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Australia's highest-paid executive faces grilling at banking royal commission – live Asic head James Shipton faces the banking royal commission – live
(35 minutes later)
James Shipton is asked about Asic’s funding.
Orr: How do you think that ASICs resourcing compares with that of conduct regulators in other jurisdictions?
Shipton: In my own experience, I believe that ASIC is under resourced compared to some of our peers globally.
Orr: And how does the level of resourcing that you have affect the way that you perform your functions and exercise your powers?
Shipton: Well, it weighs very heavily on the regulatory choices that we have to make, because it means that we are restricted in our ability to take on matters or to pursue matters in a way that, perhaps, we would like to.
Orr: And could you explain further how that plays out, Mr Shipton? Does it mean that you are not able to investigate matters that you would like to investigate?
Shipton: It means - it would be across the - the full spectrum of our regulatory activity. We are constrained in probably every aspect of our regulatory work. It’s certainly in investigations, certainly in other matters relating to enforcement, but I would also make the case that we are constrained in our surveillance, our supervision, our important work on financial capability, and - and other work that we undertake.
Senior counsel assisting Rowena Orr QC has taken over questioning here.
She has begun by establishing what exactly Asic sees its role as, and what tools it believes it has at its disposal.
We’re back, with James Shipton, the chair of Asic, in the hot seat.
Towards the end of Nicholas Moore’s evidence, Hodge asked him what would happen to Macquarie’s profits if it was prohibited from paying commissions to mortgage brokers and brokers were only able to get paid by charging customers fees for service.Towards the end of Nicholas Moore’s evidence, Hodge asked him what would happen to Macquarie’s profits if it was prohibited from paying commissions to mortgage brokers and brokers were only able to get paid by charging customers fees for service.
Moore said he’s wasn’t sure. But, speculating, “it doesn’t sound as attractive as the current structure.”Moore said he’s wasn’t sure. But, speculating, “it doesn’t sound as attractive as the current structure.”
Hayne then interjected: “Attractive to whom?”Hayne then interjected: “Attractive to whom?”
Moore said: “I think the expression used is the ‘stick of shock’ of actually seeing the upfront fee.Moore said: “I think the expression used is the ‘stick of shock’ of actually seeing the upfront fee.
“One of the other issues discussed is whether the fee should be upfront or over the life. And our position is, we would like it … to reflect the value of [the service] being delivered, which is over the life of the loan.“One of the other issues discussed is whether the fee should be upfront or over the life. And our position is, we would like it … to reflect the value of [the service] being delivered, which is over the life of the loan.
“So there is an issue, obviously, for – if you have an offer without a broking fee versus with a broking fee – that makes a difference in the mind of the consumer.“So there is an issue, obviously, for – if you have an offer without a broking fee versus with a broking fee – that makes a difference in the mind of the consumer.
“Economically, of course, the fee is being borne.”“Economically, of course, the fee is being borne.”
So, the customer will bear the cost of the fee regardless, but Macquarie doesn’t particularly want the customer to see that fee written on a piece of paper at the point of sale, because they may lose business.So, the customer will bear the cost of the fee regardless, but Macquarie doesn’t particularly want the customer to see that fee written on a piece of paper at the point of sale, because they may lose business.
Unremarkable, I guess. That’s what all businesses do. But it’s nice to see the admission sometimes.Unremarkable, I guess. That’s what all businesses do. But it’s nice to see the admission sometimes.
We are done with Nicholas Moore now. We’ll recap the last part of that for you in this next break (the commission is now adjourned until 2pm) but it was about mortgage brokers, the products they are incentivised to sell, and what would happen if they no longer received those incentives.We are done with Nicholas Moore now. We’ll recap the last part of that for you in this next break (the commission is now adjourned until 2pm) but it was about mortgage brokers, the products they are incentivised to sell, and what would happen if they no longer received those incentives.
James Shipton from Asic is up next.James Shipton from Asic is up next.
We will see you at 2pm.We will see you at 2pm.
It has to be said that out of all the executives I have seen sit in the grilling seat, Nicholas Moore looks the most relaxed. Some could even say well-rested.It has to be said that out of all the executives I have seen sit in the grilling seat, Nicholas Moore looks the most relaxed. Some could even say well-rested.
But he did make more than $18m in the past financial year and he is finishing up next week, so I guess there is not a huge amount to lose sleep over.But he did make more than $18m in the past financial year and he is finishing up next week, so I guess there is not a huge amount to lose sleep over.
Commissioner Hayne is very, very interested in Macquarie’s remuneration system, particularly how different it is to the other banks.Commissioner Hayne is very, very interested in Macquarie’s remuneration system, particularly how different it is to the other banks.
You can see his mind ticking over.You can see his mind ticking over.
Remember, Hayne is using this round of hearings to think about how future policies ought to be constructed. Remuneration will be one of them.Remember, Hayne is using this round of hearings to think about how future policies ought to be constructed. Remuneration will be one of them.
Hayne: “I understand the remuneration system is unique to Macquarie and it has been tailored for Macquarie and its businesses. What, if anything, is generalisable from the Macquarie experience?Hayne: “I understand the remuneration system is unique to Macquarie and it has been tailored for Macquarie and its businesses. What, if anything, is generalisable from the Macquarie experience?
“Are there either principles or elements of the remuneration model that Macquarie adopts that you think yield more generalisable ideas?”“Are there either principles or elements of the remuneration model that Macquarie adopts that you think yield more generalisable ideas?”
Moore: “I think the idea of profit - a profit share is more powerful than bonus. Bonuses often relate to revenue rather than bottom line outcomes. A deferral, I think, is very important. I think deferral - to see the outcome of decisions being made in finance, as we know, decisions being made today have consequences over many years. And so making sure there is that alignment over a period of time I think is - is very important. And the third element as we’re talking about, it’s not just being driven off a financial metric; it has a broader application to all the other elements that are critically important to the success of an organisation to the success of clients.”Moore: “I think the idea of profit - a profit share is more powerful than bonus. Bonuses often relate to revenue rather than bottom line outcomes. A deferral, I think, is very important. I think deferral - to see the outcome of decisions being made in finance, as we know, decisions being made today have consequences over many years. And so making sure there is that alignment over a period of time I think is - is very important. And the third element as we’re talking about, it’s not just being driven off a financial metric; it has a broader application to all the other elements that are critically important to the success of an organisation to the success of clients.”
There is no limit to the bonuses you can be paid at Macquarie. And they are not fans of that word – they tend to call it variable remuneration.There is no limit to the bonuses you can be paid at Macquarie. And they are not fans of that word – they tend to call it variable remuneration.
But there is no limit to the variable renumeration you can be paid there. Hence – the millionaire factory.But there is no limit to the variable renumeration you can be paid there. Hence – the millionaire factory.
Hodge: “And the variable remuneration then for senior executives is set each year as a percentage of profit share?”Hodge: “And the variable remuneration then for senior executives is set each year as a percentage of profit share?”
Moore: “That’s correct.”Moore: “That’s correct.”
Hodge: “And the way in which that occurs or is fixed is by taking into account four factors?”Hodge: “And the way in which that occurs or is fixed is by taking into account four factors?”
Moore: “That’s correct.”Moore: “That’s correct.”
Hodge: “And the first of those factors is financial performance?”Hodge: “And the first of those factors is financial performance?”
Moore: “That’s correct.”Moore: “That’s correct.”
Hodge: “The second of those factors is risk management and compliance?”Hodge: “The second of those factors is risk management and compliance?”
Moore: “That’s correct.”Moore: “That’s correct.”
Hodge: “The third of those factors is business leadership, including client outcomes?”Hodge: “The third of those factors is business leadership, including client outcomes?”
Moore: “Client outcomes, that’s correct.”Moore: “Client outcomes, that’s correct.”
Hodge: “And the fourth of those factors is people leadership and professional conduct consistent with Macquarie’s code of conduct and what we stand for?”Hodge: “And the fourth of those factors is people leadership and professional conduct consistent with Macquarie’s code of conduct and what we stand for?”
Moore: “That is correct.”Moore: “That is correct.”
Macquarie is known as the “millionaire factory” because of the way it structures pay for its employees, mostly the executives. Michael Hodge is asking about that system now:Macquarie is known as the “millionaire factory” because of the way it structures pay for its employees, mostly the executives. Michael Hodge is asking about that system now:
Hodge: “In relation to executive remuneration, the way in which Macquarie executives are paid – and in fact perhaps, effectively, all Macquarie employees are paid – is quite different from the way in which employees and executives within the retail banks we’ve been dealing with are paid, as I’m sure you know.”Hodge: “In relation to executive remuneration, the way in which Macquarie executives are paid – and in fact perhaps, effectively, all Macquarie employees are paid – is quite different from the way in which employees and executives within the retail banks we’ve been dealing with are paid, as I’m sure you know.”
Moore: “Yes.”Moore: “Yes.”
Hodge: “And Macquarie has a, or employees at Macquarie have a relatively low fixed salary?”Hodge: “And Macquarie has a, or employees at Macquarie have a relatively low fixed salary?”
Moore: “That’s correct. At a senior level, that’s correct.”Moore: “That’s correct. At a senior level, that’s correct.”
Hodge: “And can you explain to the commissioner at what level is it fixed? What is the purpose that is attempted to be achieved by the particular level at which it’s fixed?”Hodge: “And can you explain to the commissioner at what level is it fixed? What is the purpose that is attempted to be achieved by the particular level at which it’s fixed?”
Moore: “It depends upon the role and the person. So it does vary role by role. And as you suggested, at junior level it’s – it’s higher than at a senior level. At a senior level, it more reflects the underlying performance of the business.”Moore: “It depends upon the role and the person. So it does vary role by role. And as you suggested, at junior level it’s – it’s higher than at a senior level. At a senior level, it more reflects the underlying performance of the business.”
Hodge: “So the way the, the profit-sharing system is set up, is a sharing of the profits between the staff and the shareholders … and the variability increases the more senior you are in the organisation.”Hodge: “So the way the, the profit-sharing system is set up, is a sharing of the profits between the staff and the shareholders … and the variability increases the more senior you are in the organisation.”
Moore: “With risk functions, central functions, that variability is less, for obvious reasons.”Moore: “With risk functions, central functions, that variability is less, for obvious reasons.”
Hodge: “And so, 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?”Hodge: “And so, 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.”Moore: “That’s correct.”
Hodge: “And if we were to, to attempt to compare it to the way in which the CEO of one of the retail banks is paid, really, they’re entirely different systems of pay. There’s no – there’s no fixed relationship between the maximum amount of variable remuneration that you can receive and the fixed salary that you receive?”Hodge: “And if we were to, to attempt to compare it to the way in which the CEO of one of the retail banks is paid, really, they’re entirely different systems of pay. There’s no – there’s no fixed relationship between the maximum amount of variable remuneration that you can receive and the fixed salary that you receive?”
Moore: “I believe our system is unique.”Moore: “I believe our system is unique.”
Following Asic’s inquiries, Macquarie asked Deloitte to undertake a “risk culture review”.Following Asic’s inquiries, Macquarie asked Deloitte to undertake a “risk culture review”.
The report painted a concerning picture about the risk culture within Macquarie Equities.The report painted a concerning picture about the risk culture within Macquarie Equities.
Hodge says: “And in your view, what did it show fundamentally about the risk culture within Macquarie Equities Limited?”Hodge says: “And in your view, what did it show fundamentally about the risk culture within Macquarie Equities Limited?”
Moore: “Well, there were a number of findings in the report. And these – I mean, I wasn’t a direct recipient of the reports, but the – the story – I don’t know if you are going to bring it up but it’s a pretty clear story of a, a lack of control, a lack of challenge. I think one of the expressions used is freedom without boundaries. That general nature of a – an environment.”Moore: “Well, there were a number of findings in the report. And these – I mean, I wasn’t a direct recipient of the reports, but the – the story – I don’t know if you are going to bring it up but it’s a pretty clear story of a, a lack of control, a lack of challenge. I think one of the expressions used is freedom without boundaries. That general nature of a – an environment.”
Hodge: “And the consequence, then, having done this licensee risk - licensee risk framework assessment – and also having the Deloitte report in relation to risk, was that Macquarie then went about attempting to make a number of changes in relation to the risk culture within that business?”Hodge: “And the consequence, then, having done this licensee risk - licensee risk framework assessment – and also having the Deloitte report in relation to risk, was that Macquarie then went about attempting to make a number of changes in relation to the risk culture within that business?”
Moore: “Certainly.”Moore: “Certainly.”
Hodge: “And some of those changes were structural changes?”Hodge: “And some of those changes were structural changes?”
Moore: “That’s right … we changed the management, obviously, of the organisation; we changed compliance reporting, we made it report centrally.Moore: “That’s right … we changed the management, obviously, of the organisation; we changed compliance reporting, we made it report centrally.
“We embarked on a whole range of new systems, processes and procedures in terms of how the business managed itself and, of course, as part of the EU [the enforceable undertaking from Asic] we sought to compensate any clients who may have suffered.”“We embarked on a whole range of new systems, processes and procedures in terms of how the business managed itself and, of course, as part of the EU [the enforceable undertaking from Asic] we sought to compensate any clients who may have suffered.”
Moore says a number of Macquarie staff lost their jobs as a consequence, including the senior executive responsible for that business line (the executives also saw their variable remuneration halve).Moore says a number of Macquarie staff lost their jobs as a consequence, including the senior executive responsible for that business line (the executives also saw their variable remuneration halve).
Gareth is doing you up a post about some of the issues with Macquarie which have been previously identified.Gareth is doing you up a post about some of the issues with Macquarie which have been previously identified.
Michael Hodge has moved on to asking Nicholas Moore about Macquarie’s’ culture with dealing with those issues.Michael Hodge has moved on to asking Nicholas Moore about Macquarie’s’ culture with dealing with those issues.
Moore: “We have one of our key tenets is accountability and key principles in terms of how we run our business.”Moore: “We have one of our key tenets is accountability and key principles in terms of how we run our business.”
Hodge: “And what does that mean, exactly?”Hodge: “And what does that mean, exactly?”
Moore: “We say to every person in the business they’re accountable for the outcomes that they deliver, particularly for business managers. So every business manager is accountable for all the outcomes of the business. And so that’s a – all the outcomes, financial outcomes, conduct outcomes, regulatory outcomes, client outcomes, all the outcomes.”Moore: “We say to every person in the business they’re accountable for the outcomes that they deliver, particularly for business managers. So every business manager is accountable for all the outcomes of the business. And so that’s a – all the outcomes, financial outcomes, conduct outcomes, regulatory outcomes, client outcomes, all the outcomes.”
Okay, so we can see where Hodge is going here.Okay, so we can see where Hodge is going here.
He says in 2012 Asic identified some advice misconduct and cultural failings at Macquarie Private Wealth – which is Macquarie’s wealth management/financial advice arm.He says in 2012 Asic identified some advice misconduct and cultural failings at Macquarie Private Wealth – which is Macquarie’s wealth management/financial advice arm.
Asic had become concerned about what was happening inside Macquarie Equities, where its stockbrokers were evolving also giving financial advice.Asic had become concerned about what was happening inside Macquarie Equities, where its stockbrokers were evolving also giving financial advice.
Moore confirms some of the things Asic was concerned about.Moore confirms some of the things Asic was concerned about.
Hodge says: “Compliance with obligations regarding the provision of personal advice?Hodge says: “Compliance with obligations regarding the provision of personal advice?
Moore: “That’s correct.”Moore: “That’s correct.”
Hodge: “Whether representative conduct had been dealt with consistently and appropriately?Hodge: “Whether representative conduct had been dealt with consistently and appropriately?
Moore: “That’s correct.”Moore: “That’s correct.”
Hodge: “The adequacy of record-keeping?”Hodge: “The adequacy of record-keeping?”
Moore: “That’s correct.”Moore: “That’s correct.”
Hodge: “The effectiveness of monitoring and supervision?”Hodge: “The effectiveness of monitoring and supervision?”
Moore: “That’s correct.”Moore: “That’s correct.”
Hodge: “Whether compliance, training and education had taken place?”Hodge: “Whether compliance, training and education had taken place?”
Moore: “That’s correct.”Moore: “That’s correct.”
Hodge : “The identification recording assessment and reporting of breaches?”Hodge : “The identification recording assessment and reporting of breaches?”
Moore: “Yes.”Moore: “Yes.”
Hodge: “We can see that there now. And whether Macquarie Equities management had failed to foster and maintain a proper commitment to and culture of compliance?”Hodge: “We can see that there now. And whether Macquarie Equities management had failed to foster and maintain a proper commitment to and culture of compliance?”
Moore: “That’s correct.”Moore: “That’s correct.”
Again, a change in core operations – from a stock brokerage to an advice business – appears to have been one of the main drivers of problems.Again, a change in core operations – from a stock brokerage to an advice business – appears to have been one of the main drivers of problems.
The business didn’t move as fast as it should have in making that change, Moore said.The business didn’t move as fast as it should have in making that change, Moore said.
We open by talking about one aspect of Macquarie’s business dealing, Macquarie Equities Limited, which is basically a stock brokerage.We open by talking about one aspect of Macquarie’s business dealing, Macquarie Equities Limited, which is basically a stock brokerage.
It contributed 0.5% of Macquarie’s profit in 2013, which is not a huge amount. So it is interesting that this slice of the business is what the commission wants to concentrate on.It contributed 0.5% of Macquarie’s profit in 2013, which is not a huge amount. So it is interesting that this slice of the business is what the commission wants to concentrate on.
Now it’s on to the private wealth arm.Now it’s on to the private wealth arm.
Just how big is Macquarie?Just how big is Macquarie?
It is operating in more than 25 countries. It has a market capitalisation of $39bn and consolidated net assets of just over $18bn.It is operating in more than 25 countries. It has a market capitalisation of $39bn and consolidated net assets of just over $18bn.
It also manages about $500bn. That’s half a trillion dollars’ worth of assets.It also manages about $500bn. That’s half a trillion dollars’ worth of assets.
So, big.So, big.
It’s now time for Australia’s highest paid chief executive, Nicholas Moore, who heads up Macquarie, to take the stand.It’s now time for Australia’s highest paid chief executive, Nicholas Moore, who heads up Macquarie, to take the stand.
Moore received a total reported renumeration of $18.9m in the last financial year, after Macquarie posted a $2.6b profit.Moore received a total reported renumeration of $18.9m in the last financial year, after Macquarie posted a $2.6b profit.
He will be stepping down as the CEO at the end of next week, after 32 years with the bank.He will be stepping down as the CEO at the end of next week, after 32 years with the bank.