Could Macquarie (ASX: MQG), the investment bank unkindly or perhaps jealously nicknamed the “millionaires factory”, be the shining example by which Australia’s other big banks will need to measure themselves?
It appears so after Macquarie chief executive Nicholas Moore was asked many questions at the Hayne Royal Commission about the way it paid its senior executives and how it differed from the big four banks.
Rather than dissecting Macquarie’s performance for customers – although there was a bit of that around the use of mortgage brokers and problems at Macquarie Private Wealth – commissioner Hayne seemed most interested in the Macquarie model of paying executives low fixed salaries plus a profit share based on results.
Questions about the Macquarie model
Counsel Michael Hodge asked Mr Moore a series of questions about the Macquarie remuneration model and how it differed greatly from the big four retail banks, which usually pay bonuses as a fixed percentage of an already high salary.
Hodge: “So the way the profit sharing system is set up is a sharing of the profits between the staff and the shareholders… for example, when it comes to the way in which you are remunerated, you’re paid a fixed salary of something in the order of $800,000, a bit more. But then you receive a substantial profit share that’s deferred over a number of years?”
Moore: “That’s correct.”
The questioning of Mr Moore is interesting because by now Commissioner Hayne will be moving on from diagnosing the ills of the big banks to forming his final recommendations about how banking should be restructured in the wake of the Royal Commission.
The damning revelations around Commonwealth Bank’s (ASX: CBA) former chair David Turner’s decision not to hand back forty per cent of his board fees of $437,000 when asked to by the bank will certainly be playing on Commissioner Hayne’s mind.
As will be the many cases in which bank bosses in charge of areas that were rife with problems and scandals were still paid significant bonuses with no prospect of recovering those payments should things go seriously wrong later.
Under the Macquarie model, bonuses are not only made out of divisional profit share, they are also withheld for a number of years which boosts employee retention and allows for adjustments to be made in the case of subsequent regulatory scandals.
Mr Moore was grilled in detail over how serious problems developed at Macquarie Private Wealth and also how they were solved.
Macquarie Private Wealth employees had given inappropriate advice, didn’t keep adequate records, traded without instructions and ignored many rules.
In 2013 the corporate regulator, ASIC, imposed a strict two-year enforceable undertaking on the business.
Once Macquarie were aware of the problems, Mr Moore said they fired the managers and some stockbrokers, made a compliance report to head office, compensated clients and cut a senior banker’s pay.
Although Mr Moore had to admit that it was an interesting question about what would have happened if ASIC had not intervened to alert Macquarie to the problem, which was effectively being “hidden’’ from head office because Macquarie Private Wealth was reporting through Macquarie Equities.
Still, it would not be a surprise if some of Macquarie’s deferred profit share style of payment does not form part of the Commission’s final recommendations.
Hartzer and Shipton cop a grilling
Other witnesses before the Commission were not as lucky, with Westpac (ASX: WBC) chief Brian Hartzer and ASIC chair James Shipton both being grilled heavily.
In the end Westpac chief executive Brian Hartzer was forced to admit that the bank could not work out what proportion of a billion dollars in fees it will have to repay customers who were charged with services they never received because the records were so poor.
Integrated model under fire
That admission was even more important given that Westpac is the most determined of the big four banks to retail the bancassurance integrated model of providing financial advice and investment products.
Mr Hartzer said the bank was working on establishing a rule of thumb for refunds to customers of financial advisers who worked under the bank’s licence but were not salaried employees but that poor record keeping had made the process difficult.
Mr Hartzer insisted that Westpac could still offer compliant and high-quality financial advice but he admitted that the “economics of doing that are getting very difficult.”
He said that Westpac customers would be paid compensation on a “benefit of the doubt basis” and would be repaid fees unless the bank could prove otherwise.
Mr Hartzer said the bank expected to finish repaying customers charged for services never provided by April 2019.
Mr Hartzer said Westpac did not mind being an outlier in the sector and it didn’t always agree with the other banks or the regulator.
Shipton walks into trouble
The chairman of the Australian Securities and Investment Commission, James Shipton, walked into a trap at the Royal Commission of proving that he had too much contact with the bankers he was charged with regulating.
He also consistently fell into the poor workman’s trap of “blaming his tools’’, with constant complaints about a lack of resources contributing to ASIC’s poor record as a regulator.
Mr Shipton outlined a series of formal and informal communication with bank executives and boards and even phone calls with CEOs when a point needed to be made.
Then he was asked if these close relationship made his regulatory task harder because he had built up relationships.
Frequent talks but no notes
Mr Shipton said he and his commissioners handled these interactions professionally, although he was forced to admit that no minutes were taken.
Eventually, Mr Shipton agreed with Commissioner Hayne that it would be a good idea to have a note-taker at such meetings to keep a record of what had been said and to preserve the corporate memory within the organisation.
Mr Shipton also eventually agreed that it would be a good idea to name the companies involved in reports it did on various sectors but he defended informing companies before they were named in a report.
He said ASIC was “tough, we are resolute, we are strong, but we also apply principles of fairness and follow due process.’’
He was also heavily questioned about ASIC’s poor enforcement record.