The corporate regulator is threatening Macquarie Group with sanctions after an investigation found chronic compliance failures in the bank’s retail stockbroking division.
The Australian Securities & Investments Commission secured evidence from an internal report at Macquarie Private Wealth, which found more than 80 per cent of the division’s private client advisors were in breach of compliance standards.
The timing of the ASIC demand may be no coincidence, said one source familiar with the action. Macquarie now faces the regulator in two major actions, the other being Storm Financial.
ASIC is suing Macquarie – along with Commonwealth Bank and Bank of Queensland – in a billion-dollar lawsuit which kicks off in the Federal Court in Queensland on Monday. The action is slated to run for three months and claims, among other things, unconscionable conduct on the part of the bank for providing Storm clients with high-risk margin loans.
At the 11th hour then, with Storm about to go to court, the last thing Macquarie chief executive Nicholas Moore needed was a pincer movement by the regulator. The compliance probe is no small beer.
The rumours that something was awry swirled last Thursday afternoon as Macquarie Private Wealth boss Eric Schimpf led the board of the investment bank on a tour through the funky new Shelly Street offices which tower over Sydney’s Darling Harbour.
Speculation was suddenly rife in the dealing room. Were they getting Australia’s biggest stock broking operation ready for auction?
With offices around the country, some 380 private client advisors from the east coast to the West, the whispers were of a sale to the Swiss private banking group Julius Baer.
Speculation of a sale had already been planted in the finance press to conjure up some buying interest. Something was afoot.
Heat turned up
But what the brokers didn’t know, and the board knew all too well, was that the corporate regulator was just about to turn up the heat.
A few days earlier, the bank had received a “please explain” from ASIC.
ASIC had had Macquarie Private Wealth under investigation for some time for ongoing compliance failures; for providing clients with inappropriate advice and for a raft of other alleged breaches of the Financial Services Reform Act (FSRA).
As it has done with AMP, UBS and the Commonwealth Bank, the regulator has powers to require financial services firms to commit to “enforceable undertakings” in lieu of losing their licences. These enforceable undertakings are inevitably punitive – both costly and time-consuming – especially in a bear market.
Now CEO Moore and his chairman Kevin McCann have to decide whether to fight ASIC, as they are already doing on another front in repelling the regulator’s demands over the Storm Financial debacle, or to submit to sanctions.
Outside the leviathan financial planning groups such as AMP and Colonial, Macquarie Private Wealth boasts the biggest sales force in Australia, its numbers peaking at 420 dealers four years ago just as the market was on the verge of tanking and as the traditional broking industry was about to change for good.
The compliance investigation is potentially a watershed event for Macquarie. It may entail another reshaping of its business and possibly further asset write-downs given the costs of new systems and training.
Like its competitors in stock-broking, MPW has been doing it tough since the global financial crisis hammered confidence and cut transaction volumes in half four years ago.
It was also these leaner times which distracted management from facing up to the shortcomings in their compliance regime, even taking into account the management changes which saw Eric Schimpf replace former MPW chief executive Peter Coleman in 2009.
For years, ASIC and the industry-funded Financial Ombudsman Service (FOS) had been fielding, and mostly fended off, complaints about faulty advice, breaches of the “know thy client” rule, failures to formalise advice via Statements of Advice (SOAs) and so forth.
The bank moved in 2008, however, to address the matter by forming a small team to conduct an internal review. It was called Advisor Solutions and it was distinct from the compliance officers at MPW.
What Advisor Solutions found was shocking; a failure rate of more than 80 per cent. That is, some 80 per cent of advisors in the nation’s largest broking house were not in compliance with the industry standards prescribed in the FSRA.
Already, this was an industry in a daunting state of flux, struggling to come to grips with a bamboozling new load of red tape.
Broking was no longer about long lunches and ad hoc trading calls. It was all about wealth management and formalised advice now. For many old-style brokers, it meant a veritable sea-change in culture.
Nonetheless, as the bank bosses pondered what to do about their confronting report from Advisor Solutions, it was decided not to tell the regulators. This was a mistake, sources told BusinessDay this week, only raising the ire of ASIC later, a sentiment which already inflamed by the bank’s stonewalling over the Storm Financial investigation.
Instead, a second report was commissioned, this time MPW went outside, to Ernst & Young Consulting.
Critics of the Macquarie compliance regime charge that MPW had simply gone “consultant shopping” and bought a “whitewash” which addressed similar but slightly different terms of reference to the previous report.
In any case, in 2009, E&Y found there was no compliance failure to answer. Compliance at MPW was hunky dory.
With its new clean bill of health from E&Y, Macquarie found no reason to tell the regulator when the two parties caught up for their annual chat about compliance.
But nerves were fraying. In the past, the bank had enjoyed rosy relations with the regulator. Despite myriad client complaints, the regulators had only taken action against individual advisors. There had been no action firm-wide.
There is a little-known industry committee which met with ASIC’s chairman and executive called the External Advisory Panel. It provided a sounding board for the Commission’s big wigs and it was stacked with Macbankers past and present including Bill Moss, Allan Moss, Mark Johnston and earlier alumni Belinda Hutchinson and Peter Hunt.
That was 2010, under the chairmanship of Tony D’Aloisio. D’Aloisio had initiated the Storm investigation at great cost, signing on a star-chamber of Sydney barristers to pore over the case file.
Since then, though, Macquarie has frustrated the Storm investigation at every turn and now, with the MPW investigation also in train, it is possible there might be a spot of horse-trading, one source told BusinessDay.
It is rare, perhaps a precedent even, for the regulator to be running two major actions against one large corporation at the same time. And ASIC tends to compromise and save its resources by being selective in its prosecutions.
But there is little doubt that the MPW action will lead to reform and possibly a sale or restructure. It is not good news for the compliance team during the period when the Advisor Solutions group found gaping holes in the regime.
In every instance where ASIC has brought an “enforceable undertakings” regime to bear, the cost for the company penalised has run into the many millions of dollars.
The first big case was AMP in July 2006 when ASIC found 93 per cent of all client funds administered by AMP financial advisors had been funnelled into AMP products.
Since then both UBS and CBA have been hit with enforceable undertakings. In the case of UBS, deficiencies in processes were not identified or fixed fast enough. At CBA it was a case of lack of oversight and a few rogue operators getting out of hand.
MPW has a massive distribution network but in the present market there is not much quality product to distribute. Moreover, independent advisors (IFAs) outside the firm already carry out a large amount, if not the majority, of distribution of Macquarie product.
Such things, not to mention the costs of a compliance overhaul, will factor into any decisions made about the future of Macquarie Private Wealth. But first things first, with the Storm court case bearing down, there will be some tense and high-level talks to be had in coming days between ASIC and the Macquarie leadership.
A spokeswoman for Macquarie declined to comment for this story. Nicholas Moore was unavailable for comment. A spokesman for ASIC said the Commission did not comment on operational matters.