Macquarie Private Wealth Australia · Macquarie Private Wealth Australia Independent Risk Culture...

Macquarie Private Wealth Australia

Independent Risk Culture Review

Final Report

May 2013

Confidential & Commercially Sensitive

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Contents

Executive Summary 3

Areas of Strength 11

Theme 1 – Inertia 13

Theme 2 – Risk insight clouded 21

Theme 3 – Freedom without boundaries 29

Theme 4 – Short-term focus 35

Theme 5 – Sidelined risk function 45

Appendix 1 – Data sources 49

Appendix 2 – Tier 1 Analysis 53


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Executive Summary

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Establishing a strong and enduring risk, compliance and control culture requires a dual focus on both “hard” and “soft” dimensions. Challenges that will likely require special

focus include.

‘Hardware’ ‘Software’

Executive Summary

The Risk Culture Review has identified systemic failings across MPW’s risk mindsets and behaviours, with issues found across all risk indicators. The extent of the challenge

is greater than those identified during other Risk Culture Reviews.

Key findings have been grouped into five inter-relating themes

1. Inertia – At multiple levels, people are disinclined to shift the status quo; as a result the business has failed to adapt to changes in its environment

2. Risk insight clouded – MPW does not identify, share or analyse information effectively to develop insight on risks facing the business

3. Freedom without Boundaries – ‘Freedom’ and individualism are core values, creating difficulties such as executing a cohesive and effective risk governance model

4. Short-term focus – Overwhelming emphasis on short term performance over longer-term, sustainable business performance and reputational standing

5. Sidelined Risk Function – The risk function has been ineffective at strengthening a culture in MPW that values and instils good risk and compliance practice

Key Findings

Challenges to Remediation

Addressing ASIC’s concerns will require significant change to MPWs formal organisational and governance mechanisms, however these will fail unless an equal

and aligned focus is applied to resolving the identified risk culture weaknesses, and there is immediate focus on creating the right conditions for change

Organisation

• A number of organisational weaknesses

undermine the ability to drive change;

e.g., flat leadership structure

Leadership

• Lack of capacity, capability, role clarity

• Lack of leader alignment and ‘learned helplessness’

Mindsets & Behaviours

• Immediate focus on FoFA for July 1, communications are silent on the EU fuelling potentially destabilising anxiety

• MPW is unused to and unprepared for large scale change and impaired by uncertainty around strategic direction

• ‘Client is the Adviser’ mindset that may undermine the ability to consistently deploy change

Formal organisational and governance

mechanisms that are intended to control

individual behaviour

Individual and collective values, beliefs, mindsets and behaviours

Independent Risk Culture Review of MPW Australia within scope for the Enforceable Undertaking (EU)

Summary


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Context

The Risk Culture Review is based on Macquarie’s Risk Mindsets & Behaviours (RMB) methodology.

This report outlines the findings from the Independent Risk Culture Review within MPW Australia

Methodology

Risk

Culture Survey

• 86 questions to gain

perspective on

prevalence of risk-

related behaviours

• 468 Responses (79.4%)

Behaviour

Interviews

• Interviews to observe

risk behaviours &

perceptions

• 77 interviews across

levels, roles & 5 states

Organisation

Mechanisms Review

• Mechanisms review to

understand how the

reinforce risk behaviour

• 125 artefacts reviewed

Deep

Structured Interviews

• Interviews to identify

mindsets & root causes

driving risk behaviours

• 43 interviews across

levels, roles & 5 states

Fact

Based Analysis

• Targeted analytics to

reinforce understanding

of predicted root causes

where necessary

Tier 1 Tier 2

• This report provides a synthesis of observable risk behaviours and root-causes identified with evidential examples from the data points described on page 6

• The purpose of this report is to facilitate the playback of analysis and findings to enable reflection and establish issue ownership among MPW leadership and other key

stakeholders

• The next step in the review methodology is to define specific remediations to address the root causes identified through this review

• The risk culture remediations provide specific detailed design considerations for the EU Implementation Plan deliverables and the overarching change strategy

Overview

Interpreting Findings

Final Report

Objectivity • The risk culture assessment methodology leverages a number of different techniques and data sources to provide objective insights and

negate the potential influence of individual reviewer unconscious bias

Perception Vs. Fact • Many of the presented insights are collated through interviews and reflect the observations, perceptions, beliefs or values of individuals in MPW

– these are presented as perception

• Where possible fact-based analysis has been employed to evidence, substantiate or understand pervasiveness of these perceptions

EU Context • Assessing risk culture in the context of a recent EU may amplify negative perceptions and subsequent conclusions

• As noted above, the methodology employed in this review leverages fact-based data such as organisational mechanisms, risk outcomes and

quantitative analytics to validate and further understand perceptions. All high level conclusions take into account a range of data to minimise

the impact of contextual bias


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Data Sources

26 52 22

The report uses a number of tools and evidential examples from the data sources to support conclusions

Overview of Data Sources*

*A more detailed explanation of data points is included in the Appendix 1

Organisation Mechanism Reviews

• A review of MPW business policies, processes,

procedures and enabling systems has been

conducted to understand how these reinforce a

clear expectation of behaviour

• Artefacts were evaluated against the Risk Mindsets

& Behaviours Framework

That’s where it helps when you work

with a planner – they can do the

compliance and planning.

Risk Culture Survey

• Numbers represent percentage distribution of

responses, excluding the responses of those who

answered ‘N/A’.

• Unless otherwise stated, the graph relates to all

respondents

People in MPW are inclined to take excessive risk

Agree, Strongly

agree

Neutral Strongly disagree,

Disagree

Behaviour Interview Analysis

• Numbers represent the different categories of risk

behaviours identified (detrimental, developing and

desirable) as ‘more like MPW’ when an

interviewee was questioned on a given Risk

indicator

Interview Comments

• Quotes from the survey, behaviour, and deep

structured Interviews have been illustrated in

speech bubbles

• These verbatim quotes have been extracted from

notes taken during interviews

• Demographic information has not been provided to

protect the confidentiality of interviews

23 29 28

“Behaviours relating to incentives and consequences”

Desirable Developing Detrimental

%

distribution

%

distribution

Fact Based Analysis

• Hypothesis-based analysis has been used to

confirm if perceived behaviours are actually

occurring and to draw insight of knock-on effects

Driver Trees

• Driver trees were used to synthesise codified

analysis of interviews and illustrate the underlying

root causes of each theme and subtheme


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Key Findings

Findings from the Risk Culture Review have been grouped into five inter-relating themes

1. Inertia | At multiple levels, people are

disinclined to shift the status quo; as a result

the business has failed to adapt to changes in

its environment

3. Freedom without boundaries | ‘Freedom’

and individualism are core values, creating

difficulties such as executing a cohesive and

effective risk governance model

4. Short-term focus | Overwhelming

emphasis on short term performance over

longer-term, sustainable business

performance and reputational standing

5. Sidelined risk function | The risk function

has been ineffective at strengthening a

culture in MPW that values and instils good

risk and compliance practice

2. Risk insight clouded | MPW does not

identify, share or analyse information effectively

to develop insight on risks facing the business

Self-

perpetuating

cultural drivers

Management

style and

decisions

Freedom

without

boundaries

Sidelined

risk function

Short-term

focus


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Summary of insights

1 | Inertia

At multiple levels, people are disinclined to shift the status

quo; as a result the business has failed to adapt to changes in

its environment

Impact

• Regulatory consequences with significant costs and reputational damage

attached

• Failure to respond effectively to external expectations e.g. FoFA

• Recurring failure to uphold internally-set standards

• Challenge for MPW to effectively mobilise and embed the required

changes of the EU implementation plan

Key drivers

A. Leaders do not drive change

B. Learned helplessness prevents people at multiple levels from trying to

initiate change

C. Advisers are unmotivated to spend time improving their compliance

capability

2 | Risk insight clouded

MPW does not identify, share or analyse information

effectively to develop insight on risks facing the business

Impact

• Gaps in senior leader appreciation of serious risk management

inadequacies

• Exposure to unacceptable levels of unmitigated risk

• Inability to respond proactively to risk issues

Key drivers

A. Information flow is stymied

B. The organisation has weaknesses across a range of capabilities that would

improve its ability to recognise and appropriately respond to issues

C. Failure to challenge and ineffective escalation

Theme 1 and 2 are self-perpetuating and multi-faceted aspects of the culture that will be challenging to shift


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Summary of insights

3 | Freedom without boundaries

‘Freedom’ and individualism are core values, creating

difficulties such as executing a cohesive and effective risk

governance model

Impact

• Principle that ‘the client is the adviser’ undermines MPW ability to establish

and maintain minimum standards regarding compliance and quality of

advice

• Difficulty providing appropriate and standardised tools and processes to

facilitate effective and efficient compliance outcomes

• Challenging to align, influence and hold people accountable for shared

organisational goals – e.g., management of reputational risk

• Inability to capture benefits of a more team-based environment including

peer review, coaching and tailored training

Key drivers

A. Organisational model and capabilities result in few explicit boundaries

being set across the business

B. There is little acceptance by many Advisers for the (few) boundaries

that are set

4 | Short term focus

Overwhelming emphasis on short term performance over

longer-term, sustainable business performance and

reputational standing

Impact

• A one dimensional driver of revenue among advisers, in some cases

resulting in decisions that compromise integrity, client's interests and

Macquarie’s reputation

• Tight cost management and lack of investments in systems and people

• Multiple ‘band-aid’ solutions that, over time, have simultaneously decreased

effectiveness and increased the cost of compliance relative to peers

• Lack of selectivity on recruitment and acceptance of advisers with

questionable reputations

Key drivers

A. Leaders are regarded as overwhelmingly short-term revenue and cost

focused

B. Adviser/broker culture exacerbates over-emphasis on revenue

C. Broader Macquarie and industry environment places extreme focus on

financial targets without adequate balance on other goals

Themes 3, 4 and 5 are reinforced by a combination of management factors, but possibly less challenging to address than Themes 1 and 2


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Summary of insights

5 | Sidelined risk function

The risk function has been ineffective at strengthening a

culture in MPW that values and instils good risk and

compliance practice

Impact

• Ineffective management of issues, allowing them to reoccur

• A dogmatic approach to risk management that fails to respond

appropriately to changes and needs of the business

• Emphasis on monitoring rather than analysis and insight meaning that

material risks may not be identified

Key drivers

A. The risk function is unable to effectively influence the business

B. Risk staff are not incentivised to drive genuine impact

Themes 3, 4 and 5 are reinforced by a combination of management factors, but possibly less challenging to address than Themes 1 and 2


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Areas of strength

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Strong client orientation amongst a core group of advisers,

particularly Financial Planners

Areas of strength

New leadership recognised as a strong symbol of change

• Financial Planners recognise that long term client relationships are critical to

the sustainability of their business models

• Planners are more focused on compliance activities, evident in the number of

breaches received relative to brokers (see chart below)

• Many planners welcome FoFA changes and the resolution of issues raised in

the EU, providing a capability and behaviour foundation to build upon

• New MPW leadership and direction have set the stage for transformational

change

• Most people recognise the EU as a catalyst for greater focus on risk and

compliance

This kind of regulatory change is a

once-in-a-lifetime opportunity. It’s an

opportunity because it’s a good thing for

clients. So the question is, how do we

make the most of this opportunity?

Financial Planners are very strong at

Risk and Compliance. They come from

a background where all plans are written

by Para-planners before advice is given,

so record keeping, keeping file notes

etc. is embedded in their culture

There has been a lot more engagement

with advisers post EU Because of the EU people’s behaviour

is starting to change…Whether it’s

because of Bill and Greg Ward watching

or whether they feel personally

responsible because of the EU... there

has been a big change since December.

Recognition of need for change has led to some emerging teaming

and collaboration

• Some Adviser recognition of the need for strategic solutions to FoFA – e.g.

Brokers partnering with Financial Planners

• Positive examples of ‘Informal’ teams and networks operate within larger offices

That’s where it helps when you work

with a planner – they can do the

compliance and planning.

I partner up with a Financial Planner… I

have a strong belief that we're better off

offering a holistic service to clients

I want to be a better stockbroker - to do

this, I need more technical training in my

area and to complement this by

partnering up with a Financial Planner.

Whilst the focus of the Risk Culture Review has been on identifying improvement opportunities, some strengths emerged for MPW to build upon

Average breaches per person 2012*

Until Bill started it was the wild west

Advisers are there to look after their

clients – they will put them first, do the

best thing

FOFA is exciting. It’s the last cleanup.

The downturn in the market has already

done an initial hosing down, and now it’s

time for the final cleanup

I think they [advisers] can change – I

have seen this post EU and with FoFA

requirements. I’ve actually been

surprised to see some able to adapt

* Based on a headcount of 60 Financial Planners, and 320 Brokers obtained from staff

listing as at 6/12/12

0.76

0.08

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

Brokers Planners


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Theme 1: Inertia

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2339 38

50 40 10

1

2

3

4

5

2011 2012 2013

J M A M J J A S O N D F Mar A M J J A S O N D J M F

Inertia – Impact

Few organisational levers have proven effective at driving a

change in behaviour amongst certain advisers

The consequence of inertia has

been paralysis on key issues

View that risk management policies have been

slow to adapt to internal and external changes

Impact of ‘inertia’

• Regulatory consequences with significant costs and reputational damage attached

• Failure to respond effectively to external expectations e.g. FoFA

• Recurring failure to uphold internally-set standards

• Challenge for MPW to effectively mobilise and embed the required changes of the EU

implementation plan

Risk

All

MPW is quick to adapt its risk management policies,

processes and procedures as significant changes occur

in the business Adviser View (esp.

from risk

staff) that

adaptability

in risk

function is

slow

Certain

advisers

continue to

breach over

and over

Selection of Most Frequent Breachers, Number and Distribution

of Breaches, Mar 2011 – Mar 2013

At multiple levels people are disinclined to shift the status quo; as a result, the business has failed to adapt to changes in its environment

Risk Culture Survey results, % distribution

Agree, Strongly

agree


Disagree

People are too scared to change the

model...and we now have an EU which is

costing an enormous amount.

We've struggled

and lost

enthusiasm for

fighting.

-Risk

The change in

mindset required

is [our] biggest

challenge.

MPW tried to change and the problem was

resistance to change - it was quite real –

from leadership and management levels,

through to the practitioners.

Leaders do understand the

issues/concerns, but they don't want to

significantly change the culture or invest

lots of money and commitment to execute

change. Although the breach process is arguably flawed, the data illustrates that when

breaches are issued, this does not change behaviour amongst the worst offenders


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Inertia – Drivers A

Inertia Learned helpless-

ness

Change impetus at leadership

level is weak

Low discretionary

effort

Lack of insight into

need for change

Lack of a unifying purpose to drive change

Difficulty creating a compelling, cohesive vision

Belief that trying to get advisers to conform will be fruitless

Influential State Management level creates localised identity and focus, and a barrier to higher level, division-wide purpose

Flat leadership organisation structure, geographic spread and size of business decreases practicality of personal leadership engagement

FOFA, EU and general external environment have made it difficult to predict ‘what the future holds’ for people in MPW

Many individual cultures (e.g. Brokers vs Planners, team ‘acquisitions’) difficult to reconcile into a single compelling vision and purpose

Highly independent values of adviser population somewhat ‘at odds’ with creating a single vision

Fear that advisers who don’t buy-in to the vision may choose to leave (and take all their clients with them)

See ‘Risk Insight Clouded’ driver tree

No accountability for longer-term goals

Organisation structure

Personal ‘ownership’ of longer-term goals is weak

Central staff who receive profit share are incentivised based on short-term BHAG

achievement

Very strong focus by senior leaders on BHAG gives impression it is the ‘only thing that matters’

Past experiences of being guided to prioritise short-term BHAG leads to perception that this is a general principle

Little articulation of who is accountable for longer-term goals

Intense focus on BHAG undermines prioritisation of longer-term goals

Perception there are few consequences for failing to meet longer-term goals

Diffusion of accountabilities across multiple committees undermines individual accountability

In some cases, ‘empire building’ in head office roles has resulted in diluted focus in key functions that should be more focused on longer-term outcomes

Management structure inhibits decision making

Barriers to decision making

Interpersonal styles a barrier to achieving alignment

Difficulty achieving agreement across complex web of committees and individual

stakeholders

Scope of role/concentration of control makes it unfeasible for senior leaders to be

across everything in a timely manner

Strong personalities that overpower discussions, leading to ‘agreement’ in meetings,

but not genuine buy-in

In some people/situations, a preference to avoid open conflict, resulting in avoidance

rather than honest conversations

1

2

1

Key drivers

Branches over page See evidence under corresponding

number on following page n Theme 15


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23 21 57

29 14 57

26 52 22 52

30 23 47

Inertia – Evidence A

Little impetus to set aspirations to improve risk and

compliance if it might result in lower financial performance

A lack of open, constructive debate amongst leaders regarding

key risk issues stifles the drive for change

Focus on goals

overrides other

drivers like risk

appetite

MPW's business objectives are consistent with

Macquarie's risk tolerance

People in MPW are inclined to take excessive risk

DD

Risk management concerns are discussed openly and

honestly in MPW Australia

AD

SM

Mgr

AM

SA

Assoc

Especially at senior levels,

there is a perception that

risk issues are not debated

freely

1 2

Change impetus at leadership level is weak

Agree, Strongly

agree


Disagree

Agree, Strongly

agree


Disagree

If Bill has to make money over the next two years

and change the culture he will fail...Greg and

Nicholas will say the business has to make money.

For Head Office to ignore the need of advisers (and

ASIC’s requirements) for SO LONG without us

seeing positive change makes me wonder about the

bonus structures at head office and if change is a

genuine concern.

If I'm used to getting paid more

by generating revenue as

efficiently as I can and you want

me to do something to reduce

risk and there is no upside for

me and no downside if I don't do

it, except for making the state

manager unhappy, then I won’t

do it.

People seek to build up empires. If you are doing

this, the core influence is building your empire and

you might end up ignoring risk. This is driven by

promotion and profit share - people get promoted if

they grow their empires.

The personality of ExCo members

[varies]... there is a low level of

leadership training. Bully behaviours

[are used to] shut down others. There is

an inconsistent way of pulling up the

aggressive leaders... no-one will actually

say it’s wrong.

Maybe we could have pushed and

peddled harder [but] that’s the nature of

big organisations...

It's very closed doors, so critical

decisions won't always involve the right

people. I think the corridor

conversations need to stop. Why no

decisioning? Too many people. Eric had

more than 20 direct reports. He inherited

all these legacy reporting lines with

people who felt they were entitled to

report directly to the head of the

business.

Risk Culture Survey results, % distribution Risk Culture Survey results, % distribution

50% of the leaders wanted this

change to happen but didn't

have the tools/systems/

mechanisms or the conviction

to see this change through.

29 25 46

36 23 41

37 25 37

50 8 42

44 23 33

16


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Inertia – Drivers B

Key drivers

Belief that initiating and succeeding with change is impossible in this business

Perception that scale of change is too difficult to overcome in this instance

Belief that leaders are disconnected from ‘reality’

Experience/perception that leaders don’t listen to feedback on need to change

Belief that leaders do not know the true state of the business (because depth and breadth of connection to the offices is hampered by size and distance)

View that leaders are not ‘strong enough’ to make change stick

Perception that past leaders quickly ‘gave up’ on their promises to introduce change

View that there is a disincentive for leaders to move away from the status quo

Perception that State Managers have far more influence with advisers than senior leaders

Perceived ‘inherent’ barriers

View that it is ‘impossible’ to shift brokers away from their inherent nature which is at odds with required changes

View that it is ‘economically impossible’ to have sufficient management required to drive/sustain change with current number of advisers (and size is necessary to achieve required profit)

View that required changes are impossible to make in the time frame available (e.g. due to extensive backlog that exists)

View that legislation requires behaviour that is impossible to balance with commercial goals of revenue generation activities

Organisational inadequacies

Belief our systems are inadequate to support required change

Belief our approach is ‘un-sophisticated’/inadequate to achieve genuine change (e.g. tick-a-box, admin focused, not adviser or client-centric)

Belief Macquarie doesn’t have enough capacity in the risk function to drive/sustain change (e.g. compared to other firms)

Perception that leaders have a general principle that if you are told once ‘there is no money’ don’t bother asking again

Perception that many risk staff have critical gaps in their experience and knowledge of risk, compliance and/or the business

Belief that ‘400 business models’ strategy is an unchangeable assumption, and a barrier that cannot be overcome

1

2


number on following page n Theme


ness


level is weak

Low discretionary

effort


need for change

17



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19 45 35

13 88

Inertia – Evidence B

View that deep-seated barriers prevent leaders from initiating and

succeeding at change within this business

Perception that scale of current challenges (e.g., FoFA) are

almost too difficult to overcome

Onerous/complicated processes

are one of the main reasons why

people fail to comply

Too much credit or creed around here is

based on precedents... We can't do it now

because we didn't do it in 2006.

There is a lack of openness to

upward feedback - it just goes in

one ear and out the other.

When Bill and Greg [visited this

office] everything they said was

met with absolute scepticism.

“We’ve heard that before; we’ve

been told that before.”

MPW has the right skills and

expertise to manage the various risks

to which it is exposed

It’s very hard to teach brokers a planning

mindset... They don’t know what they

don’t know... You can’t teach 300 brokers

how to be advisers... You need to

fundamentally change the structure. But I

don’t think they will...

The real problem was there was

never going to be enough time to

make all these changes happen in

time. So people became disillusioned

because it seemed like the task was

impossible. It was both time and the

scale of change required.

My impression is that we aren’t in people’s

minds [in the state locations]. In Sydney

you have access to people like Peter

Maher, Bill and even people like Matt

Whitehead. You can’t get things fixed as

easily – you can’t just go downstairs...

There are too many grey areas. They'll

find something to breach you on. There's

always something, and with FoFA there

will be even more grey.

When all your time is taken up with SoAs,

reporting tools etc (which you shouldn’t be

doing) and you’ve got to talk to clients, and

you’ve got to prospect, then the result is that

you don’t dedicate enough time to it

[compliance activities]. But if we had the right

tools I’m 100% sure everyone would do it.

It’s not difficult to adhere to

Statement of Advice (SoA)

regulations

Significant disconnects

seem to exist, giving

advisers a sense their

feedback isn’t heard and

change will be difficult to

achieve

12 12 76 Advice

40 60

20 80 Adviser

Solutions

Risk Mgt

28 34 38

MPW

Australian

Advisers

2013

MPW

Canada

Advisers

2011

9 3 88

Confidence in

organisational risk

skill is extremely

low, for example,

compared to the

Canadian adviser

population

1 2

Learned helplessness prevents people from trying to initiate change

21 34 45

Agree, Strongly

agree


Disagree


Agree, Strongly

agree


Disagree

18


MGL.0001.0003.0204

Inertia – Drivers C

Key drivers


ness


level is weak

Low discretionary

effort

Personal/individual barriers to compliance change

Lack of buy-in to overall approach

Complacency/comfort regarding work-life balance

Current state provides an optimal balance of income-to-effort for many advisers – more time on compliance perceived as disrupting this balance

For advisers in later stages of career, impetus to put in effort to change for relatively short trade-off period is low


need for change

Internal conflict between ego and need to change

Resistance to be ‘being told what to do’

Knee-jerk reaction by advisers to perceived ‘kindergarten’ approach towards ‘enforcing’ change

Difficulty ‘letting go’ of models that have been so successful in the past

Lack of buy-in to Macquarie’s response to external pressure

View that our response is/has been overly administrative (form over function)

View that Macquarie should be challenging the regulator more

Lack of buy-in to industry changes in general

View that legislation changes will not achieve their stated aims (form over function; likely to produce undesirable results for small investors)

Belief that nothing Macquarie does will satisfy the regulator and media

View that the legislation is not clear in its requirements and too difficult to interpret accurately

Lack of accountability for change

Little perceived consequence (in the past) for failing to change

Few rewards for change

View from advisers that the reputational impact of compliance failures (even systemic ones leading to the EU) will not impact them individually, due to their strong personal relationships with clients

More direct benefit perceived from revenue-generating activities than change activities

AVP penalty only applies to small number of advisers

No encouragement/informal reward from State Managers who are often cynical about change

Reasonable likelihood that files will not be reviewed, and even if they are, few consequences exist for ‘Needs Improvement’ result

Fundamental independence mindset that inhibits willingness to conform

Lack of understanding regarding content/breadth/extent of changes

Low credibility of leaders managing Macquarie’s response to FoFA

1

2

2





MGL.0001.0003.0205

29 39 33

11 22 67

13 16 71

27 73

28 23 49

39

Inertia – Evidence C

Many advisers resent the compliance activities expected of them

currently (let alone increasing the expectation)

Buy-in to the risk framework is weak and the business has not

created many compelling incentives to reinforce compliance

35

65

Advisers

audited

Advisers not

audited

% Advisers that had BRP file reviews conducted

1 April - 31 Dec 2012, Nationally

Advisers know the

likelihood of being

audited is less than 50-

50, lessening the impact

of the BRP in identifying

and penalising non-

compliant advisers

The time required to complete risk management activities

exceeds the value they add

Advisers

Risk Mgt

Bus. Strat. & Perf.

Advisers

The risk policies, processes and procedures utilised by

MPW help us manage various types of risk more effectively

Adviser Solutions

Advisers are

not bought-in

to the value of

compliance

activities

1 2

Low discretionary effort expended on changing the status quo

Agree, Strongly

agree


Disagree

My view is that the current

"issues" are every bit

about a lack of investment

in information technology

than poorly drafted

legislation

Coming to Macquarie was

an out and out shock.

Systems were shocking,

compliance was by

comparison draconian. To

treat grown men and

women as school children

is just….

[What are the

consequences?] There

wasn't any until recently. I

hadn't been audited since

my first year - I asked to

be audited..

The amount of time and effort we have

to put into risk these days is many times

that of years ago. We are still expected

to reach financial targets with a much

higher risk burden... Remuneration is

98% skewed to revenue performance

and 2% risk - that sums it up!

As people get older, change gets harder

– I see it in myself. Especially when you

have a successful model that has

worked for so long and worked well for

so long.

I hate being told what to do. I’m getting

older now and sometimes I think

“seriously mate, you’re 30 years old and

you’re telling me what to do?”

What does it take to be successful?

Independence. You need to be

independent and focus on what you’re

here to do – make money for your

clients. So clients and independence

comes first, and what is best for

Macquarie comes second.

The Head Office risk structure is...

ineffective and does not seek to improve

the system. They are the ‘police’ and

issue ‘fines’ rather than making the

systems workable... The truth is

advisers do NOT have the most basic

tools we need in order to be compliant.


Agree, Strongly

agree


Disagree

20


MGL.0001.0003.0206

Theme 2: Risk insight clouded

MGL.0001.0003.0207

Risk insight clouded – Impact

Limited file reviews hamper insight into breadth of compliance

issues, and recognition of need take decisive action

Lack of understanding regarding

extent of risk exposure

Ongoing, unaddressed skill gaps exist, even

within the risk function

Impact of ‘risk insight clouded’

• Gaps in senior leader appreciation of serious risk management inadequacies

• Exposure to unacceptable levels of unmitigated risk

• Inability to respond proactively to risk issues

28 45 28

56 44 Risk

Advice

I am equipped with appropriate skills to manage all the

risks I am responsible for

Files reviewed as part of Business Review Program

1 Jan – 31 Dec, 2012

Even risk

‘experts’

feel they

don’t have

the

necessary

expertise

to fulfil

their role

MPW does not identify, share or analyse information effectively to develop insight on risks facing the business

Agree, Strongly

agree


Disagree

When Commonwealth got their EU... the

risk managers [were asked] what would

happen if ASIC came and did a similar

investigation here. Reading the report,

senior risk people were surprised that

we didn’t think we were so bulletproof.

But why should they be surprised?

[No one listened] to about 5 years of

consistent feedback that our systems

are rubbish and do not support

consistent quality of advice being

delivered efficiently.

The goalposts and interpretation of the

‘law’ and requirements are often

blurred... There seems an unhealthy

lack of core guidance and

comprehensive understanding of all

requirements from above.


Files reviewed

in 2012 = 640

Total clients

=113,009

22


MGL.0001.0003.0208

Risk insight clouded – Drivers A

Risk insight clouded

Capability gaps inhibit

ability to recognise

issues

Information flow stymied

Failure to challenge

Structural barriers to transparent information flow

Mindset barriers to transparent information flow

Siloed management

Lack of effective state management supervision

Influential State Managers that have favoured retention of a model that gives them a high level of autonomy

Separation of risk from the business decreases cross-functional transparency

MPW head office disconnected from regional offices

Low expectations regarding the need for open, detailed discussions

Large spans of control makes it difficult for State Managers to be ‘across’ everything

Perception/reality that advisers prefer a ‘low-touch’ model of management

Practical factors prevent adequate face-to-face interactions between Sydney and regional staff

Management style that favours delegation of accountability to State Manager level for many issues

Individual disincentives to transparency

Accepted process of ‘filtering’ large volumes of information as it progresses up to senior management

Consequences for non-transparency/missing information perceived as less severe than those for concrete issues

Active requests from senior leaders for more digestible forms of data resulting in summarised reporting

Reluctance to be the ‘bearer of bad news’

Active pressure not to escalate issues where possible

Leaders (both State and senior level) seen as role modelling non-transparency to achieve desired outcomes

Few metrics around State Manager performance besides high level revenue targets

Local risk staff seen as ‘gatekeepers’ and ‘policy’, thus decreasing willingness to be transparent with them

1

2

Key drivers



Retrospective, sample-based review mechanisms fail to provide timely insight

Lack of systems and automation to provide ‘real-time’ compliance transparency

23


MGL.0001.0003.0209

27

26

26

17

11

45

10 10 80

56 44

22 44 33

Risk insight clouded – Evidence A

Especially within the risk function, the environment is not perceived

to encourage openness regarding risk concerns and issues

Flow of information is hampered by a dispersed and relatively ‘loose’

management model

I feel confident that I will not be penalised for raising risk

management concerns

I receive useful communications on all important issues related

to risk in MPW

Risk Mgt

Risk Mgt

1 2


Agree, Strongly

agree


Disagree

There is a preference by

management not to look into issues

where breaches may have occurred

and could result in compensation

being payable to clients where the

business would have to fund this,

unless concrete evidence is raised.

The support of risk procedures in terms of skilled, willing staff in risk and

compliance has always been an area of concern. Risk staff are barely

visible on the floor and have low engagement with advisory staff and it’s this

low engagement that would form the biggest improvement in behaviour.

The general fear is that if risk

is approached or reported etc.

it may mean a deal cannot go

ahead and a comprehensive

answer may not be provided. A

more open and consultative

approach would be good.


48 26

36 64

State Managers/Team Leaders provide

adequate supervision and monitoring of risk

and compliance issues

The senior leaders of MPW are actively

involved in the management of risk

Adviser

Solutions

Risk Mgt

Bus. Strat.

& Perf

56 18

53 30

67 22

36 18

Advice


Agree, Strongly

agree


Disagree

Adviser

Solutions

Risk Mgt

Bus. Strat.

& Perf

Advice

There is no clear explanation

or suggestion as to how to

integrate...obligations

practically or efficiently. Every

person has a different

interpretation of how to build

it into their daily routine. This

ultimately opens up the

window for non-compliance

and/or misinterpretation of the

compliance obligations by

staff.

The paradox of a siloed

business structure is that

people want to be left

alone, so [ironically] the

biggest advocate for us is

someone who leaves us

alone.

Being in a satellite office

of MPW we are very much

left to our own devices.

The layer of management

that is indifferent, cynical,

opposed to and completely

lacking in any positive risk

culture is the State

Manager level. The

messaging that was coming

from the top was NOT

being fed down to advisers.

Advisers were fed a

different message yet the

State Managers relayed

upwards that advisers were

on board and everything

was OK.

31 42

24


MGL.0001.0003.0210

Risk insight clouded – Drivers B




issues



Significant risk capability gaps in adviser population

Many incumbents in risk roles lack extensive risk

experience

Professional backgrounds of many advisers lack risk depth

Opportunity to improve effectiveness of professional development

Large broker population requires minimal risk knowledge to attain certification (e.g. compared to planners)

Even brokers with relatively lengthy experience have not been required to develop strong compliance skills

Structural barriers to demonstrating deep risk insight as an adviser

State Managers not in a position to identify risk gaps

Industry-wide tendency to achieve required number of training hours as a priority – genuine learning is a secondary aim

Use of channels and techniques (possibly due to capacity constraints) that don’t engage advisers – lack of tailored coaching, in-person, ‘war-stories’ etc

Complex nature of incoming legislation difficult for even risk professionals to interpret, let alone advisers

Tendency for advisers to specialise in certain strategies/products means breadth of risk knowledge is limited

Risk expertise and knowledge not leveraged to develop management insight into risk topics

State Managers often delegate majority of risk issues to Risk Managers and therefore do not develop expertise themselves

Breadth of models being managed within offices makes it very difficult to demonstrate risk insight across range of strategies/products

Capacity and system constraints inhibit proactive analysis by risk function to aid management in understanding risk ‘profile’ of their office

Little attempt to provide external insight around best practice to up-skill management on ‘what good looks like’

Some advisers don’t see the individual value proposition for developing their risk expertise – e.g. at later stages of their careers, or work-life goals

Management lacks in-depth risk expertise

Many State Managers from a broking background may not have deep risk skill in general, particularly for planning-oriented risks

See Ineffective Risk Function tree

Focus of adviser capabilities (qualification) is around minimum standards

Treatment of risk management effectiveness in performance management for advisers is very inconsistent and not embedded

Lack of leadership development for State Managers

Key drivers



1

2

25


MGL.0001.0003.0211

25 20 56

29 52 19 27 48 25

27 35 39

Risk insight clouded – Evidence B

I regularly receive feedback on my ability to

manage risk effectively

My risk management capabilities are assessed

regularly

Advice

Advice

Our risk management professionals take a lead

role in guiding key risk decisions

Risk management professionals provide critical

input to the strategy/product development

process in MPW

Management lacks individual risk expertise, and also fails to

leverage the risk function to bolster their ability to manage risk

Many advisers are ‘unconsciously unskilled’ in risk, especially those

from a broking background 1 2

Capability gaps inhibit ability to recognise issues

Agree, Strongly

agree


Disagree

Agree, Strongly

agree


Disagree

It’s very hard to teach brokers a

planning mindset. They’re just about

‘give me 10k and I’ll invest it for you’.

They don’t know what they don’t know.

The heritage of the business is stockbroking,

but financial services reforms in recent years

have increasingly brought brokers’ obligations

in line with financial planners/advisers.

Brokers still largely believe this stuff does not

apply to them...when in fact the law requires

everybody to be advisers when advising retail

clients.

Advisers put the onus on their assistants to

make them compliant - but assistants don't

know anything about the regulations. I

wouldn't know what a compliant SoA looks

like. I feel wealth managers are

much more in touch with their

legal and fiduciary obligations

under the AFSL requirements

whereas the brokers tend to

be either unaware, untrained,

or not interested in meeting

compliance requirements.

Over the past few years, there has been a big push from

MPW management for advisers to ‘diversify’ their service

offering and become accredited to provide advice in other

areas outside traditional stockbroking services...This has

resulted in advisers providing advice in areas in which they

have little skill or experience and poor record keeping and

documentation of the advice processes.

When [a member of management] gave a

heads up that management were really

unhappy about the EU, he said the things

you need to be doing are watching how you

carry yourself, dress around town... [and yet]

we have no directions on what to do for

FoFA!

The risk manager isn’t involved in

recruiting at all. HR was completing the

checks on these people after they’d

already begun working for us. And now

we are still dealing with some of these

people.

Since merger of broking/planning majority of

management are brokers with little

understanding of the planning business. I

have no confidence speaking with

management.

Most State Managers are either

stockbrokers or former stockbrokers

and given where MPW currently finds

itself, I now question if these former

stockbrokers have the skill set going

forward in managing risk which has

become a much more complicated

process.

Without regular

feedback many

advisers don’t know

they have gaps in

their compliance

behaviour/skill


The Risk function

may be under-

leveraged in providing

input

Advice

Advice

26


MGL.0001.0003.0212

Risk insight clouded – Drivers C




issues



Arguments to increase risk management effectiveness lack organisational support

Risk message often holds little weight

Perception that risk management improvement ideas will be too expensive

Those with a risk ‘agenda’ often dismissed as ‘non-commercial’

Risk activities seen as not contributing to the bottom line, and thus less important

Widely held view that Macquarie compares favourably to peers

Individuals avoid raising concerns openly

View that ‘best practice’ approaches are too expensive to implement with Macquarie’s model (e.g. enough ARAs to review all SoAs)

Perception that gap between Macquarie and other firms with ‘leading’ approaches is too large to address economically

Vocal opinions that Macquarie compares favourably to peers sway general opinion

Difficulty accessing reliable benchmarking data regarding practices at other firms

Response to raising issues not constructive

Inappropriate pressure from those in positions of influence on subordinates not to raise issues

Individualised nature of adviser culture decreases sense of personal responsibility and confidence for raising concerns regarding other advisers

‘Good news culture’ means concerns are often met with consternation, not welcome

Tendency to delegate problem solving to issue raiser dis-incentivises raising of issues

Previous attempts to request funding have been denied leading to generalised expectation that future requests will also be denied

Ineffective escalation of concerns

Challenge in open forums not seen as culturally appropriate

Fear that asking for help will result in penalty rather than help

Perception that challenges regarding favoured advisers may be simply ignored and/or penalised informally

Instances of public belittling and other consequences for raising issues

Perception that bulk of compliance activities are, practically speaking, optional

Influence of leadership and management messaging in adviser perceptions (e.g. “The EU is mostly about systems”)

1

2

Key drivers




MGL.0001.0003.0213

26 40 34

Risk insight clouded – Evidence C

I found MPW's risk framework far more

comprehensive then competitors - and

this was before the EU. I was surprised

MQG got targeted for this.

60% of people

interviewed

selected “Easily

yielding to

inappropriate

pressure from

others” as ‘more

like’ MPW

People in MPW are expected to do what they are

told, no matter what

People in MPW challenge others constructively if

they think that they are not doing the right thing

[There has been a] lack of investment by

the Business into staffing resources and

integrated surveillance systems.

The only real problem MPW has in terms

of risk management [is] IT systems.

Many

advisers

and

managers

are ‘blind’

to any

problems in

the risk

function

(besides IT

systems)... I believe the risk mindsets are on the

whole good at Macquarie...when

compared to other firms I have worked

at... The issue for me is the systems.

Systems are rubbish... lack of investment

is biggest ongoing obstacle to advisers

being able to meet all performance goals

set by management, including both

revenue and risk management.

..which

reduces

the

impetus to

invest in

the risk

function in

general

Discussion of risk issues is stymied in a culture that does not manage challenge

productively, on all fronts (advisers, management and risk) 1 Concerns regarding under-investment in the risk

function have been met with resistance 2


We have [risk] resources now with

[name], but you should ask [name] why

they left. They felt management didn’t

believe there was any value in their role. I

thought they were a real asset to the

group...The State Manager said it straight

to them, “I don’t believe in the value of

your role.”

25 40 35


29 36 35

Agree, Strongly

agree


Disagree

Raising issues of compliance some years

ago in relation to our handling of IPOs

with State Manager just got me labelled

as a whinger. And told that this is they

way we are doing it.

Ever since the GFC, MPW has been

doing everything to indiscriminately chase

the dollar. When staff have raised risk

concerns, management have ignored

them and when the risk team has tried to

ensure the business meets the

regulations they have been treated with

derision.

All risk management decisions are made,

managed and reported [in line with

management maintaining the status quo].

Anyone who holds management to

account is bullied and/or de-resourced.

If you do not get along with your risk

manager you tend to be crucified for any

mistakes and held up as their example

that they are doing their job.

There have been a number of incidents

raised in past times where the Business

has challenged Risk and adviser penalties

have not been imposed or enforced

because of ‘associations’ with Business

Leaders.


% of behaviours selected as representative of

MPW across all interviews

Behaviours relating to “Challenge”

Risk behaviour interview analysis

28


MGL.0001.0003.0214

Theme 3: Freedom without boundaries

MGL.0001.0003.0215

35 38 26

Freedom without boundaries – Impact

‘Freedom’ and individualism are core values, creating difficulties such as executing a cohesive and effective risk governance model

‘400 individual businesses’ are very difficult to

support with efficient and effective risk

systems and processes

Emphasis on individualism makes it difficult to

align behaviour around shared goals, e.g. risk

The environment of ‘freedom’ includes a lack of

explicit focus on who is accountable for risk

400 models... It sounds

great in theory, but it’s

impossible in practice.

We get different

messages as to what we

are required to do, either

from different people or at

different times. What we

are asked to do now is

different to 6 months ago.

We’ve always had freedom within boundaries, which I

describe as freedom without boundaries.

Advisers aren't aware of their obligations - they don't

know how to give compliant advice and are given no

training on how to do this.

People in MPW seek to resolve problems even when they

are outside their area of responsibility

Embedded

Range of mechanisms to drive

personal responsibility

Evidenced

Mechanisms focus on driving

performance responsibility for

formal accountabilities

Not Evidenced

Few mechanisms to

communicate or support

ownership of risk

Impact of ‘freedom without boundaries’

• Principle that ‘the client is the adviser’ undermines MPW ability to establish and maintain minimum standards

regarding compliance and quality of advice

• Difficulty providing appropriate and standardised tools and processes to facilitate effective and efficient compliance

outcomes

• Challenging to align, influence and hold people accountable for shared organisational goals – e.g., management of

reputational risk

• Inability to capture benefits of a more team-based environment including peer review, coaching and tailored training

In this business it's very

individualistic, there's

nothing in it for people to

help each other.

Broking is a very selfish

industry – unless a broker

will make money for

himself he won’t pick up

the phone.

People are individuals

and have completely

different values.

The advantage of this

model is that we can

meet client needs, the

downside is that [it] is so

difficult to monitor.

You've got 300 people.

There is going to be natural

variation. You've got so

many business models.

Agree, Strongly

agree


Disagree


• No specific

mention of risk

competencies in

job descriptions

• Few

mechanisms to

allow risk

reporting

outside direct

area of

responsibility

• Little formal

communication

of risk

ownership

30


MGL.0001.0003.0216

Freedom without boundaries – Drivers A

Freedom without

boundaries

Organisational barriers to boundary-

setting

Leadership barriers to boundary-setting

Leadership role design encourages

‘hands-off’ discretionary approach to management

Large spans of control make it hard for State Managers to be ‘hands-on’

Few explicit boundaries set (legal

boundaries implicit)

Little acceptance

of boundaries that are set

Risk function lacks effectiveness in

reinforcing and setting boundaries

Organisational power imbalance makes it difficult for the risk function to effectively influence management

Risk function is under-resourced compared to the past, making it difficult for risk professionals to undertake a more strategic role in governance

Risk function is undermined by leaders making discretionary concessions around penalties

Lack of agreement between leaders on where boundaries

should be set

State Managers running own client books undermine perceived independence of ‘manager role’

Tension between business and risk teams around who owns risk

State Managers sometimes question the value of a perceived ‘compliance overhead’ and fail to support the messages being passed down by risk teams

View that boundaries must be ‘loose’ in a business with ‘400

models’

Business breadth is seen as key to Macquarie’s market position and brand

Business models that generate good revenue are accommodated, even if their fit with the business’ risk tolerance and strategy is questionable

Accommodating all business models is used as part of the value proposition to attract and recruit advisers

View that ‘the boundaries are the law’ contributes to the view that it is appropriate to accommodate diverse business models so long as they are legal

Leadership not inclined to set

boundaries

Fear that advisers will leave (or not join) if models are not accommodated

Leadership focused on short-term goals which are more easily realised through ‘loose’ management

Lack of a clear vision and strategy to help define boundaries means the direction provided by managers is sometimes discretionary

Some managers personally cynical towards risk management boundaries, implicitly advocating circumvention when possible

Risk staff do not fully understand all the businesses that they monitor, which limits their ability to set meaningful boundaries

Risk function does not consistently have the presence and influence required to be effective influencers

Reputational and client risk boundaries not set due to view of ‘advisers as clients’

1

2

Key drivers




MGL.0001.0003.0217

21 52 26

Boundaries are undermined because they are difficult to set in a

multi-model environment, and Risk is a toothless tiger in

reinforcing them



Behaviours relating to “Communications”

Freedom without boundaries – Evidence A

…no one in leadership

can tell you what model

we should be in 5 years.

Accountability is lacking at

leadership levels. For

leadership it’s easier that

way.

Culture starts at the top

and leadership is very

short sighted about the

messages they send out.

Embedded

Range of organisational

mechanisms to facilitate visible

involvement and role modelling

of senior leaders in risk issues

Evidenced

Senior leaders

required to participate

in some risk issues

Not Evidenced

Little systematic involvement

of senior leaders in risk-related

activities and/or

communications

22 33 45

Senior Leadership Organisation Mechanisms

Leaders are not focused on boundary setting for a range of

reasons 1 2

Although there are some risk KPIs, and risk features as a standing item in selected

leadership forums (e.g. Advice EMC), many formal mechanisms are missing, e.g.:

• Job descriptions explicitly calling out risk accountabilities

• Formalised two-way cascading communication opportunities

• Visible senior leadership involvement in risk activities is missing

Few explicit boundaries set (legal boundaries implicit)

38% of people selected

“Misaligned messages

communicated by

leaders at different

levels of the

organisation” as ‘more

like’ MPW

Commerciality and flexibility to

accommodate a number of different

business and adviser models. This is

both a strength and a weakness.

I think we go out to hire 'big

writers' regardless of their history.

If they write good revenue, we let

them in on our licence.

It's always been our selling point…if

you have a business model we can

accommodate it.

When advisers come to

Macquarie the message is we will

modify to fit their business model

- not "here is the Macquarie

business model“. 400 models...”the clarity is the law”.

The boundaries people are expected

to operate under is the letter of the

law.

State Managers/Team Leaders in MPW tend to

be cynical about risk policies, processes and

procedures

26% of people believe their

State Manager is cynical

about risk policies,

procedures and processes,

which may undermine the

risk function’s effectiveness


Agree, Strongly

agree


Disagree


400 advisers with 400 different

models – do they [RMG] really

understand the risk they’re taking

on at an aggregated level?

How can you run 400 businesses and

manage them? How can you even

audit it when there are 400 different

ways of obtaining information?


32


MGL.0001.0003.0218

Freedom without

boundaries

Lack of personal ownership regarding

compliance obligations

Low affinity with Macquarie

Tension in the Adviser Value

Proposition

Some advisers do not feel they receive sufficient support for the proportion of revenue they share with Macquarie

Feeling that Macquarie takes all the upside and none of the downside with regards to risk and revenue generated

Few explicit boundaries set (legal

boundaries implicit)

Little acceptance

of boundaries that are set

View of risk and compliance as a task

rather than an outcome

Acceptance of advisers using their assistants and other junior resources to complete compliance activities, rather than take personal responsibility

Adviser culture of individualism and

entitlement

Precedent of exceptions in consequence management

Advisers highly value independence, with Macquarie regarded as a ‘third party’

Adviser belief that ‘my model is different to everyone else’s,’ providing an excuse to play by their own rules

Preferential treatment of advisers to retain loyalty, especially for large writers

Many individual cultures

Past recruitment focused on ‘bums on seats’ rather than cultural alignment

Legacy of acquisitions with few attempts to instil MPW culture

Geographic spread and size of business creates sub-cultures where primary affinity is to the local office

Little support for collaboration

Incentive model discourages partnering, referrals and teamwork

No formalised coaching or mentoring arrangements to facilitate collaboration and knowledge sharing

Reluctance to partner due to different levels of capabilities amongst advisers and close guarding of client relationships

Lack of understanding

regarding obligations

Knowledge and skill gaps around risk obligations specific to the retail advice industry

View that breaches may be ‘negotiated’ undermines clear accountability

History of ‘popular’ risk professionals assisting with compliance completion, rather than pushing responsibility back to advisers

Risk function focus on efficiency of compliance activities rather than monitoring around compliance quality has reinforced a ‘tick-a-box’ mindset

Legislation is very ‘grey’ on expectations making it difficult for advisers to understand what they will be held accountable for

Poor reinforcement of desirable risk

behaviour Perceptions of ineffective

consequence management

Inconsistent application of breach policy

BRP interrogates a small proportion of files and focuses on discovered issues, with no systematic review of other files for the same adviser or for recurring issues

Lack of standard recruitment and induction process to establish and reinforce minimum standards and expectations

1

2

1

Freedom without boundaries – Drivers B

Key drivers




MGL.0001.0003.0219

24 22 54

Freedom without boundaries – Evidence B

My ability to operate relatively independently as an

‘entrepreneur’ under Macquarie’s brand is critical to my

job satisfaction

Risk management activities tend to limit, rather than

promote, business growth

Behaviours relating to “Personal

Responsibility”

13 51 36

The understanding and individual ‘value proposition’ required to

foster personal responsibility for risk and compliance is weak

A shared culture of independence means advisers do not feel

obliged to ‘play by Macquarie’s rules’ 1 2

15 11 74

27 29 44

25 47 28

Little acceptance of boundaries that are set

It doesn’t matter if you’re

known for breaching, all

that matters is your

revenue. The higher

revenue writers are

protected.

If there is no incentive to drive positive behaviours, it is

just the same as giving incentives for bad behaviour -

you won’t correct it by threatening people.

Behaviours relating to

“Incentives and Consequences”

29 36 35

Advice

Other

Advice

Other

Agree, Strongly

agree


Disagree


74% of advisers see

operating as an

entrepreneur as critical to

their job satisfaction,

compared to 44% for

other functions

54% of advisers see risk

management as limiting

business growth,

compared to 28% for

other functions




Compliance risk is

pushed to advisers by

Macquarie - then the

adviser pushes it to

their assistant.

A lot of advisers don’t

think that they own

risk; they don’t think

about owning risk.

Everyone likes the big pay

cheques, the big expense

accounts, the big titles.

But when it comes down

to it they've all got

responsibility, but they've

shirked them all. There is a lack of

accountability…when things

go wrong it is [seen as] the

fault of Compliance

because Compliance didn’t

pick it up.

Macquarie offers a franchise

to advisers. But that doesn’t

come with any brand

management. The clients are

seen as owned by the

advisers, not owned by the

advisers and Macquarie.

Macquarie is often described

as a third-party: “they haven't

done this", "their systems

don't work"... rather than

work together because they

have the client relationship

and bring in the money.


33% of people interviewed selected

“Ignoring risk issues outside own

area of responsibility” as ‘more like’

MPW

• 48% of people interviewed

selected “Lack of consistent

consequences for behaviour that

is clearly misaligned with risk

principles” as ‘more like’ MPW

• 31% selected “Excessive risk

taking rewarded”

34

There tends to be a ‘hands-

off’ approach. People don’t

want to touch things

because there’s a culture of

“if you touch it you own it”


MGL.0001.0003.0220

Theme 4: Short-term focus

MGL.0001.0003.0221

22 30 48

23 34 44

Short-term focus – Impact

Revenue focus has fed a ‘quantity over

quality’ approach to recruiting

Leadership focus on short-term financial results

provides implicit approval to de-prioritise risk if

necessary

Impact of ‘short term focus’

• A one dimensional driver of revenue among advisers, in some cases resulting in decisions that

compromise integrity, client's interests and Macquarie’s reputation

• Tight cost management and lack of investments in systems and people

• Multiple ‘band-aid’ solutions that, over time, have simultaneously decreased effectiveness and

increased the cost of compliance relative to peers*

• Lack of selectivity on recruitment and acceptance of advisers with questionable reputations

25 35 41

Senior Macquarie leaders demand results - it doesn't matter

how the organisation gets them

The financial rewards in MPW encourage people to manage

risk effectively

MPW will not recruit someone who has an attitude

to risk that is fundamentally different to that of

Macquarie & MPW

Overwhelming emphasis on short term performance over longer-term, sustainable business performance and reputational standing

Over-emphasis on revenue gives top generators

power and a degree of immunity from the rules

It’s very sales oriented –

you can do pretty much

anything you want.

Make the sale and we’ll

work out how to

execute/do the job

afterwards. Macquarie

doesn’t always dot the

i’s and cross the t’s.

It’s the world Macquarie

has created – status at

MPW is based on

revenue only. It doesn’t

matter if you’re known

for breaching, all that

matters is your revenue.

Advisers hitting the

perfect 50%,

threatening to leave if

they don’t get the AVP

bonus and then getting

paid it.

We’ve recruited people

who’ve never done

SoAs… they don’t go

through that screening.

The mentality is that

advisers are the client –

they hold the power.

That’s not to say we put

up with people that are

fundamentally bad, [you

might] tolerate things

from high writers that

you wouldn’t necessarily

tolerate from others.

30% of MPW

believe leaders

don’t care how

they get results

Only 35% think

rewards

encourage

effective risk

management

Only 44% think

MPW wouldn’t

recruit people

with misaligned

risk attitudes

Agree, Strongly

agree


Disagree


Agree, Strongly

agree


Disagree

I hear mutterings from

other advisers, “Why did

we recruit those

people?”

36


MGL.0001.0003.0222

Short-term focus – Driver A

Short-term focus

Adviser mindset

Leadership behaviour

Macquarie culture

Perception that senior leadership focus is overwhelmingly weighted towards revenue generation and cost reduction

Perception that management are almost entirely focused on revenue generation

Content of messages reinforce revenue focus

Actions prioritise revenue over other goals

Ratio of risk to revenue messages heavily weighted towards revenue as a focus (at the expense of client/risk)

In the absence of a strong risk culture, senior leaders emphasis on BHAG (e.g. starting and ending presentations with it) seen as indicative of over-riding emphasis

Actions to prioritise cost reduction over other goals

Perceived preferential treatment of top-revenue generators

Leadership behaviours perceived as ‘protecting’ revenue generators (e.g. overlooking compliance shortcomings)

Perception of tolerance of some business models that may stretch risk appetite, but generate revenue (e.g. options)

Leadership perceived to be maintaining a low cost structure with a perceived disregard for the risk implications of cost reduction

Management actions that highlight emphasis on revenue

Perceived kudos and power of top revenue generators driven by fear of them leaving

View of a “don’t ask, don’t find” approach to big writers (i.e. not ‘hassling’ them about compliance issues)

Actively arguing on behalf of large revenue generators to avoid penalties for non-compliance

Distribution of books to big writers as a form of informal reward

Published daily rankings of revenue generation in isolation of other metrics

Lack of long-term vision, strategy or goals focused on alternative drivers (e.g. client interest)

State Managers seen as caretakers rather than leaders driving strategy for their office

Belief that leaders opt for the low cost, ‘band aid solution’ to issues rather than resolving the root cause

Historical decisions prioritise revenue over other drivers

Historical ‘bums on seats’ hiring strategy seen as revenue-over-quality focus

Decisions to de-prioritise investment (e.g. in systems) seen as over-emphasis on ‘short-term over sustainable profitability

Leadership remuneration and profit share tied to profitability

Leadership perception that competitors pay more for good risk talent than Macquarie MPW

1

2

Key drivers




MGL.0001.0003.0223

34 43 24

30

Short-term focus – Evidence A

Senior leadership words and actions create an overwhelming focus

on financial goals regardless of the trade-offs or implications

Management (state and head office) reinforce revenue focus via

decisions and actions – e.g. preferential treatment of top writers

The main focus was BHAG, instead of,

“are we delivering a quality product?”

Especially in 2006/7 it was all about

profit share instead of putting dollars

into systems. There’s not so much cash

going around now but it’s still revenue,

revenue, revenue, instead of thinking

about quality. There is not a focus on

client and giving them a quality product.

The BHAG is all about revenue...so

everything is all about revenue…

assistants aren’t valued because they

don’t write revenue; Risk is the same.

I tried to see Peter about that bad debt.

In the end I let it go. Big writers go to

Peter. [Name] does – he can have what

he wants, he’s the biggest writer

It's revenue at all costs …MPW has

placed an emphasis on “you are a good

employee based on how much money

you make.” There's no productivity

measure except revenue.

In the past, bigger business advisers

tend to get supported and can get away

with things.

The higher revenue writers are

protected. It flows down though

management. What the adviser makes

flows up to the state management, what

the states make flows up to business

head, what the business head makes

flows up to Peter. They are incentivised to keep costs

down and maximise profit. The flipside

is that client culture, staff culture...they

are all about short-term, maintaining and

progressing their own positions.

People are too scared to change the

model because it affects their pocket...

It’s all about short-term profitability, even

though this focus on short-term

profitability means we now have an EU

which is costing an enormous amounts.

No-one asks proactively “where are the

issues that may trip us up in the future?”

Always reactive due to cost pressures.

Profitability is priority #1. What

Macquarie is missing is alignment of

leadership around what the goals and

values are. The lesson may be filtering

down that it is revenue first.

There’s a daily email that ranks you

against other advisers in Australia

[Daily Commission Rankings].

The only measuring stick is revenue,

which Is fine, but there is no measure of

what is good/bad revenue.

Cost - cutting had an impact on the

capability of the Risk team.

The senior leaders of MPW role model the

right risk behaviours

1

Management didn’t want to know about

it [systems issues]. They’re driven by

profits. They have their noses in the

trough. They’re on salary and bonus.


2

Agree, Strongly

agree


Disagree


There has been a lack of spend

culture...Bonuses that top execs earn

are tied to profitability – so they are

encouraged not to spend.

Only 43%

agree that

the senior

leaders role

model the

right risk

behaviours

“Behaviours Relating to

Incentives and Consequences”

29 36 35





• Only 41% of people interviewed about

this indicator selected “Definitive, prompt

consequences for behaviour that clearly

contradicts risk principles, that is shared

to heighten awareness within the

organisation”

30 47 24

State Managers/Team Leaders in MPW role model

the right risk behaviours

Agree, Strongly

agree


Disagree

Only 47%

agree that

the State

Managers/

Team

Leaders role

model the

right risk

behaviours


38


MGL.0001.0003.0224

Short-term focus – Drivers B

Overall culture influenced by high number of ‘broker personalities’

Formal incentives and consequences model focused on revenue

Nature of people working as brokers

Specific advisers attracted to and recruited by Macquarie

‘Type A’ personalities

MPW’s broker-centric heritage

Revenue related pay is the primary tool to drive performance and shape behaviour

Macquarie’s ‘Millionaires’ Factory’ reputation attracts advisers that are highly money-motivated

Macquarie value proposition to advisers that all business models are accommodated, as long as they generate revenue

Wealth Management culture seen as ‘dwarfed’ by FSB in integration

No meaningful, consistently applied consequences to act as deterrents

Standard commission model puts revenue generation at the centre of adviser performance

Strong incentives to achieve revenue hurdles (e.g. pay thresholds, AVP, non-financial rewards)

Low base compensation means almost entire pay is reliant on revenue generation efforts

Ability to influence consequences on basis of revenue leverage

Relatively narrow professional scope (focused on generating revenue – as opposed to planners focused on client understanding, compliance etc)

In most cases breaches do not carry financial consequences

Informal environment reveres high revenue generators

Ongoing broker culture influenced by State Managers who are former/current brokers

Incentive model does not encourage collaboration or teaming

Macquarie brand attracts ‘high achievers’ with competitive nature

Competitive nature of adviser pool, focused on revenue

Management mindset that “advisers are our clients” – especially high writers

Historical strategy that places advisers at the centre of all revenue generation success

Little source of shared identity or purpose as an alternative to individualistic focus on revenue maximisation

Large books make advisers attractive in the market, and thus a retention risk, giving them internal leverage

Performance of advisers overwhelmingly measured against revenue KPIs, with little other basis for evaluating their contribution to the firm

Sign on bonus and corresponding revenue target reinforces a revenue focus

Short-term focus

Adviser mindset


Macquarie culture

Lack of performance appraisal among advisers, preventing focus on ‘beneficial behaviours’ (e.g. client management, negotiation)

1

2

3

Key drivers




MGL.0001.0003.0225

31 38 31

Short-term focus – Evidence B

MPW’s culture is fundamentally a ‘broker’ culture

Competitive environment where high revenue generators are

revered and treated as ‘clients’ themselves

Revenue-based incentives place almost sole emphasis on

financial targets at expense of other outcomes

This is a broking business - they are

across industry the Type A of brokers…

Brokers are Kings… The firm has to keep

brokers happy.

They have an old traditional broker

mindset - these are my options strategies -

you [client] are either in or out. They

couldn't care less what the money means

to the client - they don't know if it’s just

play money or if it’s their life savings. They

treat them exactly the same.

Advisers are the client… There is

acknowledgment that the advisers own

the clients. Inherently this is very difficult

to control.

The risk Macquarie is running at the

moment is that they’ll lose their advisers

and they’ll also lose all the clients.

Too much reward is based on revenue.

All incentives are for revenue milestones

(e.g. 0.5m - a bottle of wine, $1m - a

dinner, $2m - a hotel etc). Rewards are

always for the top business writers – it’s

hard to see a reward for compliant

people. Its always the top writers who

are recognised.

We need to be equitable in a team - big

business writers don't want to work with

smaller writers. The approach only

works when business writers are equal

[i.e. revenue generated].

We don't refer clients very well - e.g. a

broker referring a client to a planner or

to a futures adviser. Remuneration does

not encourage referrals.

…It comes down to the consequences

for misbehaviour in the context of

principles. If you are putting profitability

right under clients [as a value], the

imperative is “how can I get enough

revenue to get to the 51% threshold?” The broader MPW business culture is

short-term focused with no incentive to

invest in the future. Broking is about short-

term revenue.

Its hard to live on $60k (the base salary

if commission thresholds aren't met).

22 27 52

People in MPW are penalised if they take unacceptable

risks, even if their actions generate positive results'

People in MPW are disciplined if they do not adhere to

risk management policies, processes and procedures

Brokers

61%

Financial

Planners

11%

Assistants/

Associates

22%

State Managers

1%

Other

5%

1

2

3

MPW Advice Headcount Breakdown

There is a big planner - broker divide. Planners are compliant - they come from a

different culture. With FoFA, everyone is put under the same Financial Adviser, holistic

advice umbrella… have to know about tax, super, insurance and their client, and have all

of the bases covered to give the best advice. If you're a broker, you're used to just doing

equities...You don't have time to get to know your client. It should be up to the planner.

Broking is 110% revenue driven.

Without revenue you’ve got no risk

management, compliance...

Adviser mindset

His comment was “your nearest

competitor is the guy next to you.” This

seems to be fairly accurate.

Agree, Strongly

agree


Disagree


Only one third of

MPW believe that

people are punished

for unacceptable risk

taking ; half see

discipline for failure to

adhere to risk policies

Revenue is obtained at the expense of

compliance or what's right for the client.

E.g. One adviser put through a huge

amount of trades on the last day of the

financial year...he was trading them for the

commissions, not in the best interest of the

client.

40


MGL.0001.0003.0226

Short-term focus – Drivers C

Macquarie's culture influenced by broader banking culture

Industry culture heavily focused on financial rewards

Industry under pressure since the GFC

Industry emphasis on achieving short-term profit targets to satisfy shareholders and management

Increased competitiveness in a compressed industry heightens need to focus carefully on sources of revenue

Increased pressure to generate profit in an industry where scrutiny is high

Individuals attracted to banking and finance due to personal interest in financial rewards

Macquarie-specific focus on profitability

Perception that up to the most senior level, leaders are incentivised according to Group (BFS)-wide profit vs other Macquarie-wide goals

Revenue is the primary source of shared purpose in the absence of a strong shared vision

Policies and targets reinforce revenue and profit focus

Policies exist that inherently place Macquarie’s profit above possible client interests (e.g. IPO distribution process)

Long-term Macquarie-wide vision is not well-articulated beyond “making money”

In a highly diverse business, profitability is a common denominator

Leadership at senior levels role model intense focus on profitability as a core value

Intense emphasis on profit maximisation as the goal for all parties in banking (clients as well as firms and individuals)

Short-term focus

Adviser mindset


Macquarie culture

1

2

Key drivers

Founding principle of freedom within boundaries has driven entrepreneurial and individualistic behaviour




MGL.0001.0003.0227

Short-term focus – Evidence C

Broking houses in general are all the

same – I’ve been at 4 big ones. It’s

because of the industry – commission

driven, write business, eat what you kill,

40-50c in the $. The bank says that

what you do with your 50c is your

problem but don’t start asking us about

our 50c!

MPW operates within a broader banking environment that

encourages a focus on short-term profits

Macquarie’s culture puts a particularly strong emphasis on

financial goals 1 2

The business hasn’t invested during the

good years….when we were making

hay, we didn’t put it in the shed –

instead we went and bought a Maserati.

And Macquarie is no different – broking

has always been like that.

Macquarie's strength is its brand - you

know there are 13,000 egos coming into

work everyday and we all have potential.

Last 5 years the firm has changed. The

industry has changed as well – the

business is more driven by banking

culture. Banks in general are always

driven by this 6-12 month profit, bottom

line, return on equity mindset. The

broking/ financial planning industry

fluctuates in terms of its income and this

doesn’t fit very well with banking’s 6-12

month targets. From a business point of

view, I can see why they have these

targets...but I’m there to represent my

client [not the bank’s profits].

Advisers will wait and see if they can get a

better deal elsewhere [post-FoFA

remuneration]. We currently pay 43% in

commissions - this is competitive in

Australia. It will be tougher for them to

make money after 1 July. Old school brokers in the good old days

it was all about lunch and mates. Now

it’s tougher – you’ve got to be more

educated. I wouldn’t want my kids doing

it.

When there’s an IPO or a capital raising, as advisers we’re expected to put our hands up

and take, say, $1m of that. Then I have to talk to clients about it before there’s a

prospectus available. But if the client turns around and says they’re not interested after all,

then I’m left holding it. That’s the ultimate breach of client trust…if the stock opens at a

profit, Macquarie takes the win, but if it opens at a loss, the adviser wears it...We are

pressured to put up our hand to take some because if we don’t it might prejudice our

participation in the next float...also my clients won’t get access to what could be a good

opportunity. This is a formal process at Macquarie, and it’s inherently conflict-driven.

Generally the more business you write, the higher you are in the pecking order for these.

Macquarie culture

Payment of advisers – they eat what they

kill – it’s 100% commission based, and

fundamental to the way the business is

run.

There is definitely a view from advisers on

that. I would probably not disagree. It’s not

a Macquarie thing; it’s driven by

legislation… The overwhelming feedback

from advisers was do ASIC ever look at

retail clients who take on stock then dump

it on the market 2 days later? [implication

being why should these guys need all this

process and paperwork?] In their minds

it’s very clear that whilst ASIC intent might

be right, their action is like booking a guy

for jaywalking when you can see a bank

robbery going on down the street. It’s not

for us to solve it; it’s for the industry to

solve.

I have no doubt that if ASIC went to

absolutely any firm they’d find the same

issues... some of my friends in the

industry are gobsmacked by what we

have to do. This EU could have

happened to anyone.

The highest revenue generator was made

Executive Director.

Above and beyond(eg closing

transactions)

Special assistance(product dev)

Business Referral

Multiple businessreferral

Team award

Macquarie Awards by Category

2009 (last year when category was published)

100% = 275

• Most utilised

categories focus

on revenue

generation

• No categories

explicitly reward

outstanding risk

management

• A closely related

category of

“Integrity”

received no

awards during

this period

42

The GFC has changed lots of things.

Post GFC it’s all been revenue focused.


MGL.0001.0003.0228

Theme 5: Sidelined risk function

MGL.0001.0003.0229

24

47 25 28

54 22

Sidelined risk function – Impact

Inadequate resourcing has hampered completion of file

reviews (a key detective control for regulatory compliance)

Potential regulatory breaches allowed

to occur while riskier areas are ignored

Business outcomes ultimately hampered by risk

processes that are not seen as adding value

The risk function has been ineffective at strengthening a culture in MPW that values and instils good risk and compliance practice

Melbourne position

remains vacant

Risk management activities tend to limit,

rather than promote, business growth

Impact of ‘sidelined risk function’

• Ineffective management of issues, allowing them to reoccur

• A dogmatic approach to risk management that fails to respond appropriately to changes and needs of the business

• Emphasis on monitoring rather than analysis and insight meaning that material risks may not be identified

Advice

Other

Adl.

Bris.

Mel.

Per.

Syd.

Jun

11 Dec

11

Jun

12

Dec

12

Mar

13

No

advisers

Audited

In 2012

53

66

71

36

149

59%

49%

59%

9%

14%

ARA position filled

ARA position vacant

Ave = 26%

for locations

with gaps in

ARA

resource

Ave = 53%

for locations

with ARA

continuity

54% of advisers believe

that risk activities limit

growth

The compliance culture here is one of no

pre-vetting. I looked over one SoA and it

looked like a clever double gearing

strategy. I asked a compliance guy to look

over it and he said no. I said “but if I send it

out will you breach me?” He said yes.

The real risks are completely ignored until

it’s too late – they concentrate on legislation

issues... the real risk is inappropriate trading

or underestimating risk.

Agree, Strongly

agree


Disagree


I'm not sure if anyone in risk has a good

grasp of how to measure risk - looking at

roles and testing them. There is not

enough thought given to the best way to

find the risk in the business – it’s more

“let’s have a process”

44


MGL.0001.0003.0230

Sidelined risk function – Drivers A

Sidelined risk function

Inability to influence

Disincentive to drive genuine impact

Risk function undermines its own effectiveness

Risk function is under-resourced and risk audit roles are allowed to remain vacant for many months

Time required to provide coaching or sufficiently tailored training, and drive genuine engagement, exceeds capacity

Capacity constraints limit efficiency

Lack of buy-in from the business

Perception of ‘form over function’

Lack of proactive capability building based on cross-office analysis on risk skills and knowledge

Perception that the risk function seeks to punish rather than up-skill, i.e. ‘police officers’ instead of coaches

Message to advisers is that “this is the law” rather than explaining how it supports their business or protects client interests

Perception that monitoring is focused on completion of documentation rather than content (e.g. SoAs)

Individual capability gaps drive an unsophisticated approach

Risk staff do not fully understand the businesses that they monitor meaning that they focus on routine compliance activities rather than analysis to drive insight

Complex and challenging environment with many business models make it difficult for individuals to have sufficiently broad knowledge

Lack of experience inhibits understanding of best practice

Inability to convey seriousness of risk issues

Filtering of messages means that issues are not always escalated appropriately or communicated upwards with clarity

Risk leadership and local teams struggle to tell a compelling story about risk concerns to enlist the business

Focus on discrete incidents fails to identify underlying, recurring or thematic issues

Risk team is excluded from business decision-making or is brought in at a late stage

Perception that state leaders and senior management do not value the risk function

Leadership failure to support risk function

Low credibility with advisers and senior management

Risk staff are generally much more junior than the people they seek to influence

Local risk teams capitulate to state managers, which undermines their credibility

Perception that the risk function (at different levels) gives confusing and inconsistent messages, and avoids giving a definitive opinion

Risk as seen as an inhibitor rather than an enabler

Systems weaknesses hamper effectiveness by requiring more time to be spent on routine compliance checks and inhibiting transparency

Risk systems and processes do not support risk function effectiveness

Advisers believe that there are more effective risk processes that could be developed (e.g. as used at other firms)

Risk processes that are not always welcomed by clients lack buy-in from advisers and thus lack optimal effectiveness

1

2

Key drivers



Unclear accountability at senior level for driving effectiveness of risk team

Lack of support, direction and oversight from central risk

Lack of proactive effort from central risk to address long standing concerns raised in the business

45


MGL.0001.0003.0231

31 34

27 40 33

34

10 50 40

70 30

26 33 41

Sidelined risk function – Evidence A

Risk team undermines its own credibility by not exhibiting the

skills, capacity and systems needed to manage risk effectively

The risk team struggles to have impact because the business is not

bought in to the function’s ‘value’ 1 2


Risk

All

MPW has the right skills and expertise to manage the

various risks to which it is exposed

My risk management capabilities are assessed

regularly

Risk

People in MPW prioritise risk

management and reporting

All

ED & DD level

Agree, Strongly

agree


Disagree

...and there is

insufficient ongoing

assessment to up-skill

the risk team

Neither the business

nor the risk function

itself thinks that MPW

has the necessary risk

skills.. Desirable Developing Detrimental

21 41 38

Particularly at senior

levels, risk

management is not

valued as a priority

You need the warning signs. The

warning signs have just been watered

down the whole way to the point that it

gets to the board and it's all green.

Coming to Macquarie was an out and

out shock. Systems were shocking,

compliance was by comparison

draconian. To treat grown men and

women as school children is just…

One guy from RMG was sitting there

talking to me about corporate super. A

statement he made [missed this point]

means he doesn't understand it. The fact

that you are a compliance person and

said that shows you don't even

understand it.

As a whole, the MPW risk team do not

make the average of what the industry

would be. Cost cutting had an impact on

the capability of the risk team.

It’s like they’re looking at the grass but

missing the trees. Also stock risks. In a lot

of cases [the trades/positions] are

completely inappropriate for the client.

From the start we were told that risk

managers are there to help but every time

we go to them we get [kicked]. We need

someone to coach us and train us to bring

our standards up to theirs. They can’t be

our coach and our regulators.

It's not about help. Risk don't help us. They

are like the guard dogs. They are not here

to help us they are here to bite us if we get

too close.

Risk is seen as a cost centre that cuts into

revenue to reduce profit. It’s seen as a

hindrance more than a help. And the reason

they’re seen that way is because they don’t

understand the day-to-day business of advisers.

They aren’t commercial. They just say, “No, you

can’t do that.” Which is fine, but then don’t just

say no, tell me how I can do it whilst still being

compliant.

When you ask a question you don’t get a clear

answer. It seems that they don’t want to stick

their neck out. So you do what you think is the

right thing. A lot of advisers will be sitting on

barrels of dynamite and don’t even know it’s

wrong.

Agree, Strongly

agree


Disagree




Behaviours relating to “Risk Governance”


• 50% of people selected “Confusing

messages regarding personal

accountability “ as ‘more like’ MPW

• 43% selected “Overlooking input

from risk professionals (RMG and

internal) when making key risk

decisions”


[Here] you are given the latitude to do

something, but at other firms the

governance and compliance [of this

freedom] is better handled.

46


MGL.0001.0003.0232

Sidelined risk function – Drivers B

Sidelined risk function



Historical mindset of reporting to the business

In the past, the structure created reporting relationships between risk and the business (e.g. promotion decisions)

Historically, business management influenced risk function financial rewards and profit share

Lack of independence

Lack of ownership

Overly protective risk leadership does not always support local risk staff to escalate concerns, particularly systemic issues

Business has influence over risk function via resource pressure

Prevailing reinforcement to align with the business

Senior leadership undermines the risk function

Central risk team is disconnected from the regional risk teams

Risk leadership undermines local risk management thereby discouraging issues being raised

Risk function is not empowered

State managers have the ability to override risk decisions

Advisers do not see the risk decision as final and seek ways to circumvent it

The role of risk is poorly defined

Disparity between the business and risk function regarding who ‘owns’ risk

Risk function perceives role to be one of giving advice rather than managing risk-related outcomes

Advisers’ desire for risk team to play a coaching role undermines their role in enforcement

Lack of performance metrics around the risk function’s impact in the business

Lack of clarity in the delineation of accountability between the advice risk analysts and risk managers

1

2

Key drivers




MGL.0001.0003.0233

2638 36 27 22 52 31 31 38 20 15 65

80 10 10 70 20 10 56 44

Sidelined risk function – Evidence B


Perception that the risk function is too embedded in the business

to be sufficiently independent

Risk function is undermined by its own leadership and the business 1 2

All

People in MPW are disciplined if they do not

adhere to risk management policies, processes

and procedures

People in MPW are penalised if they take

unacceptable risks, even if their actions

generate positive results

I feel confident that I will not be penalised for

raising risk management concerns

Risk

Agree, Strongly

agree


Disagree

The risk function is willing to

work around policies for the

business

Compliance is seen as optional – and this

lack of ownership and accountability is

particularly felt by the risk function

Low confidence amongst risk

staff about raising concerns

...people in this team have been here a

long time. They have lots invested in the

business...

- Risk

Risk is joined at the hip with

management.

The State Manager delivered the

breach, the consequences were a chat

with the State Manager, told to fix the

files reviewed, but not all of the other

files. There was nothing in there about it

being raised to ASIC. It appears it’s just

blown over...

Their attitude is, if an adviser blows the

client up, well he’s an adviser, he

recommended it, it’s his problem. Maybe

they’re more concerned with protecting

their job than actively managing risk.

Where individuals don’t believe

compliance activities offer value they push

back through State Managers then MPW

leaders and up.

We had a guy who was terrible. He failed

2 BRPs. They recommended that they

terminate his contract. It went to Risk,

[they] agreed. It went to the State

Manager, he agreed. But months passed

and he was still here. The State Manager

said, “we are just waiting til year end”.

After year end, more months passed.

Even now, he's still here. ...and then there are other instances

where the adviser does a deal [obtains an

exception from state manager] and it

[paying for the error] doesn’t happen...

It's a great example of 'us and them’. But

it's not. You [risk] are leaders too. They

say, “Oh, state leaders are bad”, but

whose job is it to provide state managers

with good information and support?

The business is not understood from a

broader RMG perspective, and the

relationships that should exist between

partners does not.

20 20 60

There are often instances where working

around a risk management policy is necessary

to meet commercial goals


I wouldn’t say the risk guy’s decision is

final. Should I think that? I don’t think so

48


MGL.0001.0003.0234

Appendix 1 – Data Sources

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Data Sources – MPW Risk Culture Survey

Risk Culture Survey Survey Demographics

• Graphs used in this report use data from the Risk Culture Survey

administered between 27 February to 13 March

• The distribution list staff within MPW Australia, excluding parts of the

business deemed to be out of scope for the EU (e.g. Private Bank) and

include non-MPW staff who work with MPW on a regular basis (e.g. IT)

• The survey received 468 responses (79.4%)

• For all questions, respondents were provided with a statement and

asked to select the option that best describes their view: strongly

disagree, disagree, neutral, agree, strongly agree or not applicable

• The percentages shown in the graphs in this report illustrate the

percentage of respondents that disagree (i.e. strongly agree or

disagree), are neutral, or agree (i.e. agree or strongly agree), excluding

the responses of those who answered ‘N/A’

• Unless otherwise stated, the group relates to all respondents

• The illustration below explains the graphs used

The Risk Culture Survey probed participant’s risk mindsets and behaviours, providing a valuable data point to assess prevalence across MPW

31 23 38

People in MPW are penalised if they take unacceptable

risks, even if their actions generate positive results'

%

distribution

Survey question

Red box highlights

negative result

illustrating

detrimental risk

mindsets or

behaviours % of

respondents who

disagree or

strongly disagree

% of

respondents who

agree or strongly

agree

% of

respondents

answering

neutral

• Graphs used in this report use data from the Risk Culture Survey

administered between 27 February to 13 March

• The distribution list staff within MPW Australia, excluding parts of the

business deemed to be out of scope for the EU (e.g. Private Bank) and

include non-MPW staff who work with MPW on a regular basis (e.g. IT)

• The survey received 468 responses (79.4%)

• For all questions, respondents were provided with a statement and

asked to select the option that best describes their view: strongly

disagree, disagree, neutral, agree, strongly agree or not applicable

• The percentages shown in the graphs in this report illustrate the

percentage of respondents that disagree (i.e. strongly agree or

disagree), are neutral, or agree (i.e. agree or strongly agree), excluding

the responses of those who answered ‘N/A’

• Unless otherwise stated, the group relates to all respondents

• The illustration below explains the graphs used

50


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51

Data Sources – Interviews

Behaviour Interviews Deep Structured Interviews (DSIs)

• 58 face to face behaviour Interviews and a further 19 telephone

interviews were conducted, focussed on observing risk behaviours and

understanding people’s perceptions

• Participants included 15 key roles (e.g. Leadership and State

Managers), 5 State Risk Managers, 28 volunteers who self selected

through the survey process and 30 randomly selected advisers /

assistants from across 5 states and career levels

• Quotes from behaviour interviews (and DSIs) have been illustrated in

speech bubbles. These quotes have been extracted from notes taken

during the course of the interviews

• Demographic information has not been provided to protect the

confidentiality of interviews

During the course of the Risk Culture Review, 120 interviews were conducted providing insight into the risk mindsets and behaviours of a broad

cross section of MPW

• 43 ‘Deep Structured Interviews’ were conducted to identify the root

causes that drive risk-related behaviours including understanding

peoples mindsets and other factors.

• Participants included 7 key roles, 4 State Risk Managers and 32

advisers / assistants from across the 5 states and career levels

• The following statements , distilling key insights from the behaviour

interviews, provided the basis for discussion:

• MPW Australia’s organisational model (“400 individual

businesses”) recruits and provides freedom for many different

types of advisers; however the rules and boundaries people are

expected to operate within are unclear.

• The effectiveness of the risk function has eroded over the past few

years, and many aspects are treated as ‘form over function’.

• People feel varying levels of personal accountability for different

types of risk – for example, compliance risk versus financial risk.

• There is some lack of openness in MPW Australia, including

candid discussion across levels and teams regarding risk issues,

errors and concerns.

• Management, advisers and other staff sometimes seek to influence

each other in ways that are not constructive and/or appropriate.

• Leadership are very focused on revenue and key relationships, and

don’t always ‘walk the talk’ when it comes to risk and values.

• Consequences for non-compliance are often managed

inconsistently.

• Continuous development on risk and other technical topics is often

approached from a compliance angle (for example, meeting

licensing requirements) rather than genuine skill building.

• Risk-related values and standards of individual behaviour vary

widely across the business.

22 33 45

Risk culture indicator

% of ‘Detrimental’

behaviours

selected as “more

like MPW”

% of ‘Desirable’

behaviours

selected as

“more like MPW”

% of

‘Developing’

behaviours

selected as

“more like MPW”

Behaviours relating to “Communications”




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52

Data Sources – Organisation Mechanisms Review and Fact-Based Analysis

Organisation Mechanism Review Fact Based Analysis

• An ‘Organisational Mechanisms Review’ evaluated the prevalence of

organisational mechanisms (e.g., systems, processes, procedures and

other formal aspects of the organisation) that support and encourage

desirable risk behaviours in the business

• 7 individuals from across the business provided a range of

documentation towards the review

• In total, 125 artefacts were reviewed including policies, risk reporting,

strategies, and charters

• These artefacts were assessed according to the Risk Mindsets &

Behaviours framework

During the course of the Risk Culture Review, 120 interviews were conducted providing insight into the risk mindsets and behaviours of a broad

cross section of MPW

• Data analysis was used to confirm if perceived behaviours are actually

occurring, and to draw insight of knock-on effects

• This process involved testing behavioural and root-cause hypotheses

with Macquarie data to establish a fact-base for those hypotheses

Embedded

Range of organisational

mechanisms to facilitate visible

involvement and role modelling

of senior leaders in risk issues

Evidenced

Senior leaders

required to participate

in some risk issues

Not Evidenced

Little systematic involvement

of senior leaders in risk-related

activities and/or

communications

Senior Leadership

Risk culture indicator

Rating of level of evidence

for mechanisms supporting

the risk culture indicator

Adl.

Bris.

Mel.

Per.

Syd.

Jun

11 Dec

11

Jun

12

Dec

12

Mar

13

No

advisers

Audited

In 2012

53

66

71

36

149

59%

49%

59%

9%

14%

ARA position filled

ARA position vacant

Ave = 26%

for locations

with gaps in

ARA

resource

Ave = 53%

for locations

with ARA

continuity

Example Analysis


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Appendix 2 – Tier 1 Analysis

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54

Risk Culture Review – Overview of Approach

This review uses the Macquarie’s risk culture methodology and follows a two tier approach to identify the prevalent risk-related behaviours

(Tier 1) and then probe key areas to understand the root causes for why people behave the way they do (Tier 2).

Tier 1 – Identifying Risk Behaviours (Complete)

Tier 1 focuses on identifying risk-related behaviours, both desirable and detrimental.

The outcome is the identification of key focus areas to explore in Tier 2. The following

research and analysis techniques were used:

Behavioural Interviews

Observing risk behaviours and understanding people’s perceptions

• 58 x face-to-face interviews completed across 5 States

• 19 x structured telephone interviews completed

• Includes 28 volunteers who self selected through the survey process

Risk Culture Survey

Gaining perspective on the prevalence of risk-related behaviours

• 467 people responded over a two week period

• High response rate (79.4%)

Organisational Mechanism Review

Reviewing mechanisms to understand how they reinforce a clear expectation of

risk behaviour

• 91 files/artefacts reviewed (e.g. policies, risk reporting, strategies, charters)

Tier 2 – Understanding why people behave the way they do (Commenced)

Tier 2 seeks to identify the root causes that drive risk-related behaviours including

understanding peoples mindsets and other factors. The outcome is an action plan to

remediate areas of weakness in the MPW risk culture.

Key activities include:

Risk Culture Framework

• 40 x Deep Structured Interviews (DSIs) across 5 States (from 26 March)

• Fact Based Analysis to quantify behaviours and identify implications

• Workshop to present synthesised findings back to the leadership team with

the goal of understanding current risk culture and define actions and

accountabilities (Targeted for 1 May)


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Motivation

The reasons why

people manage risk the

way they do

Risk Culture Review: Tier 1 Snapshot

Weaknesses identified across all sixteen risk culture indicators are systemic, an emerging theme is that risk management efficacy and proactive

activities to promote risk understanding have eroded over time.

These findings are a ‘snapshot’ of what has been heard to date, further analysis is required in the next stage of the review to identify root causes.

• Advisers have a strong client orientation and ‘want to do the right thing’ (however, feel that they are not supported to do so)

• Since the announcement of the EU and impending FoFA changes, people recognise the need for change and greater focus on risk and compliance

• New MPW leadership and direction have set the stage for transformational change

• ‘Informal’ teams and networks operate within larger offices (in pockets) and have the potential to be leveraged to drive change

• ‘400 independent businesses’ within which the management of risk is inconsistent and often seen as the responsibility of Risk and

Compliance teams

• Strong strategic focus on revenue and growth, often at the expense of appropriate risk behaviours

• Systems and processes are seen as laborious and cumbersome, resulting in manual workarounds or non-compliance

Organisation

How MPW is structured

and what is valued

• Leader behaviours do not consistently reinforce risk messages

• Open and constructive challenge is not a strong feature within the business

• Low adviser confidence in their personal understanding of risk and compliance obligations and a lack of supporting mechanisms

provided by MPW

• Absence of systematic risk assessment (capability and appetite) through the recruitment process

• Inconsistent MPW staff inductions fail to set risk obligation and behaviour expectations

• Consequence management is seen as discretionary, untimely, with many precedents for exception

• Performance appraisal processes are lacking and rewards focus on revenue at the expense of risk

• Lack of clarity of risk accountabilities, including the definition of ‘risk’, the definition of the State Manager role and rules/boundaries

Relationships

How people in MPW

interact with others

Identified Risk Culture Challenges

Strengths to Build On

Risk Competence

The collective risk

management

competence in MPW

55


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• The MPW business model is described as a ‘franchise’ of independent businesses

lacking a consistent end-to-end risk management approach

• Participants report a lack of understanding around personal accountability for risk

• Many interviewees implied that risk management is the responsibility of the Risk and

Compliance teams

• Risk management is perceived to be secondary to revenue generation

Organisation

• ‘400 independent businesses’ within which the management of risk is inconsistent and often seen as the responsibility of Risk and Compliance teams

• Strong strategic focus on revenue and growth, often at the expense of appropriate risk behaviours

• Systems and processes are seen as laborious and cumbersome, resulting in manual workarounds or non-compliance

Behavioural Interview Insight

• The risk management framework and related policies are recognised for their intent,

however, seen as poorly adapted to suit day-to-day work

• Risk staff are valued but have limited input into business strategy

• Risk and reporting are a low priority compared to financial performance

• Half of respondents indicated that the tension between RMG and the business is

inevitable because their goals are different

Summary Insights

Organisational Mechanism Insight

Survey Insight

Strongly Agree Agree Neutral Disagree Strongly Disagree

• Strong strategic focus on revenue and growth

• Explicit alignment of organisational goals and values, business strategy, and risk

principles is lacking

• Processes and procedures are regularly updated, but may not be embedded into day-

to-day work

• Delineation of risk responsibility is somewhat unclear

In BFS and MPW risk is delegated to

the Compliance Team - there is no

business ownership

Risk governance is operationally-

focused, and the hard conversations are

not happening

You’ve got 400 Advisers running 400

businesses. But that is a risk. You’ve

got 400 guys running a business their

own way

Revenue is valued, not risk

management

'MPW is quick to adapt its risk

management policies, processes

and procedures as significant

changes occur in the business

People in MPW prioritise risk

management and reporting

Leaders in MPW demand financial

performance irrespective of how it

is achieved (R)

Our risk management

professionals take a lead role in

guiding key risk decisions

(R) Indicates a question asked in a negative context

How the organisational

environment is structured and

what is valued

11%

9%

10%

28%

16%

23%

39%

23%

26%

34%

25%

29%

46%

29%

20%

9%

9%

5%

7%

0% 20% 40% 60% 80% 100%

56


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Relationships

• Leader behaviours do not consistently reinforce risk messages

• Open and constructive challenge is not a strong feature within the business


• People generally feel an obligation to challenge, however, open and constructive

challenge is not regularly occurring

• Over a third of respondents agree that it’s expected they will do as they are told and

that revenue is valued by leaders above risk and compliance requirements

• Current communication channels are seen to be ineffective and communications from

leaders are at times insufficient and non-transparent

Summary Insights


Survey Insight

Message coming from Sydney is not

always as strong as it might be

When things go wrong, we don't know

why - It's not communicated. We don't

talk about the behaviours here a lot

There is a huge culture of ranking and

remunerating by revenue

You have 350 sole traders that don't

see it as their role to call out or

challenge behaviour

People in MPW challenge others

constructively if they think that

they are not doing the right thing

I receive useful communications

on all important issues related to

risk in MPW

Senior Macquarie leaders

demand results - it doesn’t matter

how the organisation gets them

(R)


• Staff indicate that managers are too reactive and focus on issue management

• People perceive a lack of proactive emphasis on coaching and leadership

• Some staff are reluctant to challenge either due to the siloed [adviser] business focus

or fear of consequence

• Some people had experienced ‘filtering’ of messages when risk issues were escalated

• Email is described as the main communication channel but seen as untailored and

ineffective, with a desire for greater emphasis on other channels (e.g. targeted group

knowledge sharing sessions)

• Outside of the senior leadership team, few forums exist to facilitate open discussion

around risk within and across teams and levels

People in MPW are expected to

do what they are told, no matter

what (R)

How people in the

organisation interact with

others


8%

10%

5%

26%

31%

38%

22%

26%

29%

22%

31%

35%

31%

24%

36%

5%

4%

6%

6%

0% 20% 40% 60% 80% 100%

57


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Motivation

• Consequence management is seen as discretionary, untimely, with many precedents for exception

• Performance appraisal processes are lacking and rewards focus on revenue at the expense of risk

• Lack of clarity of risk accountabilities, including the definition of ‘risk’, the definition of the State Manager role and rules/boundaries


• No formal performance appraisal mechanism for advisers

• File reviews are conducted on a sampled basis, remediation focuses on the identified

issues within sampled files only

• There is evidence of consequence and remediation planning for individuals where

behaviour clearly contradicts risk principles

• Role definitions that clarify accountabilities and personal responsibilities are lacking

• Advisers report a lack of constructive feedback regarding risk activities

• Participants report revenue-focused incentives and instances of favouritism (e.g. leads

going to ‘favourites’ first)

• People report that lower level breaches are taken less seriously and that

consequences for high revenue generators can be over-ruled

• Participants perceive limited reward for people who manage risk effectively, citing

limited punishment for risk taking and an emphasis on meeting revenue KPIs

• Many participants indicate they get no feedback on their risk capability

• Many people do not appear to accept accountability for managing risk or admit to

mistakes

• People indicate an understanding and consideration of MPW’s risk appetite when

making decisions involving risk, but may also bend the rules when it suits them

Summary Insights


Survey Insight

Where people who contravened a

regulation and had a time period set to

rectify, but then didn't meet this

timeframe and asked for an extension,

there should have been a breach…

There is no improvement in your pay to

reduce risk…

Reducing risk in business comes at a

huge cost if you have inadequate tools

and it takes an age to get compliant… If

people can work around and focus on

revenue they do… They've really gotta stuff up to get

penalised…


The reasons why people

manage the risk the way

they do

People in MPW are penalised if

they take unacceptable risks,

even if their actions generate

positive results'

I regularly receive feedback on my

ability to manage risk effectively

People in MPW admit when they

have made mistakes

People in MPW accept

accountability for managing all the

risks that they are responsible for


8%

10%

7%

8%

23%

33%

26%

28%

31%

27%

29%

33%

31%

25%

34%

30%

7%

6%

3%

1%

0% 20% 40% 60% 80% 100%

58


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Risk Competence

• Low adviser confidence in their personal understanding of risk and compliance obligations and a lack of supporting mechanisms provided by MPW

• Absence of systematic risk assessment (capability and appetite) through the recruitment process

• Inconsistent MPW staff inductions fail to set risk obligation and behaviour expectations


• Some knowledge sharing channels exist with content on key risk topics

• Few systematic methods exist to refresh risk competency

• Few mechanisms exist for assessing risk competence / attitude during recruitment or to

provide a consistent induction experience to set clear behaviour expectations

• Risk capability and knowledge development activities are described as ‘tick-the-box’

• Participants perceive a difference of risk skill between planners and brokers

• MPW induction processes are described inconsistent, on-boarding activities are left up

to the business or ‘who you share a desk with’

• Participants indicate that programs to support knowledge sharing for Advisers have

gradually been discontinued

• People believe they take the time to coach and teach others, yet this is also reported as

being lacking in the business

• The majority of participants agree there is a clear expectation for them to adhere to risk

and compliance requirements, these expectations are not adequately communicated or

assessed during, recruitment, induction or performance feedback processes

• Participants indicate that while they are expected to keep skills current, they are not

supported to do so

Summary Insights


Survey Insight

I feel as though I would have benefited

from a comprehensive training course

as part of the induction

It’s a key weakness that we make the

same mistakes or we identify issues and

don’t really address them

Coaching is limited to only the minimum

standard of risk and compliance

Prioritising active knowledge sharing

around risk has only really started since

the EU

People in MPW take the time to

teach others how to manage risk

more effectively

An individuals risk management

capabilities are assessed during

our recruitment process

We are expected to keep our risk

management skills current


The collective risk management

competence of the organisation


9%

13%

34%

32%

29%

31%

9%

25%

21%

60%

4%

3%

25%

0% 20% 40% 60% 80% 100%

59


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