Michael West Sydney Morning Herald September 6, 2012
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 and 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 advisers 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 the Commonwealth Bank and Bank of Queensland — in a billion-dollar lawsuit that begins 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 Shelley Street offices that tower over Sydney’s Darling Harbour.
Speculation was suddenly rife in the dealing room. Were they getting Australia’s biggest stockbroking operation ready for auction?
With offices around the country and some 380 private client advisers, the whispers were of a sale to the Swiss private bank Julius Baer.
Speculation of a sale had already been planted in the finance press to conjure up some buying interest. Something was afoot.
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 had a ‘‘please explain’’ from ASIC. The regulator had had Macquarie Private Wealth under investigation for some time for compliance failures; for allegedly providing clients with inappropriate advice, and for other alleged breaches of the Financial Services Reform Act (FSRA).
As it has done with AMP, UBS and the CBA, 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 — costly and time-consuming — especially in a bear market.
Now Moore and his chairman, Kevin McCann, have to decide whether to fight ASIC, as they are already doing 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 stockbroking, MPW has been doing it tough since the financial crisis hammered confidence and cut transaction volumes in half four years ago. It was also these leaner times that distracted management from facing up to the shortcomings in their compliance regime, even taking into account the management changes in which Schimpf replaced former MPW chief executive Peter Coleman in 2009.
For years, ASIC and the Financial Ombudsman Service (FOS) had been fielding, and mostly fending 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 Adviser Solutions and it was distinct from the compliance officers at MPW.
What Adviser Solutions found was shocking; a failure rate of more than 80 per cent. That is, some 80 per cent of advisers in the broking house were not in compliance with the industry standards prescribed in the FSRA.
Already, this was an industry in a 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. Now it was wealth management and formalised advice. For many old-style brokers, it meant cultural sea change.
Nonetheless, as executives pondered what to do about the report from Adviser Solutions, it was decided not to tell the regulators. This was a mistake, sources told BusinessDay, as it only raised the ire of ASIC, already inflamed by the bank’s stonewalling over the Storm Financial investigation.
Instead, a second report was commissioned, and this time MPW went outside, to Ernst & Young Consulting.
Critics charge that MPW had simply gone ‘‘consultant shopping’’ and bought a ‘‘whitewash’’ that 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.
With a 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 client complaints, the regulators had only taken action against individual advisers. There had been no action firm-wide.
There is a little-known industry committee that met 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, Belinda Hutchinson and Peter Hunt.
That was 2010, under the chairmanship of Tony D’Aloisio, who had initiated the Storm investigation at great cost, signing on a star-chamber of Sydney barristers.
Since then, though, Macquarie has frustrated the Storm investigation, but now, with the MPW investigation also in train, it is possible there might be a spot of horse-trading.
It is rare for the regulator to be running two major actions against one corporation at the same time. ASIC tends to save its resources by being selective in its prosecutions.
But there is little doubt 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 Adviser 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 many millions of dollars.
MPW has a massive distribution network, but in this market there is not much quality product to distribute. Moreover, independent advisers (IFAs) outside the firm already carry out much distribution of Macquarie product.
With the Storm court case bearing down, there will be some tense talks to be had between ASIC and the Macquarie leadership.
A spokeswoman for Macquarie declined to comment for this story.