ASX Announcement - National's Response to Foreign Currency Options Trading Losses - 12 March 2004

Download the PricewaterhouseCoopers Report and associated documentation

The National's Chairman, Mr Graham Kraehe, and Chief Executive, Mr John Stewart, today announced a four point action plan to fully address all of the issues associated with recent foreign currency options trading losses.

The action plan follows a thorough and impartial review by PricewaterhouseCoopers over the last two months involving interviews with over 45 employees and third parties and research into several thousand e- mails, numerous reports and a database of 10,000 transactions. A copy of the full PwC report is attached.

The Board has also received advice from Deloitte about potential conflicts facing PwC as a result of past and current relationships in areas relevant to the review, and probity and governance advice from Blake Dawson Waldron. A copy of the advice from Deloitte and Blake Dawson Waldron is attached. The PwC report and Deloitte and Blake Dawson Waldron advice should be read together.

Mr Kraehe said: "The Board is confident that a full and fair assessment of all issues has been undertaken and that appropriate remedial actions are being taken to address all of the issues raised in the PwC report and to prevent them from recurring."

Key points

Key points in the PwC report include:

• the final loss arising from foreign currency options trading announced on 27 January is $360 million
• the losses arising from the foreign currency options trading increased significantly between September 2003 and January 2004
• four traders on the foreign currency options desk exploited loopholes and weaknesses in systems and processes to hide trading losses and protect bonuses
• the trader's activities were contrary to the National's strategy of building customer-focused business
• the foreign currency options trading losses were reported to management by several junior employees
• no customers were directly or indirectly affected by the foreign currency options trading losses
• in the Markets Division there was:

- inadequate management supervision,
- significant gaps in back office monitoring functions,
- escalation processes that did not work properly,
- weaknesses in control procedures,
- failure of risk management systems; and
- an absence of appropriate financial controls

• there is not a suitable compliance culture within this area of the National and a tendency to suppress bad news rather than be open and transparent about problems; and
• warning signals, both inside the National and from regulators and other market participants, were not properly acted upon.

1. Board changes

Mr Kraehe said Directors had accepted the proposition in the PwC report that the Board is ultimately responsible for the culture and the reputation of the National, and any losses suffered by shareholders.

"The former Chairman, Mr Charles Allen, and former Chief Executive, Mr Frank Cicutto, resigned earlier this year because they felt that was in the best interests of the National and its shareholders," he said.

"However, the Board accepts that further action is required. I have already announced that we are seeking two additional Directors with banking experience, one from Australia and one from the United Kingdom. This process is well advanced.

"We have also made a separate announcement today concerning changes in the Chairmanship of Board Committees and the appointment of a Senior Independent Director in accordance with international best practice in corporate governance."

2. Management changes

Mr Stewart said that management changes were also appropriate.

"Primary responsibility for the unauthorised trading rests with four members of the foreign currency options desk and they have been summarily dismissed from the National," he said. "The four traders that have been dismissed are: Mr Luke Duffy, Mr David Bullen, Mr Gianni Gray and Mr Vince Ficarra. The Head of Foreign Exchange in the Markets Division, Mr Gary Dillon, who was the direct supervisor of the four traders, will also be dismissed."

Mr Stewart said the events surrounding the foreign currency options trading losses are being investigated by the Australian Prudential Regulation Authority (APRA), the Australian Companies & Securities Commission (ASIC) and the Australian Federal Police (AFP). Overseas authorities are also reviewing the events and the National's responses.

"These agencies will determine whether any civil or criminal actions will be taken against individuals as a result of the foreign currency options trading losses," he said.

"The National will continue to fully co-operate with the authorities in their investigations."

Mr Stewart said a number of other employees within the National would also be transferred or counselled as a result of the events surrounding the unauthorised foreign currency options trading.

Mr Stewart said the National had decided to review the employment of certain individuals: "Those who will be leaving the National include; the Executive General Manager of Corporate & Institutional Banking, Mr Ian Scholes, the Head of Markets Division, Mr Ron Erdos, and the Executive General Manager of Risk Management, Mr Chris Lewis. Experienced managers have been appointed to these positions on a short term basis until the National completes appropriate recruitment processes."

3. Risk and control frameworks

Mr Stewart said the management team are continuing to implement remedial actions to close gaps and loopholes identified in the PwC report that were exploited by the traders or contributed to long standing breaches of policies and limits. "We will refine our risk management framework to get a more appropriate balance between management and policing functions," he said. "We have already reviewed value at risk limits and reduced our risk exposure."

"Weaknesses in control procedures identified by PwC have been or will be rectified without delay. This includes analysis of daily trading profits and accounts, reporting of all large and unusual transactions, investigation of all off-market rates on high risk transactions, critical review of revaluation rates sourced from third parties and a stronger back office function that properly checks all transactions."

"It is totally unacceptable that employees of the National breach policies and control limits. From now on, there will be a zero tolerance policy towards unauthorised limit breaches at the National."

Mr Stewart said the management team would also review responsibilities between business units to ensure that there would be clear reporting lines and accountabilities between Risk Management, Operations and Finance functions within the National.

"These and other specific issues identified in the PwC report will be addressed quickly and I will report to the Board regularly on our progress in tackling these long standing problems at the National."

4. Culture

Mr Stewart said he was concerned about references in the PwC report to staff that adopt arrogant or aggressive attitudes towards others, or who abrogate responsibility and focus on suppressing bad news rather than engaging in full and frank dialogue.

"We will continue cultural change programs within the National such as Revitalisation and Making a Difference that promote positive and transparent behaviours," he said. "We will ensure that these programs are actively adopted in the Markets Division of the National."

"I am pleased that whistleblowers had uncovered the losses from foreign currency options trading and the National would continue to encourage and protect whistleblowers: "We need more brave people that are prepared to confront bad behaviours," he said.

Mr Stewart said the management team would also review its recruitment processes, the annual appraisal processes and incentive structures to avoid inappropriate behaviours in future at the National.

For further information:

Brandon Phillips
Corporate Relations Manager
Group Corporate Affairs
03 8641 3857 work
0419 369 058 mobile