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. 

Enforceable undertaking

As a result of the EU, MEL has implemented significant changes to its financial advice and private wealth business that include a new monitoring framework and revised controls for managing compliance risks.

ASIC received the final report from independent expert KPMG, which sets out the program of compliance reforms undertaken by MEL under the EU. KPMG has stated that 'MEL has completed all of the deliverables as outlined in the EU Implementation Plan'.

MEL has made substantial changes in management, business structure, surveillance and compliance, staff training, monitoring and supervision technology and licensee risk governance. The compliance function for MEL's advice business now reports to the Macquarie Group Compliance, rather than to MPW management.

The number of advisers in the MPW business has reduced by about 25%, and additional staff have been recruited to that business to support advisers complying with their obligations. 

The independent expert, KPMG, did extensive work under the EU by testing MEL's licensee risk framework. The testing also included assessing a sample of client advice files. KPMG has reported its findings to ASIC regularly over the past two years. 

A substantial number of the compliance reforms under the EU have been tested, and have not been subject to any negative reporting by KPMG. However, there are some areas where testing has not been completed (see Next steps below).

ASIC acknowledges a significant improvement in MEL's business overall since the compliance failures were identified that led to the EU. There have been important improvements in MEL's ability to identify and address compliance risks and issues and KPMG reports that there has been a marked improvement in risk culture. The latest testing of samples of personal advice by KPMG shows no evidence of inappropriate advice, and improvements in the quality of record keeping and advice documents.

Next steps

While there has been substantial improvements in MEL's operations, further work and/or testing of these operations is 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.

KPMG noted: 'The business and cultural changes observed throughout the EU, if supported on an ongoing basis by management and complemented by the additional ongoing work committed to by MEL, should continue to see advice quality improve, allow MEL to better manage its obligations and decrease its risk of errors or more breaches.'

This further program of work will be subject to ASIC oversight.  If ASIC does not see the expected outcomes from testing, or satisfactory improvement in the client advice files, we will consider all regulatory options.

Client remediation program and adviser investigations

Along with the compliance changes under the EU, the client remediation process begun under the EU is continuing.  It is overseen by Deloitte, and monitored by ASIC, with monthly meetings continuing. (14-201MR) MEL will provide periodic updates on the progress of the program.

ASIC is closely monitoring the client remediation process to check whether any systemic advice issues emerge that have not been identified and addressed through the EU.  If they do, ASIC will review them closely to see whether they need to be addressed through further regulatory action. 

ASIC is also continuing its investigations into some former MEL advisers.

ASIC recognises the positive actions taken by MEL under the EU. We are determined to ensure MEL's compliance with its legal obligations and will take further action if regulatory intervention is warranted.

Background

The development of the MEL work streams under the EU were subject to review by KPMG, and ASIC. They were then subject to extensive design and operational effectiveness testing by KPMG. This included actively interacting with MEL staff at all levels across the business, attending and assessing meetings and training sessions, and reviewing policies and procedures and the operation of systems. KPMG retested work that had been subject to earlier comment or recommendation, to assess changes that were made.

The KPMG report said:

'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
• upgraded services to support advisers
• reviews of compliance and risk culture within MPW; and
• broad and specific review of advice provided by advisers.