Macquarie Group is motoring along in top gear again but it can now see John Walker, chief executive of litigation funder IMF Bentham, looming in its rear vision mirror.
The class lawsuit fraternity has been tailing Macquarie, and indeed all the banks for years, but Walker has now drawn fully into view:
“IMF is aware of the issues raised in the enforceable undertaking in respect of Macquarie Private Wealth and is interested in talking to more people who were clients of MPW and who may have been subject to breaches of standards for financial services,” he told Fairfax last week he is talking to victims.
The challenge for Walker is not so much getting victim numbers. These are legion, as evidenced again in the weekend story by Adele Ferguson and Ben Butler over the widespread compliance breaches at Macquarie Private Wealth (MPW).
Nor is the pot of money at issue. Macquarie is a rich target, even if it fights every case tooth and nail. Rather, the conundrum for Walker is in coalescing the myriad claims for faulty financial advice and the consequent client losses into one representative action.
Losses span an array of financial products and Macquarie will seek to defend each case separately, effectively taking Walker and the plaintiff law firms out of the picture.
The critical question for the bank and its shareholders is the size of the liability. What is the overall exposure here?
In what came as a surprise to many, the presentation to the bank’s annual general meeting presentation the week before last contained a slide on the “remediation process”.
Out of the blue – perhaps prompted by its own lawyers or the Australian Securities and Investments Commission (ASIC) which had struck an Enforceable Undertakings (EU) arrangement in 2012 with the bank to address its compliance failures – Macquarie announced a review process with the regulator and Deloitte was under way.
The slide noted the bank was writing to its clients to inform them of the MPW remediation process. The number of clients potentially affected was put at 87,000 “of which a significant number are high net worth”.
This may be the number now but the number of clients of Macquarie Private Wealth in 2012 when the EU was struck was 319,500 according to newspaper reports the next day.
The numbers, and their divergence, are substantial issues for the bank when calculating its exposure to claims for inappropriate advice.
Using an average $100,000 loss per client (losses include loss of future earnings from depleted capital), you get an exposure of $8.7 billion for 87,000 clients. On a client base of 319,500 however the exposure is almost $32 billion. Which number is right, the figure put to the ASX or the higher numbers from two years earlier when the EU was struck?
Working backwards, let’s say the bank reckons its overall exposure at $1 billion. That would suggest an average loss of just over $3000 per client (if the number of clients was 319,500). If the client base was 87,000, a $1 billion exposure would mean an average loss of just $11,500.
Is Macquarie really saying that the average loss per client since before the global financial crisis amounts to just $11,494.25 per client?
That’s only a 1 per cent loss on a $1 million portfolio.
The EU with ASIC came about in the wake of an internal audit conducted by a team called Adviser Solutions in 2008, which found that more than 80 per cent of advisers in the nation’s largest stockbroking house were not in compliance with the industry standards prescribed in the then financial services regime.
Redolent of the regulatory delays to address the compliance failures at the Commonwealth Bank, there was a three-year hiatus until ASIC announced its EU program.
Incredibly, in the wake of the EU, Macquarie then shifted many of its clients from retail client status to sophisticated client status (wholesale clients are not required the same level of advice and care as retail clients). ASIC has been made aware of this mass transition but its response is as yet unknown.
Whatever the outcome, it should be said that the actions against Macquarie and CBA are a response to widespread compliance failures but these sorts of failures are by no means contained to these two banks. The advisory market is similarly fraught elsewhere by client losses stemming from poor advice, excessive product leverage and commissions. It is just that Macquarie and CBA were, on the whole, more aggressive in their product sales and cultures than their rivals, and in the case of Macquarie, exacerbated by billions in sales of derivatives products and margin loans.