Why ASIC’s blockbuster Macquarie legal action should set alarm bells ringing

Macquarie has clashed with ASIC four times over the past year on serious compliance failures. Picture: Britta Campion

The corporate regulator’s blockbuster legal action against Shemara Wikramanayake’s Macquarie Group has exposed worrying gaps in the investment bank’s famed “three lines of defence”.

Even more worrying, ASIC’s allegations over Macquarie’s failure to correctly report and fix its short selling data over a decade is a warning sign of the hubris that has started to drift into the bank around non-financial risks.

This should put Macquarie’s top executives, including Wikramanayake, under intense pressure similar to what former ANZ boss Shayne Elliott faced when it came to his bank’s missteps around trading room culture and non-financial risks. Hubris and leveraged financial institutions make for a terrible combination.

At the very least, Macquarie’s board needs to sharpen its message to the investment bank’s CEO and her executives over potential failures: That message is Macquarie’s big pay cheques also come with big accountability.

Macquarie chief executive Shemara Wikramanayake. Picture: Bloomberg

In a NSW Supreme Court filing, ASIC alleges the investment bank failed to fix its short sale reporting system despite several reviews into the platform. This allowed the wrong trades being reported for as much as a decade, covering a staggering 1.5 billion transactions.
If the case is successful, ASIC could seek a penalty in the hundreds of millions of dollars. Macquarie hasn’t filed a defence, but is reviewing the allegations. The investment bank noted that it self reported the issue to ASIC in late 2022.

This is Macquarie’s fourth, and by far most serious, public run-in with ASIC in just 12 months. The most recent came last week when the regulator was forced to place tougher conditions on the bank’s financial services licence due to market compliance reporting problems with its futures and derivatives trading platform.

For ASIC, Macquarie is a repeat offender on the same issue: Problems in compliance systems or policies and the bank is slow to do anything about it – even after being warned.

There is a bigger concern within ASIC that as Macquarie has pushed into new areas globally and navigated frontline market shocks, it has become complacent in other areas.

“Macquarie are a very successful institution within the Australian economy and globally,” ASIC chairman Joe Longo told The Australian.

“Over the years, what crept in here is a kind of hubris where they just haven’t taken seriously enough issues that have been raised with them – not only by us but by other regulators – about the systems and processes, and the compliance,” he said.

“Until that gets rectified and taken more seriously, I think ASIC is entitled to be a little sceptical that things aren’t going to change at Macquarie (and) we’ve taken this action.”

Macquarie prides itself on the risk model of the so-called three lines of defence which puts responsibility of risk on each of the business units. Oversight of group-wide risk and an internal audit provide the third line.

ASIC chair Joe Longo. Picture: Colin Murty

However in this case, a known systemic problem allegedly continued for years, unchecked by each of the lines of defence. Although the allegations centre on the reporting of data rather than trading risks, they still have serious implications.

The first is that the mere suggestion of a problem around the quality of trading data should have been enough for Macquarie to act. After all, where there’s a failure in monitoring systems, it begs the question: what other consequential risks could be sitting on the balance sheet that we don’t know about?

However, the bank allegedly ignored these warnings.

The second implication is poor disclosure over short selling then becomes a broader market integrity issue for the regulator.

This measure that was part of a regulatory package on short selling in response to the global financial crisis. Ironically, Macquarie was among the biggest winners from the disclosure regime, given that it was being targeted by hedge funds at the time.

Macquarie chairman and former Reserve Bank governor Glenn Stevens last week acknowledged the investment bank has to do better on compliance.

While Stevens was speaking about the futures disclosure skirmish, he admitted these alone were serious obligations in terms of reporting and market integrity.

“Macquarie wasn’t good enough here. And when that happens, you have to own that. We will fix it,” he said.

Macquarie clearly needs to go beyond that. Fixing relations with its regulator would be a good start.

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