ASIC Deep Fries a Big Mac


By George Gilligan, UNSW

SYDNEY: 22 August 2014 – Macquarie Group Limited (MGL) is a global investment bank and diversified financial services group employing more than 14,000 people in 28 countries.  It is the largest investment bank in Australia and is sometimes euphemistically referred to as MacBank.  In May 2014 MGL announced full year net profits after tax of $1,265 million.  However, in recent times some of the media coverage relating to Macquarie has been less pleasant reading for Macquarie executives.  Some of that coverage has been related to the activities of Macquarie Private Wealth (MPW), which is the financial adviser network for Macquarie Equities Limited (MEL), a subsidiary of MGL.  On 15 August 2014, as part the Enforceable Undertaking (EU) of 29 January 2013 between the Australian Securities and Investments Commission (ASIC) and Macquarie, ASIC announced that MEL would:

‘..begin writing to current and former clients about possible remediation for flawed financial advice.  The advice was provided by MEL’s financial adviser network, Macquarie Private Wealth (MPW).  This remediation process is part of ASIC’s enforceable undertaking with MEL, which was imposed in January 2013…. MEL must remediate the client, including compensation. MEL will send out more than 160,000 letters to its clients, inviting them to raise concerns about the quality of advice. The letters will be sent to all people who have been clients at any time since MEL obtained its AFSL [Australian Financial Services Licence] on 1 March 2004.’

This process is obviously embarrassing for Macquarie and damaging to its reputation for probity.  The media coverage has been hostile in some quarters regarding the standards of financial advice given by Macquarie to some of its clients.  Some commentators have given prominence to remarks by ASIC deputy chairman Mr Peter Kell that poor record keeping and a lack of information about customers lay at the heart of Macquarie’s problems.  However, Mr Kell emphasised that such problems are not confined to Macquarie alone: ‘Unfortunately we see problems in a range of (financial planning) firms and we’ve seen them over some time… This is an industry that has to lift its game, this is an industry that has to put customers back at the centre of their business models.’

Mr Kell’s comments that financial planning firms should prioritise the interests of clients are well made, but ASIC itself of course is still reeling from the criticism that it received from the Senate Economics References Committee (the Committee), which in June 2014 released its Final Report into the performance of ASIC (the Report).  The Report was extremely critical of ASIC and Commonwealth Financial Planning Limited (CFPL).  CFPL is a wholly owned subsidiary of Australia’s largest bank the Commonwealth Bank of Australia (CBA), CFPL operates under the business advice structure of Colonial First State (CFS) which is also part of CBA.  Then Inquiry chairman Senator Mark Bishop stated that: ‘…the evidence that the committee has received is so shocking and the credibility of both ASIC and the CBA so compromised that a Royal Commission really is warranted.’  There is no immediate prospect of a Royal Commission on these issues but the Committee’s call for one indicates deep concern about Australia’s financial planning industry in general.

Members of the Committee also were critical of what they saw as insufficient cooperation from Macquarie.  For example Senator Bishop stated that Macquarie had 'systematic problems’ similar to CBA and that the Inquiry had written to Macquarie requesting that they respond to a number of complaints that the Inquiry had received: ‘They wrote back and politely told us to mind our own business.’  Another member of the Committee Senator John Williams said that Macquarie should: ‘..look pretty hard in the mirror in terms of their compliance.’  The same Australian Financial Review (AFR) article quoted former Macquarie advisers stating that Macquarie had a ‘strong and sometimes toxic sales culture…Nothing gets in the way of sales.’  Macquarie professed itself ‘surprised’ by the AFR (7/7/14) article and added: ‘…we advised the Committee that we remain committed to resolving these matters through the EU and through regular discussion with ASIC… Macquarie takes its regulatory obligations very seriously and always seeks to ensure compliance with the requirements of all our regulators including ASIC.’

Macquarie Group repeated this mantra when it acknowledged ASIC’s 15 August 2014 measures with a media release of its own: ‘Macquarie takes its regulatory obligations seriously and always seeks to ensure compliance with the requirements of all its regulators.’  It is worth reflecting at this point on this notion of Macquarie always seeking to ensure regulatory compliance by noting the issues that gave rise to the EU of January 2013 between ASIC and Macquarie.  ASIC surveillance of Macquarie began in December 2011 and when announcing the EU ASIC stated:

"ASIC found MEL had failed to address recurring compliance deficiencies that involved a significant number of its advisers". These deficiencies were initially identified by MEL’s own client file reviews dating back to 2008. Specifically, the deficiencies include instances of:

  • client files not containing statements of advice
  • advisers failing to demonstrate reasonable basis for advice provided to the client
  • poor client records and lack of detail contained in advice documents
  • lack of supporting documentation on files to determine if there was a reasonable basis for the advice provided to the client, and
  • failing to provide sufficient evidence that clients were sophisticated investors.

ASIC’s review found these deficiencies, which were not reported to ASIC, to be serious and that any remediation initiatives attempted by MEL over a four year period had been ineffective…ASIC is about ensuring investors can be confident and informed and central to this is ensuring financial services are provided efficiently, honestly and fairly…Our surveillance found Macquarie Private Wealth fell significantly short of this mark, so ASIC took action…. If the review identifies a client has been adversely impacted due to the failings of a MEL representative, then MEL is obliged to notify ASIC of the circumstances and to remediate the client where appropriate.’

This of course is the foundation of the 15 August action, the review of what ASIC saw as serious deficiencies is part of the EU and the independent expert, that expert KPMG whose work is scrutinised by Deloitte, has found significant problems in Macquarie’s regulatory compliance adherence, hence the 160,000 letters.  It leaves a question mark over whether all units and individuals throughout the Macquarie organisation always had a commitment to meeting regulatory requirements.  It should be emphasised here that ASIC believes that: ‘The EU has led to changes in MEL’s management team and internal standards.’  As part of an update to its Annual General Meeting and in a later press release, (31 July 2014) Macquarie itself had already flagged some of these changes which included: ‘Ongoing review of client files and client classification…ongoing review of all advisers (approximately 300)… ongoing client remediation…significant investment is being made in new processes, practices and systems ….technology to support the supervision and training of advisers…new adviser assessments..11,500 hours in face-to-face adviser training to date….supervised compliance knowledge assessment for advisers…providing all requested information to KPMG in its role as Independent Expert…meeting ASIC’s breach reporting requirements.’

It seems apparent that the EU is improving Macquarie’s internal regulatory compliance processes but there has been sustained criticism of Macquarie by some commentators.  A Sydney Morning Herald (SMH) article that appeared on 1 August 2014 alleged that: ‘Some financial advisers at the ‘‘millionaire’s factory’’, Macquarie Group, cheated on competency exams using a document circulated by management known as the ‘‘Penske File’’… The Penske File, named after a folder of documents featured on 90s sitcom Seinfeld, contained answers to continuing professional development examinations that advisers are required to take annually in order to keep their professional accreditation up to date.’  The next day the SMH ran another article repeating the Penske File claims and also alleging that Macquarie misclassified clients and: ‘..Macquarie’s victims tell a grimmer, simpler story of a culture that encouraged planners, motivated by the prospect of lucrative commissions, to flip clients into high-risk investments.’  Macquarie was annoyed by the claims of these SMH articles: ‘Macquarie is referring The Herald's articles to the Australian Press Council given the inaccurate, unattributed and unsubstantiated claims they contain.’

So, the tension between Macquarie and Fairfax Media simmers on with a Press Council investigation a distinct possibility.  This week another possible controversy involving Macquarie has received prominent coverage from Fairfax Media with the AFR reporting the views of former Macquarie staff that they have interviewed.  The latter allege that Macquarie distorted the Initial Public Offering (IPO) of BrisConnections toll road in 2008 by allowing a select group of wealthy clients to return more than $20 million of shares before the disastrous float when shares fell 59% on the first day of trading.  According to one quoted Macquarie insider: ‘They knew it [the IPO] was going to tank.  The changes since the EU are lipservice and the culture has stayed the same.’  Macquarie again issued a media release refuting the claims published by Fairfax Media and stressed the fluidity of the IPO process regarding stock allocations to clients.

So, the Macquarie EU proceeds and is scheduled to run until 29 January 2015.  However, it is unlikely that there will not be more media coverage of Macquarie’s role in the BrisConnections IPO.  ASIC has declined to comment on the matter but: ‘..encourages members of the public to report any potential breaches of the law.’  Senator John Williams is quoted as saying the BrisConnections IPO: ‘..has a rotten smell about it.’  Senator Williams is not only a Member of the Senate Inquiry discussed earlier, but also sits on the Parliamentary Joint Commission on Corporations and Financial Services (PJCCFS).  The PJCCFS currently is conducting an inquiry into proposals to lift the professional, ethical and education standards in the financial services industry including: ’the adequacy of current qualifications required by financial advisers; 2. the implications for competition and the cost of regulation for industry participants of the financial advice sector being required to adopt: a. professional standards or rules of professional conduct which would govern the professional and ethical behaviour of financial advisers; and b. professional regulation of such standards or rules; and 3. the recognition of professional bodies by ASIC.’

The PJCCFS inquiry is a welcome initiative as a depressing litany of scandals has ensured that standards in financial services in Australia are a high profile issue in Australia at this time.  Submissions to the PJCCFS inquiry close on 5 September 2014 and it is just one contemporary public inquiry which will be scrutinising the standards of financial services in Australia.  The current Financial System Inquiry (FSI) also is certain to be examining these issues closely before the scheduled release of its Final Report in November 2014.  In the words of the FSI’s chair Mr David Murray AM: ‘We know we need to give consumers more recourse… there seems to be a need to have a system in which there is a much higher incentive on product providers and distributors in the system to build trust with their own customers… That’s why we are looking at the regulatory arrangements, the enforcement arrangements, [and] the penalty arrangements much more closely.’  Major Australian financial institutions such as AMP and Westpac have announced that they will be significantly raising the educational and training standards of their financial planners and advisers.  So, whether in the ASIC EU deep frying pan or the fire of market competition, market dynamics and looming higher regulatory criteria will make it inevitable that Macquarie, like other financial institutions in Australia, are going to have to raise their game in terms of the standards and operational cultures of their financial planners and other financial advis

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