A big four bank has been ordered to pay a civil penalty of $15 million for engaging with unlicensed home loan introducers.
The Federal Court of Australia has ordered National Australia Bank (NAB) to pay $15 million for accepting information and documents in support of at least 260 consumer loan applications from third-party introducers who were not licensed to engage in credit activity.
The penalty comes after the financial services regulator last year commenced proceedings in the Federal Court against NAB for breaches of the law arising from failures within its introducer program (which were flagged during the banking royal commission).
Under the “spot and refer” introducer program, which was in operation between 2000 and October 2019, introducers referring customers to NAB were only meant to only provide the bank with the potential customer’s name and contact details.
In order for an introducer to provide NAB with further information or documents, the law requires that the introducer be authorised under an Australian Credit Licence (ACL).
Specifically, the National Consumer Credit Protection Act 2009 (National Credit Act) prohibits credit licensees from conducting business with parties engaging in credit activity without an ACL.
However, an investigation by the Australian Securities and Investments Commission (ASIC) found that, between 3 September 2013 and 29 July 2016, 16 NAB bankers overstepped the “spot and refer” requirement by accepting information and documentation from 25 unlicensed introducers, including completed home loan applications, payslips, copies of customer identification documents and more.
ASIC said that this behaviour “can pose a serious risk to consumers”. Indeed, the court noted that borrowers were exposed to the risk that bankers may have relied on the information provided rather than taking reasonable steps to assess the veracity of information provided and determine whether the loans were “not unsuitable”.
Moreover, ASIC also identified that in some instances the documents provided to NAB by the unlicensed introducers were false. For example, in three cases, fraudulent payslips were provided.
The court has now declared that NAB breached the National Credit Act 260 times by engaging in a credit activity with introducers who did not have an ACL and were engaging in a credit activity by assisting NAB customers in entering into mortgages.
ASIC deputy chair Daniel Crennan QC said: “The penalty imposed by the court reflects the serious contraventions by NAB and is an important result for ASIC’s first civil action alleging contraventions of s31(1) of the National Credit Act.”
In arriving at the penalty to be imposed, the court reportedly took into account NAB’s cooperation with ASIC and admissions of contravention of the law.
‘A nagging feeling of disquiet’
The judgement noted that the introducer program “generated a very large number of loans worth thousands of millions of dollars”. For example, in 2015, the value of loans drawn down exceeded $8.3 billion. In that year, there were 5,250 introducers who were paid total commissions of $47,472,294.
The investigation also found that there appeared to have been a focus on non-resident lending by introducers and bankers. The proportion of non-resident lending was 53 per cent in April 2015 and 71 per cent in April 2016.
Notably, Justice Joshua Lee suggested that the case may be the tip of the iceberg.
He outlined: “Although NAB has admitted that it engaged in conduct amounting to 260 contraventions of s31 of the National Credit Act, which also involved 260 contraventions of s47(1)(d) and at least one contravention of s47(1)(a) of that act, there is a high degree of artificiality in proceeding on the basis that I have been presented with anything like a full picture of what actually occurred in relation to the program. This results from deliberate regulatory and forensic choices made by ASIC.
“It is not for me to gainsay these decisions of ASIC. It evidently has competing and heavy demands upon its finite resources.
“What became evident during the course of the hearing, however, is the very limited independent investigation as to the true scope of what has occurred during the relevant period and the significant reliance by ASIC on the internal work done by NAB in its investigations (by its officers or by a professional services firm it had engaged) as to where the problems were located within NAB and what went wrong.”
Justice Lee continued: “I must deal with the evidence adduced and put out of my mind speculation. I will fix penalties and make other orders on the basis of the issues as presented by the parties and what has been proved.
“But having said that, I have a nagging feeling of disquiet that the true picture of the extent of the problems with the program has not been revealed because there was not a real regulatory desire to pursue a thorough investigation as to what in truth occurred.
“It is both unnecessary and unsafe for me to speculate as to why these regulatory and forensic decisions have been made, including any attempt to prove actual harm to individual customers, but their consequence is to require me to fix penalties in circumstances where my understanding of the true scope of what occurred in relation to the general operation of the program during the relevant period (let alone at earlier times to the extent it reflects on conduct during the relevant period) is incomplete.”
Justice Lee concluded that the total penalty was “an amount reflective of, and proportionate to, the seriousness of the contravening conduct and the necessity to serve as a deterrent”.
“Any lesser aggregate penalty would not, in my judgment, achieve the appropriate deterrent effect,” he said.
National Australia Bank has acknowledged the $15-million penalty imposed by the Federal Court, in which the bank admitted certain breaches relating to receiving information from introducers that went beyond their remit of “spot and refer”.
NAB’s group executive, legal and commercial services, Sharon Cook, commented: “NAB has acknowledged that the Introducer Payments Program had inherent risks and ultimately fell short of customer and community expectations. We want customers to have the confidence to come to NAB because of the products and services we provide – not because a third party received a payment to recommend us.
“We ended the Introducer Payments Program in October 2019, and in November 2017 we established a remediation program, which has paid about $5 million to impacted customers.”
NAB ceased payments to introducers on 1 October 2019. This decision followed on from NAB overhauling its introducer program, when it reduced its introducer network from 8,000 to just over 1,000.
NAB had previously reported to ASIC that it had uncovered several of its bankers were engaged in fraudulent misconduct in Greater Western Sydney.
As such, in 2018, ASIC permanently banned two former NAB employees, Danny Merheb and Samar Merjan (also known as Samar Awad), from engaging in credit activities and providing financial services.
Last year, ASIC banned former NAB branch manager Rabih Awad from engaging in credit activities and providing financial services for seven years.
ASIC then permanently banned and then commenced criminal action against former NAB branch manager Mathew Alwan. Late last year, Mr Alwan was sentenced to 12 months’ imprisonment to be served as an Intensive Corrections Order.
A majority of the false documentation Mr Awad submitted to NAB was found to have been provided to him by a real estate agent who was previously registered as an introducer (and was one of the 25 introducers identified in the recent proceeding).
The role of introducers in mortgage lending was referred to repeatedly over the course of the royal commission, as it looked at intermediated relationships and its impact on lending.
[Related: NAB to ‘carefully assess’ ASIC allegations]