure statements.
88 I accordingly reject NAB's contention that the civil penalty contraventions are at the lower end of the spectrum of seriousness.
89 ASIC put forward a number of matters as aggravating factors. The focus of ASIC's submissions centred on NAB's "slow granular diagnosis and reactive rectification" to the identification of efficiencies in its systems and their maintenance, which ASIC described as "grossly deficient" and systemic in nature. It was put by ASIC that NAB had an inadequate compliance culture, with heavy reliance placed by ASIC on NAB's compliance systems failings, the inadequacies in NAB's responses to those system failings and NAB's continued charging of fees after May 2018.
90 ASIC also contended that broader compliance issues of which senior management was aware by May 2018 beyond the civil penalty contravening conduct, which is the subject of this proceeding, can and should be taken into consideration by the Court as informing the character of the fee disclosure statements contraventions and bearing upon the seriousness of those contraventions. Specifically, ASIC sought to rely on various internal NAB documents to show actual or constructive knowledge by NAB of systemic issues in respect of charging of ongoing fees to clients who did not receive the contracted services (fee for no service conduct). It was submitted that in the face of that knowledge, NAB could not reasonably assume that the services had been provided, which made its prohibited charging conduct from May 2018 all the more serious. ASIC's case was that over half of the prohibited charging contraventions occurred after 31 May 2018, although substantial non-compliance was revealed by NAB's own fee disclosure statement accuracy reviews introduced in April 2018 on samples of recently issued fee disclosure statements, selected for the purposes of ascertaining the existence of problematic non-compliance. That sampling found following proportion of fee disclosure statements to be defective:
(a) 40% of the 30 fee disclosure statements sampled in April 2018;
(b) 65% of the 40 fee disclosure statements sampled in May 2018;
(c) 56% of the 50 fee disclosure statements sampled in June 2018;
(d) 41% of the 75 fee disclosure statements sampled in July 2018;
(e) 61% of the 75 fee disclosure statements sampled in August 2018;
(f) 71% of the 75 fee disclosure statements sampled in September 2018;
(g) 69% of the 75 fee disclosure statements sampled in October 2018;
(h) 70% of the 125 fee disclosure statements sampled in November 2018; and
(i) 64% of the 85 fee disclosure statements sampled in January 2019.
91 There are three responses to those submissions.
92 First, I accept that NAB's compliance systems failings are relevant to the circumstances of the civil penalty contraventions in evaluating the need for specific deterrence and in determining the size of the penalty that should be imposed for general deterrence to be achieved. NAB cavilled with ASIC's submission that the deficiencies in its systems and compliances processes were "gross" and systemic throughout the relevant period, but that submission misses the point that these contraventions were the product of the failure to implement robust and effective compliance measures. Moreover, the parties jointly submitted that the Court should infer that the inadequacies could reasonably have been improved during the relevant period; that inference is available and is a matter to which weight should be given in assessing the need for specific deterrence. However, the weight to be given to what ASIC described as an inadequate culture of compliance should also take into account that NAB proactively responded to remedying its system deficiencies. In response to ASIC's submission that NAB had an inadequate culture of compliance, it is significant and relevant to take into account that as system deficiencies were identified, NAB investigated and implemented changes intended to improve its processes and controls and remedy the deficiencies. NAB also made disclosure of breaches to ASIC and there was no suggestion that NAB did not comply with its reporting obligations. It appears that the steps taken were insufficiently effective, as there continued to be deficiencies in those systems and processes in relation to the generation of fee disclosure statements, but it is relevant in assessing the need for specific deterrence that the continuance of the civil penalty contravening conduct after May 2018 was not in a context where there was disregard on the part of NAB to its fee disclosure statement obligations or inaction on its part in doing something about improving its compliance measures.
93 Secondly, I am not persuaded to treat the continuation of charges after May 2018 as a significant aggravating factor. First, weight should also be given to the fact that from May 2018, NAB was not sitting on its hands - over this period, NAB was undertaking investigations to determine the extent and prevalence of the non-compliance, as well as taking steps to improve its compliance measures going forward. Secondly, the Court was not asked to find, and the evidence does not allow an inference to be drawn, that it was reasonable and appropriate for NAB to cease charging all fees as from May 2018. Thirdly, and importantly, none of the civil penalty contravening conduct the subject of the proceeding involved NAB charging clients for services that were not provided. ASIC's original claims against NAB in this proceeding had included a claim for unconscionable conduct for failing to deliver planning reviews to clients while charging fees under ongoing service arrangements, but ASIC did not pursue that claim against NAB and the fees for no service conduct allegations are not an element of any of the admitted contraventions. Nor did ASIC adduce any evidence from the individual customer to the effect that they did not receive the contracted fee service. ASIC cannot, through the back door, introduce elements of its fee for no service conduct to seek to elevate the seriousness of the prohibited charging contravening conduct to support the proposed penalty of $40 million.
94 Thirdly, contrary to the case presented by ASIC, it appears that the incidences of the contravening conduct in question significantly decreased after May 2018: of the 445 s 962P contraventions, only nine arose from a defective or missing fee disclosure statement on or after 31 May 2018; of the 225 s 962S contraventions, only three occurred on or after 31 May 2018; of the 130 s 12DB(1)(g) contraventions, only 14 arose from a defective fee disclosure statement issued on or after 31 May 2018; and of the 1,485 contraventions of s 12DB(1)(a), only 101 arose from a defective fee disclosure statement issued after 31 May 2018. I accept NAB's submission that it is objectively evident from the fact that the contraventions decreased over the relevant years that the steps it took in response to the fee disclosure statement issues improved its processes and controls and the measures NAB implemented, rather than the matters giving rise to the penalty contraventions in the first place, were the better measure of NAB's prevailing culture, that is of continuous improvement within NAB and a focus on compliance.
95 ASIC contended that NAB's historical under investment in its operational risk and compliance framework is also a relevant consideration in assessing the extent of deterrence that would be appropriate for an organisation as large and as well-resourced as NAB, but it is important not to elide the civil penalty contraventions with the s 912A contraventions in determining the appropriate penalty and NAB's failure to establish and maintain adequate compliance measures is not the contravening conduct for which the penalties are to be imposed.
96 ASIC also submitted that prior similar conduct of NAB is an aggravating factor in the assessment of penalty, as NAB or its related entities have been found on other occasions to have breached consumer protection provisions of the Corporations Act and the ASIC Act, including breaches arising from failures of NAB's compliance systems. NAB has not however, been subject to other findings of contravention of div 3 of pt 7.7A of the Corporations Act and whilst ASIC seeks to rely upon contraventions committed by MLC Nominees and NULIS Nominees Pty Ltd for contraventions of s 12DB of the ASIC Act, MLC Nominees and NULIS, whilst entities in the NAB Group, are separate entities with separate Australian Financial Services Licenses with independent obligations as superannuation trustees under the Superannuation Industry (Supervision Act) 1993 (Cth).
97 Against these matters, there are mitigating factors to take into consideration. One is that NAB has implemented two remediation programs that have led to payments being made to clients the subject of the penalty contraventions. Those remediation programs have led to a number of clients receiving more than that to which they were entitled under the terms of their ongoing fee arrangements.
98 ASIC also accepts that NAB has sought to work constructively with ASIC during the course of the investigation and proceedings. ASIC submitted however, that its investigation was significantly hindered by the extent of NAB's historic record keeping and most significantly, information in relation to four groups of clients in response to compulsory notices issued by ASIC as provided by NAB in delayed tranches. Those matters do not gainsay a lack of cooperation or unreasonable conduct on NAB's part and I am satisfied that a discount for cooperation should be applied.
99 NAB has also shown substantial contrition and has accepted responsibility for the contraventions both in words and by its actions. The most senior executive with responsibility for MLC Wealth (which now conducts the business previously conducted by NAB Financial Planning) gave affidavit evidence of NAB's contrition and remorse for the contraventions and delivered an apology on behalf of NAB for the contravening conduct. NAB also apologised publicly at an early stage of the proceeding and conveyed a written apology to its clients. ASIC submitted that the weight that should be given to NAB's contrition should be reduced by reason of its submissions made on penalty in failing to acknowledge properly the awareness of NAB's senior management in relation to NAB's compliance values and in particular from 31 May 2018. I do not accept that submission. NAB's contrition and acceptance of responsibility and wrongdoing is reflected by its admissions of liability and by the remediation and refund programs that NAB has implemented.