EY review of Macquarie’s financial planning arm a sham: ASIC

The Australian 12:00am April 20, 2017

Ben Butler

A review of Macquarie Group’s financial planning arm commissioned by the banking major and carried out by big four accounting firm EY was a “sham”, according to a senior investigator at the corporate watchdog.

Adrian Borchok, a senior manager in the Australian Securities & Investments Commission’s enforcement team, made the comment to colleagues in January 2013, after a probe by the watchdog found “recurring ­compliance deficiencies” that had gone on for years at Macquarie’s wealth arm, Macquarie Equities Limited (also known as MEL or Macquarie Private Wealth).

His frank assessment, together with material illustrating the difficulties the regulator had dealing with Macquarie, is revealed in a trove of documents obtained from ASIC by The Australian under Freedom of Information laws.

The documents show how ASIC allowed big banks including Macquarie input into the drafting of press releases dealing with financial services misbehaviour.

However, there is no indication Macquarie had any input into a press release dealing with the compliance failures Mr Borchok and others were investigating.

In January 2013, ASIC accepted a two-year enforceable undertaking from Macquarie, under which the company agreed to hire an independent expert to oversee a clean-up of the trouble-plagued financial advice business.

The regulator later ordered Macquarie to contact 160,000 customers potentially affected by shoddy advice and the company has so far paid more than $20m to compensate clients, according to an ASIC report issued last month.

ASIC found Macquarie knew about problems at the financial advice division as far back as 2008 through regular file review but did not report them to ASIC and “any remediation initiatives attempted by MEL over a four-year period had been ineffective”.

It is believed quality checks carried out by Macquarie showed extremely high compliance failure rates. The ASIC documents show that Macquarie also hired accounting major EY (formerly known as Ernst & Young) to review their compliance system.

However, it is believed ASIC investigators were not satisfied with the result, feeling the EY review was too favourable to Macquarie given the poor raw data.

By mid-December 2012, Macquarie was moving towards signing an enforceable undertaking with ASIC over the scandal, and officers at the regulator were turning their minds to crafting a press release. Commissioner Peter Kell, who is responsible for overseeing ASIC’s project to clean up financial planning, was closely involved in the process.

On December 12, Mr Borchok emailed a draft press release to other ASIC staff involved in the case, including the senior executive responsible for financial services, Louise Macaulay.

“I have not included the usual line acknowledging the ‘co-operative approach taken by MEL in relation to this matter’ because I did not view this as being particularly co-operative despite their repeated attempts to tell us they are,” he said in the email.

“The outcome was inevitable rather than as a result of any real co-operation.”

On January 25, commenting on a revised draft of the press release, Ms Macaulay asked Mr Borchok: “In para 5 do we really want to say ‘superficial’, as MEL did engage EY to do a review of their compliance system”. Mr Borchok responded: “I think the use of ‘superficial’ is appropriate because it reflects the situation. Further, the EY review was a sham therefore they are getting off easy with ‘superficial’.”

Because the documents provided to The Australian under FOI do not include the draft press releases that were under discussion, it is not possible to determine in what context the word “superficial” was used. However, the word does not appear in the final press release issued by ASIC, as published on its website.

“I cannot believe ‘superficial’ was removed!” Mr Borchok said in an email to a colleague sent in the afternoon of January 25.

Earlier, Mr Kell told staff, including Ms Macaulay, he was concerned the draft press release wasn’t specific enough. “My broadest comment goes to the way in which we’ve explained the nature of Macquarie’s problems,” Mr Kell said in a January 24 email.

“Many journalists (and others) will read this and say ‘ ... yes ASIC, but what exactly did they do wrong’? What are the ‘serious recurring deficiencies’ that you (ASIC) refer to several times? Attempted remediation wasn’t adequate … remediation of what?”

ASIC and EY declined to comment. A Macquarie spokeswoman declined to answer The Australian’s detailed questions. “Macquarie takes its regulatory obligations seriously and endeavours to engage with all of its regulators, including ASIC, in a respectful and appropriate manner at all times,” she said.