By George Gilligan, UNSW

SYDNEY: 19 February 2015 - Friday the 13^th is traditionally seen as an inauspicious date and Friday 13^th February 2015 was a day that The Big Mac bank Macquarie Group Limited (MGL) will remember ruefully. This is because the Australian Securities and Investments Commission (ASIC) issued a media release which has the effect of keeping the compliance training wheels on Macquarie Equities Limited (MEL), a subsidiary of MGL. ASIC stated that:

‘ASIC has confirmed the finalisation of the two-year enforceable undertaking (EU) entered into by Macquarie Equities Limited (MEL) on 29 January 2013 (13-010MR). The EU aimed to address ASIC's concerns about systemic deficiencies in MEL's compliance with financial services laws under its AFS licence, operating under the name Macquarie Private Wealth (MPW). ASIC and MEL have agreed to a program of further work by MEL over the next 12 months, including continued reporting to ASIC. As part of this, MEL has also agreed to appoint KPMG to undertake further testing. This is in addition to the ongoing work on MEL's client remediation program and ASIC investigations into certain former MEL advisers.’

The fact that a two year program overseen by independent monitor KPMG is insufficient time to iron out to a satisfactory level the systemic compliance deficiencies that prompted the EU of 29 January 2013 between ASIC and MEL, is an indicator of how deep-rooted the problems at MEL have been. In its 13 February 2015 media release ASIC praised the fact that there had been substantial improvements in MEL's operations, but noted that:

‘..further work and/or testing of these operations was required for two reasons:

1. A limited number of the compliance reforms that have been implemented under the EU have not yet been subject to operational effectiveness testing by KPMG, either because the work becomes operational after 29 January 2015 or because there has been insufficient time to form a conclusion.
2. KPMG's review of a sample of client advice files shows there are some issues in the quality of records of advice. Further improvements are required, specifically in the key areas of recording the advice given, recording advice on consideration of alternative products and providing appropriate details of replacement products. While client advice files have shown a significant improvement since the EU's start, the level of gaps in the advice files needs further improvement to allow MEL to better manage its advice risk.

MEL and ASIC have agreed to a program of continued engagement with ASIC and KPMG over the next 12 months. During this time, KPMG will:

• conduct the remaining operational effectiveness testing for the projects under the EU and report back to ASIC;
• assess and report to ASIC on the sustainability of the changes from the EU;
• assess the quality of the advice and advice files of MEL advisers for two separate periods over the 12 months.’

Thus ASIC is saying in effect to MEL that its compliance improvements are still inadequate in areas of advice given, how that advice is recorded and its propensity to provide detailed advice for alternative products. This is deeply embarrassing for MEL and the Macquarie Group generally. This of course is happening as the process continues of MEL writing more than 160,000 letters to those clients MEL has had since it obtained its AFSL [Australian Financial Services Licence] on 1 March 2004, inviting them to express their concerns regarding the quality of advice that they received from MEL, and responding to the content of replies received. This intermediation process is being overseen by Deloitte, monitored by ASIC and involves regular monthly meetings to evaluate progress. Nevertheless it is not all bad news for MEL and ASIC confirms that the report from KPMG detailed a range of improvements made by MEL:

'MEL has expressed and demonstrated a commitment to making the required organisational and personnel changes to drive the desired results. In executing the Implementation Plan, MEL has made substantial changes to policies, processes, systems and the overall way it operates its business… We have seen positive evidence that these changes have improved MEL's overall business and its ability to identify and address compliance risks and issues…The work covered these key areas (among others):

• a revised program for supervision and monitoring of advisers
• changes to the way MPW defines and manages advice risk in its business
• review of Conflict of Interest policy and its use
• reporting, investigation and management of breaches
• new sets of policies for the provision of advice and extensive adviser training on those policies.’

The regulatory strife that MEL has been in with ASIC has not dampened Macquarie Group’s general financial performance. On 18 February 2015 at an operational briefing to analysts Macquarie Group chief executive Nicholas Moore indicated that Macquarie: ‘…expects full-year profits to come in at the “upper end” of its forecast range of $1.4 billion to $1.52 billion for its financial year which ends on March 31.’  This seeming disconnect between public outrage allied with regulatory opprobrium, in comparison to industry analysis and stock market performance, is actually not unusual. For example, despite Australia’s largest bank, the Commonwealth Bank of Australia (CBA) having a regulatory annus horribilis in 2014 due to the poor behaviour of financial advisers within two of its subsidiaries, Commonwealth Financial Planning Limited (CFPL) and Financial Wisdom, CBA continued to achieve record levels in terms of its performance on the Australian Securities Exchange (ASX). The lack of financial market reaction to the scathing criticism of CBA by the Senate Economics References Committee: ‘That a major financial institution could have tolerated for so long conduct that included apparent criminal behaviour is not easy to accept..’, was commented on by Justin Bratling, chief investment officer of Watermark Funds Management. Following the release of the damning Senate Committee Final Report Bratling noted that: ‘There was not a single research note written during the week from any of the analysts…and for a company that has generated $9 billion worth of profit this year, the advisory business is very small. It’s a rounding error really in the overall profitability of the bank.’

This is the economic realpolitik within which a regulator such as ASIC must operate and it helps to explain why EUs are a favoured regulatory response. It is the canvas against which specific regulatory mechanisms such as ASIC’s EU with MEL should be viewed. EUs do have the capacity to change the behaviour of organisations and the evidence from KPMG’s monitoring reports is that this is clearly happening, if not yet as quickly or as completely as desirable. It is important to remember that EUs can be an extremely cost-effective mechanism in comparison to the fiendishly expensive path of complex litigation against corporate actors with very deep pockets. ASIC is still investigating former MEL advisers so prosecutions may yet emerge. Also EUs may not only bring timely resolutions to compliance issues thereby conserving valuable and finite regulatory enforcement resources, but may also smooth pathways to restitution and compensation. It appears that this latter route remains open and is progressing as part of the Deloitte/ASIC monitored intermediating mechanism that has been part of MEL’s EU with ASIC. The regulatory compliance training wheels seem to be still firmly on MEL and that is something which MEL’s aggrieved clients and the broader Australian community should be appreciative of.