The National Australia Bank has been accused of putting its own interests ahead of those of its customers, in another intense and potentially damaging day at the banking royal commission.

Monday marked the first day of a fortnight of hearings on the superannuation sector, and NAB was first up, facing questions over the relationship between its superannuation funds and the payment of financial advisers.

Two issues were addressed: the bank’s use of commissions to encourage financial advisers to stick with NAB products; and the charging of super members fees for no service.

In the stand was Paul Carter, a former executive general manager at NAB’s wealth arm MLC, and now with NAB’s subsidiary Bank of New Zealand.

Mr Carter was repeatedly asked to justify MLC’s decisions to charge fees for no service and to maintain conflicted remuneration structures.

Counsel assisting Michael Hodge QC asked whether MLC had been acting in the interests of its customers, or looking after its own bottom line. Mr Carter’s answers were at times vague and contradictory.

The cross-examination also threw up questions about the efficacy of the 2013 Future of Financial Advice reforms, which were meant to stamp out conflicts of interest in financial advice and superannuation.

Grandfathering commissions

To understand the complicated revelations of Monday’s hearings, a brief look at the history is necessary.

Up until 2013, banks routinely paid financial advisers commissions to recommend their products – including superannuation – to clients. These commissions came in two forms: upfront commissions, and ongoing or trail commissions.

The then-Labor government decided this was a bad system because it encouraged financial advisers to act like salespeople, putting clients into products that paid the best commissions, not the ones that were best for their clients.

So in July 2013, the government introduced the Future of Financial Advice or FoFA reforms. Among other things, these banned commissions on all financial products apart from life insurance, and introduced stricter standards to ensure advisers were acting in the best interest of their clients.

However, the FoFA reforms contained provisions for ‘grandfathering’ trail commissions on products that had already been sold. That meant if an adviser had sold a superannuation product before July 1, 2013, he or she could continue to collect the trail commissions indefinitely.

What MLC did

Some time after the FoFA reforms came in, MLC decided to simplify its superannuation businesses, merging a number of separate super funds into one.

Some of these funds were paying grandfathered trail commissions to financial advisers. With the merging of funds, MLC had a choice: it could stop paying these commissions, thus bringing the new super fund in line with the spirit of FoFA; or it could opt to continue paying the commissions by appealing to a legal technicality.

Mr Carter told the royal commission MLC had opted to take the second route, insisting that the decision was in the best interest of members.

“What we concluded … is that if the commission arrangements were cancelled, that would in effect have the result of a breach of contract of the trustee with its advisers,” Mr Carter said.

“If that happened it is also highly likely that advisers [would withdraw the clients’ funds] and the amount of assets in the fund would be reduced because the advisers … would be dissatisfied.

“And it’s in that context that the trustee agreed that by continuing to grandfather and not have clients move elsewhere and have funds retained, that would be in the interest of members.”

Mr Carter later acknowledged it would not in fact have been a breach of contract to scrap the commissions, meaning the sole justification for maintaining grandfathering was to prevent an exodus of funds out of the MLC super fund.

Fees for no service

It also emerged that MLC had been charging members a default ‘plan service fee’ or PSF. This fee gave members of the fund access to general advice – that is, general information about financial products that did not take into account their personal circumstances.

It was automatically taken out of the members’ accounts whether or not they used the general advice on offer, meaning in many cases it was a fee for no service. This fee was 0.44 per cent of the balance.

Members could, if they wished, simply ring MLC and ask them to cancel the PSF. However the royal commission heard this fact was not adequately communicated to members.

Mr Carter will take to the stand again on Tuesday morning to answer questions on MLC’s decision to classify some fees as commissions. Advisers are under no obligation to provide any service for commissions, even though they are ultimately paid for by the member.