WHAT happened at Macquarie was this: there was an internal review of compliance in the bank’s stockbroking unit in 2008.
The findings were a shocker: 87 per cent of the brokers in Macquarie Private Wealth were in breach of regulations and compliance standards.
This mass failure was not reported. The findings were deemed to be ”preliminary”. Rather, Ernst & Young was commissioned to conduct another report. It found everything was hunky dory.
Whitewashes, it seems, are taken so seriously at Macquarie that they have their own project name. In this case it was called Project Jupiter.
So the matter was swept under the carpet until the sheer volume and persistence of complaints to the regulator finally brought action.
Last week, after a long negotiation and much lawyering, the Australian Securities and Investments Commission and the bank agreed to the wording of Macquarie’s ”enforceable undertakings” regime.
The bank’s spin is: one, we slipped up on the ”bookkeeping” front and, two, it’s no big deal anyway as ASIC has hit AMP, Commonwealth Bank and UBS with enforceable undertakings, too.
The reality is this is a big deal. Macquarie Private Wealth is the largest full-service stockbroker in Australia. The findings of the internal audit by the adviser services unit were that some 365 advisers of the 420-strong team coast to coast were in breach of compliance.
Though the number itself is big, the bigger deal is what the regulator’s investigations say about that elusive yet critical aspect of the corporation, culture.
In contrast to previous ASIC ”enforceable undertakings” penalties – which mostly pertained to individual rogue activities – the Macquarie action is squarely aimed at management.
To quote undertaking 2.17: “ASIC is concerned that [Macquarie Equities] management may have failed to maintain and foster a proper commitment to, and culture of, compliance within the MPW (Australia) business.”
It goes on to cite eight parts of the Corporations Act the bank might have breached and questions whether it has breached its Australian financial services licence to boot. To distil, Macquarie’s Banking and Financial Services division, which houses Macquarie Private Wealth, has been pinged for a culture of profit before principle.
The response so far from the bank appears to suggest a strategy of riding out the storm, of keeping a lid on things. No heads have rolled.
Carefully worded internal emails have pushed the ”administrative” nature of the problem, the ”bookkeeping”.
An important point: the compliance officers for Macquarie Private Wealth had reported up the line to Macquarie Private Wealth executives, to within their own Banking and Financial Services division that is, rather than into the central Risk Management Group.
The bank has now agreed to change “its compliance reporting arrangements so that compliance staff no longer report to MPWA management”, say the undertakings.
Formerly, compliance officers were part of the team, a team led by executives who were remunerated according to the profits they produced. There is considerable angst in other parts of Macquarie, say insiders.
The sanctions are not a good look and they raise questions of the culture and compliance elsewhere.
Greg Ward, the second in charge to Macquarie Group chief executive Nicholas Moore, has been given responsibility for the clean-up.
As Peter Maher, the head of the offending division, BFS, is still there – indeed he signed off on the undertakings – it appears that management has not been lumped with responsibility for the failures.
It may be the strategy is designed to take out some of the more prolific lower-level offenders and leave management in place to keep the lid on things. Axing senior managers does have its risks.
Already the bank is far more exposed to lawsuits as a result of the enforceable undertakings regime. The likes of Slater & Gordon are on the prowl.
Yet this is a management and cultural problem.
It is not about the stockbrokers. The decision, for instance, to strike the deal with Storm Financial – also a BFS blow-up and one that has led to devastating losses for retail clients – was not made by the brokers.
Neither were the structural problems arising from compliance reporting the fault of the brokers.
Brokers are brokers wherever you go. They don’t get employed for their compliance skills.
This reporter has been one of the harshest critics of ASIC but the regulator ought to be commended for putting the gloves on and shaping up to Macquarie. This would not have happened under previous administrations and it sends a message that the regulator is prepared to lock horns with powerful corporations.
This cultural issue at the bank has been brewing for a long time. It certainly pre-dates present chief executive Moore.
But Moore has a conundrum. If he tries to contain it, the problem may fester. If he swings the axe, it may throw up all manner of damaging consequences.
He may yet be saved by the one panacea for all finance industry problems, a rising market.
When everybody is making money anything can be swept under the carpet.
Most broking shops, Macquarie Private Wealth included, have been struggling to break even since the financial crisis four years ago. Macquarie Private Wealth is a marginal proposition economically. If deal-flow rises and capital markets return to full swing, this regulatory nightmare may drift away.
Meanwhile, ASIC is watching – and not just ASIC but the rest of the bank, Ward and the unit responsible for doling out the bank’s capital, operational risk management. And while the official line is that these undertakings are no admission of legal liability, they make clear they are accepted as “an alternative to commencing civil proceedings or pursuing administrative action”.