Sir John Key: ANZ directors failed due diligence obligations to Reserve Bank

Sir John Key, chairman of ANZ, the country's largest bank. Photo / Greg Bowker

Sir John Key has admitted ANZ New Zealand's directors failed in their due diligence obligations to the Reserve Bank over the use of a risk capital model which was decommissioned without approval.

The error resulted in a Reserve Bank censure and an order to ANZ New Zealand to increase capital for operational risk by around 60 per cent to $760 million as a safety net to absorb possible losses.

"We one hundred per cent own that problem," said Key, who chairs ANZ New Zealand's board and sits on the board of ANZ's Australian parent. "I own that problem. There's no ambiguity. I'm the chairman.

"We failed in our obligations to the bank. We got it wrong. We accept responsibility for that.

"We are going to do everything within our powers to make sure it never happens again."

On May 17 – 12 days before former ANZ New Zealand CEO David Hisco went on long-term sick leave never to return to his $3 million-plus job - the Reserve Bank announced it had revoked the bank's right to model its own operational risk capital requirement due to a "persistent failure in its controls and attestation process".

The matter is arguably far more important than the "parting of the ways" between ANZ and Hisco over the use of Corporate Cabs – which was hyped up by Key as "chauffeured cars - but no one from the bank had fronted publicly before last week.

Former ANZ New Zealand CEO David Hisco. Photo / File

In his press statement, Reserve Bank deputy governor Geoff Bascand said ANZ's directors had attested the bank was compliant with its capital requirements despite the approved model not being used since 2014.

"The fact that this issue was not identified for so long highlights a persistent weakness with ANZ's assurance process," Bascand said.

ANZ responded that back in 2014 it had calculated its operational risk capital to be based a previous calculation model which was decommissioned without Reserve Bank approval.

ANZ's quarterly disclosure statement went on to reveal ANZ's Australian parent was responsible for calculating the required operational risk capital.

"A failure of systems and controls, as well as no verification being undertaken by the bank, meant that the ultimate parent bank decommissioned the [Reserve Bank] approved model without the bank ensuring that it had the necessary regulatory approvals in place to move to a new model," ANZ said.

It is a serious matter for the bank's high-profile New Zealand directors Joan Withers (also chair of The Warehouse), Tony Carter (Air New Zealand chair) and Mark Verbiest (former Spark chair) as well as ANZ Group CEO Shayne Elliott and Group CFO Michelle Jablko, who signed that the bank was compliant with its obligations.

How the flaw was uncovered is a whole story in itself.

Key explained a visit from the International Monetary Fund (IMF) to New Zealand in 2017 initially sparked questions on why banks had been using a negative attestation process. The Reserve Bank encouraged ANZ to undertake a full review which uncovered the failure to use an approved model.

Key says the testing uncovered the written advice the board was getting that the model was compliant was in fact wrong.

"To be fair to me, this issue started in 2014. I wasn't even on the board then. It was actually discovered while I was, and am, chairman of the bank and was immediately reported."

ANZ is not alone. Westpac earlier had similar issues. But says Key, "that's "kind of irrelevant … I'm not responsible for other banks I'm responsible for [ANZ] New Zealand."

Key says the Reserve Bank emphasised that the directors had to do their own due diligence.

"You can imagine what Joan Withers, Mark Verbiest and Tony Carter are like when it comes to attestation – take me out of the process for a moment.

"Those are three very senior, top directors who are chairmen in their own right.'

"They don't take this process lightly. But the advice the board got was we were fully entitled to sign it."

At its last meeting, the ANZ NZ Board took the first steps towards bringing in an outside expert to review its processes.

I take my responsibilities as chairman of the bank very seriously. If I thought I should resign in the best interests of the organisation and it was the right thing to do, I would do that.

Sir John Key

Key copped a serve from Finance Minister Grant Robertson when, during last week's press conference on Hisco's departure, he appeared to blame the capital model failure on a "junior staffer".

Robertson was blunt: "That's simply not an acceptable response. It is the responsibility of the board and I'm sure Mr Key knows that."

Says Key: "I'm not going to fight back on that. I wasn't blaming a junior person. But I'm simply saying that is where it started in the organisation.

"But the responsibility for the attestation process, which is at the heart of this issue, is my responsibility not theirs.

"I'm just simply saying it wasn't as if we just sat there and if you like didn't do the due diligence you would expect us to do. We did it under the framework that is well established in banking practice. As it turned out, that was actually not the best way of doing things."

Finance Minister Grant Robertson. Photo / File

Robertson was not the only person throwing shade. Former Bank of New Zealand chairman Kerry McDonald earlier wrote to the Reserve Bank saying Key and other directors should resign over the risk capital failure and later escalated that into a call for a full Royal Commission into New Zealand banking in the wake of revelations of irregularities with Hisco's expenses.

"When you get people like a Kerry Mcdonald saying I should resign ... I take my responsibilities as chairman of the bank very seriously," responds Key. "If I thought I should resign in the best interests of the organisation and the right thing to do I would do that."

Key maintains that directors and chairs can't resign every time there is an issue. "I think the more sensible question to ask is whether they were doing their job properly and have they handled the situation properly," he said.

"Well, clearly we weren't doing our job properly in that we were signing attestations that were incorrect, albeit we were doing it to the best of the information provided to us.

"We will work on that.

"But I do think we have always been clear and transparent with people. As soon as we had the problem we did the right thing, we went straight to the regulator.

"We were upfront and open and honest about it."

The issue has yet to be finally put to bed by the Reserve Bank, which is studying ANZ's response.