Crikey’s Don Boardwalk has been trawling through the Banking Act and discovered that APRA has extraordinary powers to step in and call the shots at NAB.

By Don Boardwalk

What sort of action can APRA take against the NAB or its board? Can it sack Catherine Walter or her nemisis NAB chairman, Graeme Kraehe, or any of the other dunderheads on the board?

Investors large and small should be very aware that if the mess isn’t fixed up at or before an Extraordinary General Meeting is called, then APRA has the firepower and the will to make the changes it sees necessary to protect the bank and to get enacted the 70-odd reforms announced last week.

Now if this was to happen then there would be an almighty row with the anti-APRA gang (like columnist Terry McCrann) sounding off. But even they must realise that APRA does have the power to act because the the boards and management of every Authorised deposit-taking institution (ADI) have accepted that. There is no argument.

So, would APRA want to act? Well, just look at what APRA chairman, Dr John Laker, said on the Sunday business programs. He told the Nine Network, “If there were genuine concerns about the ability of a board to function we would clearly look at those closely, and we have ways of dealing with that…It is a concern if this (the board brawling) was then to translate into a slowness in responding to our requirements.”

And he told Michael Pascoe on Seven’s Sunday Sunrise, in reply to a question about whether the conditions from APRA were requirements (APRA’s statement) or proposed (the statement from NAB chairman, Mr Kraehe and CEO John Stewart), “They are requirements. These are not negotiation points. They were presented to the NAB board – I presented them personally – as requirements. We have a very strict interpretation of that word, ‘requirements’. It means you have to do them. They’re not proposed recommendations or proposals; they are requirements – they’re firm requirements. We’re talking to the NAB now about a prompt and rapid implementation program to get these changes in place, and they have incentives to do so because of the higher capital rates attached to them until they remedy the problems. But we’re not negotiating on our requirements.

APRA’s views of the competence or otherwise of the NAB board might be coloured however by the experience with former Chairman, Charles Allen. For instance, here’s an exchange between Michael Pascoe and Dr Laker.

Michael Pascoe: Did the previous Chairman, Charles Allen, tell you why that letter you sent to him seems to have disappeared?

Dr John Laker: It didn’t disappear; it arrived in his desk. But what we don’t understand, notwithstanding our interviews, is why he chose not to send it to the other board members. That remains a mystery.

Michael Pascoe: He didn’t offer an explanation?

Dr John Laker: Not one that we were able to understand.

From reading the key legislation underpinning APRA’s existence, it’s clear the regulator can direct certain things to be done. For instance, it can enforce its ‘requirements’ with directions to the NAB board: those directions can be made very, very official by making them through the relevant minister, Federal Treasurer, Peter Costello. That would clearly be the very last step.

The relevant section of the Banking Act is Part 1B A “APRA’S powers to issue directions”. It is worth a read because the regulator has wide and sweeping powers to issue directions to an ADI to enforce prudential standards and performance. In other areas it can also direct, for example, a ‘body corporate” such as a bank to remove management or a director!

APRA can direct an ADI who it is to appoint as a manager or director and for how long. It can direct the ADI to comply with part or the whole of a Prudential Standard (so its no wonder Dr Laker is confident his “requirements” will be done by the NAB in a timely fashion by whoever is in management and on the board).

But the section in the Banking Act that caught our eye is the one on Governance: Section 23. APRA may direct (in writing) that the ADI authorised NOHC (that’s a holding company) remove the person from the position if APRA is satisfied that the person: (a) is a disqualified person; or (b) does not meet one or more of the criteria for fitness and propriety set out in the prudential standards.
Pretty draconian!

ADI’s are also required to tell APRA in advance of proposed board changes and to run nominees past the regulator before appointment. So the NAB will have to run all the anti-Walter proposals past APRA, before they are made public: and will require APRA’s agreement.

Now the relevant Prudential Standards for directors and managers look at “fitness and propriety”, “experience and expertise”: and importantly in this case “integrity in business activities”; and “competence in business and or in the conduct of current duties”. Also to be considered is “reputation within the business and financial community.”

So what about the NAB at the moment: The phrases “integrity in business activities” and reputation within the business and financial community” sound fairly innocuous in most circumstances (but would rule a number of business people out of contention for bank or boards: Rod Adler, Trevor Kennedy, Ray Williams as current examples).

Whether it could be applied to the NAB at the moment would be debateable: but the longer the broadroom brawl goes on, the greater the potential for damage to the integrity and competence of the individuals and the integrity and reputation of the NAB.
So understand that APRA is watching very, very closely and carrying a big stick.

We don’t agree with John Stewart’s claim this week that NAB is currently facing the greatest reputational risk of any Australian company in recent years. Surely the AMP losing $10 billion in the UK and almost going broke was far worse that what NAB has served up.