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The collapse of Storm Financial
Acknowledgement of effect on investors
The committee acknowledges the catastrophic effect that the collapse of
Storm Financial has had on many investors, particularly those double-geared
clients who were not afforded an opportunity to respond to margin calls; fell
into negative equity; and were sold out of their portfolios in late 2008, at or
near the bottom of the market. These investors now face great challenges in
meeting living expenses, repaying debts and, in some cases, keeping their
Some media reporting and some submissions to the inquiry have suggested that
Storm investors were generally caught up by the promise of high returns and
were motivated by greed to enter into risky investment arrangements. However,
the committee has received evidence from many clients that their key aim in
investing through Storm was simply to generate an independent income during
retirement. Indeed, it was one of Storm's marketing strategies to appeal to
Our aims were not to be rich but to be mostly independent in
our older years and enjoy the company of our family.
... the plan was that we would do all this investment and be
independent, never have to claim a pension off the government and be able to
look after ourselves.
Like the majority of victims caught in this financial
disaster, we were made vulnerable by our desire to be independent in our
retirement. Sadly, at our initial consultation in 1997, we had set a time line
for our investment portfolio of seven to 10 years. If we had not been persuaded
otherwise we would not be here today. However, once in the Cassimatis system it
was very hard to get out again ...
The committee has received in excess of 200 submissions (some on a
confidential basis) from Storm investors. They are a variable group: some were
nearing retirement; some are already retired and relatively elderly; some have
young families to support well into the future. Many came from the same
community or workplace, and many were referred to Storm by friends or family:
Storm asked people considering them to talk to others who
were current clients. People like to share prosperity and they talked
positively, even in glowing terms, about how they felt when they were securing
their future. Now, after the fact, there are whole families who are caught up
together. They have very few financial reserves that are not caught up in this
to use to keep roofs over their heads. People feel morally devastated to have
brought their beloved family and friends into such a terrible situation. This
cross of financial loss is a big enough one to bear without additional concerns
about having recommended it to others.
Others were longstanding clients of financial advisers who joined Storm
or whose previous firms were bought by Storm, particularly during recent years in
the period when Storm was looking to launch an initial public offering (which
ultimately did not go ahead). In these cases, clients migrated to Storm with
their adviser, rather than actively seeking Storm out.
For many investors, the consequences of their involvement with Storm
have been financially and emotionally devastating. Their losses have typically
been magnified by the degree of leverage in which they were encouraged to
engage. Some are now faced with trying to return to work at a time in their
lives when it will not be easy for them to find work, or when doing so will be
inconsistent with their current state of health.
The committee sincerely thanks those submitters and witnesses who have
contributed to its deliberations and knowledge in relation to the collapse of
Limitations of the committee's inquiry
The committee's understanding of Storm Financial's business model, the
company's collapse and the subsequent impact on clients has been informed by a
range of sources, including:
submissions from affected clients, including from the Storm
Investors Consumer Action Group (SICAG);
submissions from financiers including the Commonwealth Bank of
Australia (CBA), Macquarie Bank, Bank of Queensland, ANZ Bank and MLC/NAB;
submissions from former staff of Storm and CBA;
a submission by the regulator, the Australian Securities and
submissions by industry bodies and professionals;
evidence taken at public hearings;
media reporting; and
other information in the public domain, including on relevant web
The causes of the collapse of Storm Financial are complex and contested.
The committee's sources disagree in many details, including the true nature of the
relationship between Storm and the banks (particularly but not solely the
Commonwealth Bank); the processes for filling out loan documentation; the
obligation (if any) of the banks to contact customers directly regarding margin
calls; key meetings and events between September 2008 and January 2009; and the
sophistication and understanding of risk by clients who entered into double‑geared
investment strategies under Storm's advice.
In the following sections, the committee summarises the range of
information that has been put before it and comes to a view on the key lessons
to be learned out of this collapse.
At the outset, it is important to emphasise that the committee is not a
judicial body and has no power to make judgements in relation to individual
claims that have been brought to its attention. It has also not been possible
for the committee to resolve all the contradictions in the evidence put before
The committee's overall role, having regard to what it has learnt
through the examination of this corporate collapse and others, is to make any
necessary recommendations for legislative change or regulatory improvement to
help guard against, or mitigate the effects of, similar collapses in the
future. The committee's deliberations on the need for regulatory or legislative
change in Australia's financial products and services sector are discussed in
further detail in Chapters 5 and 6 of this report. In Chapter 6, the committee
sets out eleven recommendations for change.
The Storm Financial business model
Storm Financial had a total of around 14,000 clients, of whom approximately
3000 were leveraged investment clients. Typically these investors, who included
retirees or people intending to retire in the near future, were encouraged to
take out loans against the equity in their own homes in order to generate a
lump sum to invest in the share market, via index funds (primarily Storm-badged
Colonial First State managed funds and Storm-badged Challenger managed funds).
Clients were generally then advised to take out margin loans to increase the
size of their investment portfolio.
Mr David McCulloch, long-time group accountant for Storm Financial,
summarised the business model as follows:
... using debt, mortgaging the home, using margin lending and
using only share market investments.
All Storm advisers operated under direction from Storm's headquarters in
Townsville. As Mr Gus Dalle Cort, director of Storm Financial (Nine) in Cairns,
explained to the committee:
Everything was directed back to the one system at Storm, from
the way we developed our statements of advice to the process of quoting to
banks. Everything was sent back to Storm central and farmed out from there. Our
planning was done back-office, but our input from talking to a client and
certainly a lot of our file notes were all sent to the one point.
This description was corroborated by Mr McCulloch:
No advisers were permitted to undertake their own financial
planning modelling. Rather, their role was to explain the Storm financial
planning model to clients who were interested and to ensure that clients who
were not comfortable with this did not become a client. All modelling of plans
were undertaken by Storm's compliance or cash flow modelling cell, headed up by
Clients were charged an up-front fee of around seven per cent for the
advice they were given by Storm. Before they became clients, they were required
to participate in a number of 'education' sessions. The committee was told by
Mr Gus Dalle Cort that it took on average 180 days to be accepted as a client:
We had a dozen staff in Cairns, including me. We met existing
clients and new clients, and we had a process. We tracked everything at Storm,
and the process for a client to do business with Storm Financial took, on
average, 180 days.
... That process entitled the client to a number of sessions...
This involved finding out not only their personal position but also their
financial position and right through to having a number of banks quote on the
business, whether it was margin lending or equity lending...
We as a business did not go out and invent any products. We
went to the marketplace. We invested in a vehicle called 'index funds' ... We
then asked, 'How does one make more money to expand on one's capital base?'
Mr Dalle Cort explained the education sessions to the committee as
We would show the clients the difference between shares, cash
and property. We would show them volatility and educate them on how different
markets react and give them a broad based information session—only an information
session. No advice was given on these evenings, just pure information. Should
clients decide to come back and have a chat to us, they did that on an
individual basis and we would explore their individual circumstances after
For those attendees who ultimately signed up to become Storm investment
clients, margin loans were organised with a loan to value ratio (LVR) of around
80 per cent, with a buffer of 10 per cent. There were some variations in these
figures, depending on the finance provider and individual contract, but as a
generalisation Storm clients were put into margin loan facilities with more
generous LVR and buffer provisions than was the industry standard.
Storm tendered out the client's requirements to a number of banks with
which it did business and claims to have made a selection on the basis of
service and conditions offered. Home lending was organised through a range of
banks; margin loans were largely (although not exclusively) through either
Colonial Geared Investments, which is wholly owned by the CBA, or through
Macquarie Investment Lending.
From time to time, clients were encouraged to 'take the next step' and
further increase the size of their portfolio, by applying for additional margin
loans or increasing their existing margin loans. On occasions, additional
borrowing was carried out on the basis of increased value in an underlying
property. In the wake of Storm's collapse, use of the CBA's VAS system to
revalue Storm client's houses has been a particularly contentious matter. This
is discussed further below, starting at paragraph 3.66.
The completion of loan forms for Storm clients has emerged as a
troublesome area. The committee has been told by many investors that they
signed blank loan applications; that they discovered after the collapse that
they had additional loans that they were not aware of taking out; and that
copies of forms provided by the banks post-collapse show overstated income
figures or asset values that led to grossly inaccurate portrayals of their
capacity to repay the loans. This matter is also discussed further below,
starting at paragraph 3.57.
In a rising market, leveraged investment strategies magnify financial
gains. However, the converse is also true: in the case of a sudden market fall,
losses will be magnified too. Unfortunately, as the market collapse of late
2008 unfolded, Storm's strategy ultimately proved catastrophic for many.
Events surrounding the collapse of Storm Financial
As the world's financial markets collapsed across 2008, the value of
Storm clients' investment portfolios decreased. It is this decline in value and
investor equity, compared with the static value of the loans held, that took
the clients' accounts into margin call territory. In evidence to the committee,
Mr McCulloch reflected that:
In retrospect, the telling period for Storm clients appears
to be around early October 2008...What appeared to be the strength in the Storm
modelling now became its Achilles heel, that is, the margin call at 90 per cent
...Under normal margin lending arrangements, as existed with most or all other
planners around the country, that is, 75 per cent to 80 per cent margin call
ratios, at this time clients would have been margin called and at the very
worst would have had about 20 per cent equity left in their portfolios—enough
in most cases to clear home loan debts—but of course leaving Storm alone to
account for lost values and client dissatisfaction.
There is substantial dispute about what in fact happened to Storm and to
the accounts of Storm clients during the closing months of 2008. The following
claims, some of which are inconsistent with each other, have all been made in
the voluminous evidence put to the committee:
Many Storm investors should have received a margin call or calls
but were not notified of any such call, either by their adviser or by the
Some Storm clients do recall being contacted by their bank(s) but
instructed the banks to deal through their adviser.
Many clients would have been able to rectify their position if
given a chance to act on margin calls at an appropriate time. Instead, many
found out in December that they had moved into negative equity and that their
portfolios had been sold down at some time during October and November, without
their knowledge and at or near the bottom of the market, thereby crystallising
and maximising their losses. Clients remain unclear as to who sold their
portfolios and at whose direction.
Storm staff claim that the information they were receiving from
banks during these critical weeks and months was inaccurate and out of date and
that there was no way for them to check whether client accounts were in margin
Bank staff (from more than one bank) claim that their efforts to
work with Storm to resolve accounts in margin call were not successful and that
requests were not being dealt with in a timely fashion. They also note that
they used the same approach to margin call management with all the advisory
groups they deal with, yet Storm Financial clients are the only group who en
masse failed to be appropriately notified by their advisers of the true
status of their accounts.
The banks claim that their responsibility in the event of a
margin call is to inform the intermediary, the financial adviser, whose
responsibility it is to then work with the client to determine how to resolve
the margin call within the required time frame.
Storm staff contest this by claiming that, based on the
management of margin calls that occurred in 2002, it was their understanding that
the banks were responsible for informing clients directly.
Many clients question why, if the banks were not getting
satisfactory responses from Storm in relation to margin calls, they did not
make more substantial and effective efforts to contact clients directly.
There are also differing accounts of some key events occurring at the
executive and regulatory levels during this period, particularly:
a meeting between Mr Emmanuel Cassimatis and senior Commonwealth
Bank staff in early December, at which Mr Cassimatis attempted to make an
arrangement to consolidate client debts into a large corporate debt facility;
a December attempt by ASIC to get Storm to agree to an
Enforceable Undertaking (EU). Although all parties now agree that this EU was
never signed, at critical periods during December and January clients were
refused advice when they tried to find out the current status of their
portfolios and were led to understand this to be due to an ASIC gag order.
According to Mr McCulloch, at the meeting with CBA staff Mr Cassimatis
offered to transfer the client debt and take it on as a corporate debt, to be
repaid over a three to four year period:
The choice for the bank was to seek money from the clients.
The debt was already out there. Instead of the debt being owed to 400 people,
Storm undertook to have the debt owed to itself. It would be Storm that would
take on the commercial risk of that $40 million or whatever the magic figure
was. But Colonial was more worried about the margin lending negative equity
than anything else. They were not worried about the home loans that were
associated with it. They just wanted their money back for the negative equity.
The CBA characterised the meeting in the following terms:
As best we understand it, the intention was that money would
be borrowed by Storm from the Commonwealth Bank to meet the margin calls of its
The arrangement that was being proposed, as we understand,
was that the bank lend further money to Storm and Storm in some
fashion—frankly, this proposal did not go far, for fairly obvious reasons—would
fund customers to meet their margin calls. I know some importance has been
attached to this by various witnesses, but it was actually against the
interests of the Commonwealth Bank and it was against the interests of our
shareholders. In fact, the liquidator of Storm has reported that Storm was
insolvent in early December; [meaning] a further loan to Storm in those circumstances
had all sorts of legal and insolvency implications.
In discussing the proposed EU, Mr Dalle Cort clarified for the committee
that the instruction not to talk with clients in the closing days of 2008 came
not from ASIC but from Storm's directors:
...by the directors Julie and Emmanuel Cassimatis. We were
instructed by them not to talk to our clients.
Furthermore, Mr Dalle Cort acknowledged that the EU that ASIC presented
to Storm was not agreed to: 'It was never signed'.
Of note, Mr Emmanuel Cassimatis, founder and former CEO of Storm,
believes the collapse of the company was due to the actions of the CBA:
... despite the large amount of conjecture around the issue,
the reason Storm collapsed, when you boil it down, was that the Commonwealth
Bank—the major supplier of credit to Storm and its customers—withdrew the
credit suddenly, without notice and, most importantly, without justification or
indeed without the power to do so under the margin lending contracts.
Despite the fact that the CBA caused a great deal of damage,
it exercised its power simply because it could and chose to wreck rather than
support Storm and our mutual clients as it had done in the past. The decision
by Mr Norris and his colleagues at the Commonwealth Bank of Australia to
withdraw credit was made with full knowledge of the devastating consequences
such an action would cause. Without this action, the margin lender customers
would undoubtedly have suffered some losses, but they would have retained at
least some of their assets and would not be in the devastated financial
condition that most are in today.
There were several more events of note leading up to the collapse,
A $2 million dividend paid to founders Emmanuel and Julie
Cassimatis in December 2008 was successfully frozen in February 2009, following
ASIC‑initiated court action. This freeze was later extended by further
court action by Storm's liquidators.
Attempted court action by Storm against the CBA was interrupted
when Storm went into administration on 9 January 2009.
Liquidators were appointed to Storm in March 2009.
Issues of concern
The overwhelming characterisation of Storm's operations is that the
majority of Storm clients were given the same, or substantially similar,
The big issue would appear to be that Storm was giving the
same advice, irrespective of the client circumstances. It was often margin
loans which possibly exceeded their capacity to pay or even their need for the
underlying investment. It would appear Storm were doing a one-size-fits-all
approach to advice. Everyone was doing the same, getting the same advice and
clearly, whilst they might have been doing the right thing around disclosure
and so on, that is not in line with section 945A of the Corporations Act where
there has to be a sound basis for the advice.
The committee's impression that Storm's investment clients were all
given the same or substantially similar advice was confirmed in an exchange
between the committee chairman and the former CEO of Storm Financial:
CHAIRMAN—It appears that everybody got the same advice
and, in the end, everyone was put into a particular fund, used a particular
type of leverage and used a particular number of lending institutions. They all
seemed to be using the same model. As you describe it, it all seemed to be very
much like a factory but everyone had the same outcome in the end.
Mr Cassimatis—Yes, it was a unique offering—like a
motor car. There was one particular model of vehicle ... Those who wanted that
could buy it ...
Mr Graham Anderson told the committee that he had become aware that many
of the Statements of Advice issued by Storm advisers contained clauses in
common, regardless of whom the advice was being issued to:
My understanding of financial advice is that it is
independent and it is suited to my needs. Since I have been involved with the
committee of SICAG, I have found out that this is not the case and that two
clauses appear on every statement of advice. They basically say:
We have identified that your
current asset base is not large enough to fund the lifestyle that you desire
now, or in the future. You have sought our advice on ways to expand your income
streams so that you can become more financially independent from work and have
lifestyle choices in the future. To improve the provision of capital growth and
income for the future, the size of your asset base should be increased.
Attempting to purchase assets
solely by using your surplus income would result in a relatively small change
in the size of your assets base; hence there would be an excessive delay before
your investment delivered a substantial change to your income or delivered
We recommend that you mobilise
your existing assets to produce an increase in the size of your asset base.
This could be achieved effectively by purchasing liability and offering your
existing assets as security for the loans. The liability would in turn be used
to purchase high quality assets to provide capital growth. This capital growth
will be converted to income streams over time. In doing so, you would be
effectively purchasing the capital base that you require for real wealth
Care must be taken that these
liabilities are kept at levels that are safe and that the servicing of the
liabilities is easily manageable, and both of these aspects have been of
paramount importance in the construction of these recommendations.
To me, if that is on everybody’s statement of advice, I have
a problem with that.
... the fact that everybody got the same advice shows the
cookie cutter mentality. That annoys me, and the fact that the financial
adviser is basically being controlled by the directors of Storm. I find that a
bit of a conflict as well.
The committee cannot reconcile the practice of financial advisers giving
all their clients the same advice, regardless of their life stage and
circumstances, with the existing section 945A obligation to give advice that is
appropriate to individual personal circumstances. In particular, the committee
is not persuaded by Mr Cassimatis's explanation that Storm clients
'self-selected' after being told what the investment model was.
The committee is firmly of the opinion that, for at least a subset of
Storm's investment clients—namely, clients on average incomes at or near the
end of their working lives—the advice to engage in an aggressive leveraged
investment strategy was clearly inappropriate.
Insufficient client understanding of
product, risk and protection
Some of Storm's clients did not understand, or fully understand, that by
borrowing against the equity they had in their family home they were,
effectively, putting their ownership of that home at risk.
The committee has been told that Storm advisers strongly downplayed the
risk of losing the family home:
We were told that the risk was minimal and that the world
would have to fall in before that happened, which it obviously did. But, yes,
we were told that there was a minimal risk.
... we were told that we could not lose our home—
Storm Financial advisers had always told us that our home and
investments would be safe, and we felt secure in that from day one. That
stemmed from the fact that our adviser had worked with us prior to him coming
to Storm. So we had a system there with him already before he went to Storm.
Storm Financial advisers always told us that our home and investments would be
safe. It did not happen that way.
We were advised that, having paid off our house, we had a
certain amount a month that we could use for investing. They called it getting
equity out of our home, which at the time we did not realise meant that it was
Some investors have acknowledged that they signed authority for Storm to
manage their accounts in the event of a margin call, on the understanding that
the following would take place:
If we were to receive a margin call, we were told that some
of our portfolio would be sold down to cover the margin call and that
everything would be taken care of.
Some investors report being reassured by the fact that Storm held a
professional indemnity insurance policy:
This was our first venture into investing in the stock market
and it was all new to us but Mr. Dalle Cort advised us that we were in safe
hands and that even if the market went "egg shaped", there was a
Storm indemnity insurance policy that would ensure that our original investment
would be covered.
... at the seminars ... Emmanuel Cassimatis would say, 'You are
perfectly safe with us. If we were to give you the wrong advice you could sue
us, because we have insurance to cover that.' Those were not his exact words,
but it was something like that.
There has also been some acknowledgement by some that they did not truly
understand the investment strategy they were buying into:
We trusted our adviser and we thought his advice was well
founded ... We thought we understood. This was the problem. A lot of the clients
thought they understood and signed off on that.
Unless you were a financial expert, I do not think anybody
completely understood the model. I think it was ... too complicated and far too
difficult. It all looked simple. When they tried to break it down or seemed to
be breaking it down for people, you thought you understood. But when you look
back at it, you did not understand at all.
The limited understanding that some Storm clients had of their financial
arrangements is of concern to the committee. The committee acknowledges that
some of these clients admit they did not have a strong understanding of the
leverage and margin loan arrangements that they signed up to. Indeed, some explained
that it was out of awareness of their limited knowledge that they sought the
guidance of, and acted on the recommendations of, professional financial
Accordingly, there is a multifaceted problem to solve here:
There is a need to improve the standard of advice offered to
consumers, whether that be through enhanced legislative requirements about the
standard of advice required or enhanced enforcement of existing standards, or
both, so that consumers can be confident about the advice received.
There is a need to better inform consumers about the products signed
up for, so that consumers can take a higher degree of responsibility for
financial decisions and only buy products that entail a comfortable level of
There is a need to ensure that advisers are better informed about
the products being sold.
The committee addresses these matters in a broader context in Chapters 5
and 6 of this report.
The nature of the relationships
between Storm and the lenders
The committee was told by several banks that Storm had firm ideas about
how it wanted the relationship to proceed:
We found that the approach Storm wanted to adopt with the
bank was that they effectively were the central manager of the client
relationship. They requested the bank to respond to their requests for loan
approvals or renewals and for the bank to take Storm's advice directly around
100 point checks and so on, which are part of our normal procedures, and that
they would manage the customer interaction. The bank has a procedure where we
will not do that. Our approach is that we have to contact our customers direct
... We ... have to have direct contact with the clients.
... We were also not prepared to act on Storm's instructions
around rollovers or account maintenance ...Having had a meeting with them, having
gone through this, the bank declined to have a formal relationship with Storm
and Storm said that they would not deal with ANZ.
Notwithstanding comments from the Commonwealth Bank about the routine
nature of its arm's length business relationship with Storm Financial, this is
not necessarily how the relationship was seen by—or portrayed to—Storm's
According to SICAG:
Evidence before this committee shows patently that the
Commonwealth Bank had what can only be described as an umbilical connection
with Storm Financial, one that has endured for many years. A key factor in the
decision by the majority of our members to engage in the Storm strategy was the
strength of the Storm connection with the Commonwealth Bank and its funds
management division, Colonial First State.
The CBA did not see the relationship in the same light. According to
senior executives of the bank:
It was not a relationship that ran to the highest levels of
CBA. It was an association whereby Storm did refer customers to the CBA ... The
relationship was no more than a referral of business to us, and we in turn
serviced the business.
Mr Ralph Norris, CEO of the CBA, put the relationship with Storm in the
context of the bank's overall business:
My view is that this was not a tight relationship. From the
organisation's perspective—from my perspective, from the board of the bank's
perspective—we are talking about an organisation where the revenue from Storm
itself was less than $10 million per annum and, when we look at that in the
context of around $14 billion of revenue per annum, this was relatively, in
relation to the overall bank operations, quite small.
The CBA does acknowledge, however, that there may have been a strong relationship
at a local level:
Although the intent was genuinely to assist customers, the
local relationship with Storm was sometimes too close, and on occasion we lost
Other banks may also have had close relationships with Storm at a local
level. For instance, the majority of Bank of Queensland home equity loans for
Storm clients originated through the North Ward branch.
Furthermore, BOQ admits that in approving at least some of these loans,
officers failed to check financial information directly with the client and
instead relied on information provided through a third party, that being the
Storm financial adviser. This approach was outside BOQ's lending policy.
The committee is concerned that close relationships and integrated systems,
at least at the branch level, and perhaps in combination with bank sales and lending
targets discussed at paragraph 3.54, may have caused some bank staff to lose
sight of who their true customer was and to fail in their obligations under the
Code of Banking Practice to exercise prudence and diligence in their lending
The committee therefore welcomes the acknowledgement by several banks
that compliance with lending policy needs to be improved. The committee also
welcomes the expected imposition of responsible lending provisions on credit
providers under National Consumer Credit Protection Bill 2009.
Increases in bank sales and lending
The committee received suggestions that increases in sales and lending
targets affected bank behaviour. Mrs Carmela Richards, who worked for the CBA
for 20 years until she left to work with Storm in January 2000, commented:
I started with the CBA when I was 15 years old and I never
thought I would work anywhere else, but the bank changed dramatically in my
last five years or so and there was an extreme sales culture that left little
time for client service, which was a major deciding factor in my decision to
Mrs Richards and Mrs Devney told the committee that increased targets
caused many staff to leave the bank and that there had been a change from a
service culture to a sales culture:
...people left the bank because they were not happy with having
to have those sales targets and those pressures put on. A lot of people
believed that service would bring referrals, and I believe that is the case as
When it was suggested to Mr Ralph Norris, CEO of the CBA, that increased
sales targets in the Townsville region may have skewed the behaviour of CBA
staff and caused a rapid growth in the relationship with Storm, he defended the
CBA's sales and service program:
The selling process and the sales and service program that we
have in the Commonwealth Bank is based around what is called a needs analysis
process, which is identifying the needs of a customer and providing products
that meet those needs.
... from my perspective, I think that our sales and service
program has actually done a lot for our customers and certainly improved our
relationships. I think it is also important to note that we run a balanced
scorecard—it is not all about sales; it is about making sure that risk factors
are looked at; and it is about making sure that our people surveys are of a
high level from the point of view of engagement.
Inaccurate figures on loan applications, leading to inappropriate lending
The committee received considerable conflicted evidence about who filled
out loan documents on behalf of clients. The committee received many written
submissions from individuals stating that they signed blank forms, discovered
post collapse that they had loans they did not even know about, or belatedly
discovered that information on loan documents—particularly relating to income
and assets—was inaccurate:
It was either Storm or the banks were putting their own
figures on the forms. We obviously signed the loan applications to get the
We signed the forms at Storm Financial.
They were blank.
Mr Dalle Cort of Storm (Nine) in Cairns told the committee that the
documents were filled out by the banks:
Loan documents were done by the banks, not by Storm ... They
were bank documents ...If they came from the bank, they were all filled out and
they just needed a signature from the client. So they were all filled out by
Mrs Carmela Richards, speaking in her capacity as a former CBA employee,
confirmed that bank staff completed these forms but denied that they lied about
The staff did not lie about income or assets. Anything that
was told to the bank was advised to us by the clients and with appropriate
supporting data provided to back this up.
The forms were apparently not filled out by staff at Storm
headquarters in Townsville:
We did not complete bank applications. We would send our own
form of advice listing the client's position. As far as I remember, all of the
banks—and we have had discussions with them on many occasions over the
years—were adamant that their credit policy was that they had to confirm with
the client, and that was perfectly acceptable. We understood they would either
do a face-to-face interview depending on the bank or they would do it over the
phone ... There was feedback to suggest that was occurring so I am a little bit
surprised to hear that it maybe was not.
Many investors question why the banks did not take greater responsibility
for ensuring a borrower's ability to repay their loans:
I do believe that the banks have some responsibility in our
demise, as not once did Colonial meet with us or interview us regarding our
loans or how we intended—at our age—to repay approximately $1.6 million. If
things went bad, as they did, we were as we are. Not once did they contact us
regarding a margin call, and we were given no opportunity or say in the matter.
The first contact we had with Colonial was on 8 December, and by that time
everything had been sold down. That, consequently, left us with nothing.
Several banks have explained to the committee that, for margin loans,
standard industry practice is to simply use the value of financial assets such
as shares, cash or managed funds to secure the loan.
The committee is concerned by the bulk of evidence received that
suggests there may be a gap between bank policy and practice regarding the
approval of loan applications. The evidence that the committee received from
Storm and bank staff about approval processes did not match up with the
evidence the committee received from investors about inaccurate and misleading
data on their loan forms. The committee has some doubt about the degree to
which banks were acting ethically, appropriately, morally and prudently in
their decisions to grant loans to some Storm customers.
The committee is also concerned by the number of people who indicated
that they signed blank forms or documents that they had not read. The committee
reminds consumers that their ability to protect themselves from poor decisions
or poor advice will be increased by them exercising greater caution and
diligence before agreeing to sign any documents.
The committee notes the expected passage through parliament of the
National Consumer Credit Protection Bill 2009. This imposes responsible lending
conduct provisions on lenders, who for the first time will have a legislative
obligation to ensure that loans are not unsuitable for clients. This will
provide a new layer of protection for clients entering into the full range of
lending arrangements with banks and other credit providers.
Misuse of valuation assessment
The committee has heard some suggestions that local CBA staff sought
additional business by proactively and inappropriately using their desktop
computer home valuation assessment system (VAS) to revalue Storm client's
houses, thereby making them eligible to borrow more against the new, higher
CBA executives contested this suggestion:
Effectively, Storm was selecting customers who were
Commonwealth Bank loan customers. They would approach the bank under the
pretext of their customer wanting to take out additional borrowing against
their home. They were not solicited or sourced by the bank ... we were told the
customers were supplying their owners' equity—the value that they put on their
own home—and VAS was used to decide whether a valuation was required to verify
that valuation. The only spreadsheets that I have seen are spreadsheets that
came in from Storm, where we used the VAS system to identify whether an
external valuation was required. The results of those were then sent back to
The CBA has, however, admitted that its staff did not always use VAS
We have discovered that, when it came to providing loans,
mostly secured by property, we failed at times to follow our own policies and
lending practices. Additionally, a property valuation assessment system known
as VAS was misused on occasion by some staff with the effect that loans against
some properties were larger than they would otherwise have been.
This was disputed by Mr Andrew Jackson, a former CBA employee:
I would argue that the staff working in the team did not use
VAS in any way that is not standard practice by almost every lender in
Australia ...there is no override button. If there was a problem with how they
were using VAS then this would have been an issue for every lender in
Poor management of margin calls by
That breakdowns in handling and resolving margin calls during September
– December 2008 had a catastrophic effect for many of Storm's investment
clients is not in dispute. What is in dispute is who is responsible for this
Many investors have expressed understandable frustration to the
committee that delays in Storm receiving or acting on margin calls led to them
being in a much worse position than would otherwise have been the case:
If we had been sold down early enough then there would have
been enough cash in that accelerator cash account to cover the margin loan and
there would have been enough money for us to live on—to pay our bills and
petrol; the lot—while the market was doing its thing.
Mr David McCulloch told the committee:
Advisers were specifically told not to contact the margin
lenders, leave it to Storm Central, as Colonial Margin Lending and Storm
Central preferred one point of contact as resources were thinly stretched.
We now know the share market had temporarily recovered by
around 15 per cent in late October to early November, and if ever the margin
lenders were going to act now was the time. The fact they did not—and with assurances
from the principals they were working closely with the lenders—gave assurances
in the advisers' day-to-day client dealings. The rest, sadly for all concerned,
is history. I have met many ex-clients who are now emotionally and financially
destroyed. My personal situation is no different from many clients.
According to evidence from Storm staff, Storm directors Emmanuel and
Julie Cassimatis strongly believed that Storm's investment model should have
been able to ride out the crisis, if margin calls and buffers had been
triggered appropriately. Mr David McCulloch explained to the committee that:
... the advisory team at Storm received many assurances from
the senior executive that, whilst these were worrying times, the Storm model
had stood up in previous testing times, the banks knew this, and clients who
remained steadfast came through the process in a stronger position ...
We were constantly assured during the falls of early to
mid-2008 that the business's cash buffers and reserves in place would be tested
and used up to support clients approaching danger levels or needing living
allowance support from Storm. Whilst downward share market pressure existed
from December 2007, this was explained to advisers as normal share market
volatility. In any event, should downwards share market pressure persist, we
were informed, and advised clients accordingly during 2008, that there were a
number of levels of comfort available to Storm clients. These were pretty
generous buffers to margin call, 90 per cent as agreed with Colonial Margin
Lending, and 85 per cent with Macquarie Bank. If someone was sitting at 60 per
cent in early 2008—and I believe most were; and that is after the market had
already fallen 15 per cent—they still had protection against a further market
fall of around 35 per cent before a margin call would occur. At this time
no-one was predicting a fall of this magnitude. Even if they did, along the
way, client cash reserves could be used to support the portfolio. Failing this,
we were advised that some of the portfolio could be converted to cash temporarily,
with an undertaking by Storm to support clients re-entering the market by
providing its own funds as supplementary margin loan security once a recovery
appeared underway. After all, this is exactly what happened for some clients in
the 2002-03 downturn and it worked well.
Mr Dalle Cort is of the clear view that the difficulties experienced by
Storm clients resulted from a failure of the banks to advise Storm of margin
calls in an appropriate and timely fashion:
Storm Financial would still be in business today had our
clients actually got a margin call.
When asked what he was doing to monitor the falling market and whether
he was asking the banks appropriate questions about customer accounts during
the period in question, Mr Dalle Cort told the committee that the banks were
not able to provide accurate information about account status during this
... when one gets a margin call one should be informed. But it
was impossible for one to be informed when at that point in time—in this case
for over a month—the data being received directly from the banks, being
Macquarie and Colonial Geared Investments, simply did not show that.
... the data coming through from the banks was bizarre. It
certainly was not showing what was real.
Mrs Carmela Richards, compliance manager for Storm, explained to the
committee how Storm generally managed margin calls:
We did not have a written process for what we would do, but
the process was that, if we were advised that a client was in margin call, we
would have a look at it in the compliance area from the information that we had
on the file already to see what we could do to fix it quickly and easily. As
well as that, we would let the adviser know and ask the adviser to talk to the
clients about it and see if they had any resources or anything they could do to
fix it as well. That was the general process. However, somewhere in the middle
of October we had 600 clients theoretically go into margin call. If you looked
at the Colonial Geared Investments website for any period after that for a
number of weeks there were 600 clients in margin call, but that information was
not correct. Colonial themselves, as far as I recall, did not give me any
information on clients that were in margin call for that period for a good
three weeks. Were we issued with margin calls? Yes, generally we were advised.
Was it reliable to look at their website and understand who was in margin call
and who was not in that period? No, it was not. Was Colonial actively following
up on the margin calls during that period? No, they were not ... The normal
process is easy. You let us know, we will deal with it, we will let the client
know, we will have the adviser talk to them and we will give some advice about
how to fix it and we will put it in writing once that advice is formalised ...
But it was not normal in October.
Mr Cassimatis claims there was a deliberate strategy by the CBA not to
issue margin calls to Storm:
Despite the multiplier effects of [the global financial]
crisis, the directors of Storm firmly believe that its risk management
strategies would have ensured that the company and clients would still have
been standing, albeit somewhat battered and bruised, had the CBA issued its
borrowers the margin calls as it had always done in the past. For some reason
unknown to us, this protocol had been switched off. We know that each day the
CBA system produces letters to be sent to customers. These letters were the
bank's notices of margin calls. We know that someone decided not to send these letters.
... CBA's data feeds to Storm, and hence its website on which
the customers and Storm were supposed to be able to check their positions, were
deeply and hopelessly flawed.
There seems to have been an unacceptable degree of confusion and
abdication of responsibility in relation to communicating margin calls to
clients. Mr McCulloch put this responsibility firmly with the banks:
From my experience, the margin lenders always made margin
calls to clients ...
Mrs Carmela Richards echoed this understanding of the situation:
Colonial Margin Lending has stated that it was Storm's
responsibility, not theirs, to action margin calls. The last time Storm had to
deal with margin calls was in 2003 and then only a relatively small number. The
bank's procedure at that time was to issue a margin call in writing to the
clients and to advise Storm as well. If the procedure had changed so much,
someone should have let us know what our perceived obligations were and
provided training on how to deal with them to ensure that both of us were on
the same page. I find it incredible that when the risk was so much with the
bank, when they were the ones that stood to lose if not managed correctly, they
would release so much control and responsibility without being sure that each party
clearly understood/agreed their role and had the systems and training in place
to deal with it.
In their joint submission to the committee, Storm staff members Mrs
Richards and Mrs Devney state:
The Commonwealth Bank has stated that Storm was adamant that
as the customer's financial adviser it was its responsibility, not theirs, to
action margin calls. This is not true.
Whilst Storm has always been happy to assist clients in
Colonial with the margin call process, we understood the bank had their own processes
for advising clients of margin calls.
But the evidence of these Storm staff is contradicted by the statement
of another staff member, Mr John Fuller, who clearly states his understanding
that the margin calls would come to Storm, not to the clients:
I was educated from the outset within Storm Financial that no
client would ever receive a margin call direct from their margin lender. If
maximum LVR's were breached or threatened, the margin lender would direct the
call through Storm Financial and the problem would be dealt with by both bank
and advisory body according to client position.
In response to these contradictory claims, the Commonwealth Bank
acknowledges a change in process since 2002-03 regarding the management of
In 2002 and 2003, the process for margin calls was that the
dealer—the adviser—would actually notify the client and that would be followed
up by letter from Colonial Geared Investments, which would typically arrive
four or five days later.
In contrast, the situation in 2008 was described as follows:
Our practise undoubtedly in the business at the time, with
7,000 dealers, was to make margin calls through the dealers. I can say that, in
the October 2008 to December 2008 period, 15,000 margin calls were made to
customers outside Storm from the Colonial Geared Investments business. To the
best of my knowledge, having made inquiries of my team, every one of those was
made through a dealer. So our understanding was certainly that the margin calls
for Storm customers would be made through Storm, as the financial adviser, and
three files a day of information were provided to Storm to this end.
The CBA contends that this is standard industry practice:
... the industry practice in this type of business was for the
conduct of margin calls to be made firstly to the dealer group and then the
dealer group of the financial adviser would in turn contact the customer. That
was a process that was industry wide. It was a process that operated throughout
the 7,000 dealers that CGI had a business with.
Somewhat to the dissatisfaction of the committee, the CBA was not able
to confirm at what point between 2002-03 and 2008 CGI ceased sending written
notification of margin calls to clients:
I know this will not be a satisfying answer, but we cannot
point to the exact time the policy was changed. What we can say is that to our
knowledge it was significantly in advance of the events of 2008 and certainly
not at all related to the events of 2008.
The CBA's evidence conflicts with Mr Cassimatis's claim that no margin
calls were being received:
During October we received over $600 million worth,
effectively, of action in response to margin calls from Storm. It was very,
very clear that Storm was acting on margin calls. Storm was passing on margin
calls to customers because that was the way the industry was operating and that
was the way Storm had operated with us.
Later in their evidence, the CBA directly countered Mr Cassimatis's
position that he thought, as in 2003, the bank would contact the customer
directly in relation to margin calls:
... we simply cannot agree with that characterisation. We have
documents from Storm that make it very clear that Storm was acting on margin
calls by passing on the margin calls that CGI was making to Storm ...
Storm was highly active in responding to margin calls ...
... It was very clear to us that Storm was active processing
calls. There was no silence from Storm; there was action on Storm's part.
However, what concerned us was that the speed of response and the action taken
in response to margin calls declined significantly through November. It was at
that point that we decided that we had to take direct action.
The CBA insisted that Storm was well aware of its current policy in
relation to the handling of margin calls:
I accept that there is contradictory evidence. What I can say
is that, based on my own review of discussions internally et cetera, I would be
very surprised if, going into 2008, Storm could have been under the impression
that Colonial Geared Investments' practice was to contact clients directly.
Also, it would have been the only one of 7,000 dealers that we had that policy
with. I think that, as you have heard from Macquarie, they had the same policy.
I would find it very difficult to understand ... that there was any
misapprehension about that at the time we are talking about.
As further clarified by Mr Cohen:
There were occasions—not many, admittedly—prior to 2008 when
Storm did respond to margin calls using this model, so I do not think there could
have been any doubt on Storm's part given that they had responded in this
Macquarie Bank, another major provider of margin loans to Storm
investment clients, similarly told the committee:
... our approach to margin calls was to notify the intermediary
... We did this across our entire loan book. In addition, we provided both
clients and the intermediaries, including Storm, with access to a secure
Macquarie website which was updated daily with all relevant loan information
including the current LVR and whether the loan was in margin call. So every
client had the opportunity to access their own website with up-to-date daily
information on their investments and their margin loans.
During October 2008, we became aware that there was a breakdown
in margin call loan notifications within Storm. Storm was apparently not
passing them on to their clients. We responded by immediately investigating the
situation and by late October we had commenced direct notification of margin
calls to clients. We continued to be in daily contact with Storm to notify them
of client margin calls during this period, and daily updates on the website
were maintained. The intermediated margin call process continued to operate
satisfactorily during this period with other dealer groups that we were dealing
Macquarie Bank also emphasised to the committee that a margin call is a
risk that Storm clients should have been well aware of:
... there has been public discussion suggesting that margin
calls operated or were designed to operate as a stop loss for the benefit of
the borrower. Our product brochures ... disclose margin calls as a risk for the
client; they are not a stop loss. This risk was identified in our documents
that, if an investor did not act in response to a margin call, the lender might
sell the investment ...
The committee finds it somewhat surprising and highly concerning that
there was such lack of clarity around this critical facet of the Storm model.
The leveraged investment strategy was sold to clients on the basis that there
were sufficient buffers and triggers in place, as well as cash reserve funds,
to ensure that any margin call situation could be appropriately managed. It
seems remarkably careless, from Storm's point of view, to leave any room for doubt
around this process.
Equally, the lenders carry the risk of default on the loans and have a
clear interest in ensuring that all parties to the transaction are fully aware
of their obligations and the agreed processes to be followed in the event of
While the committee acknowledges the banks' contention that their legal
obligation was to inform the intermediary financial adviser, who in turn was
obliged to consult with the client about how to resolve a margin call, the
committee nevertheless believes the banks had a moral obligation to attempt to
make direct contact with the loan account holders once it became clear that,
for whatever reason, Storm was not functioning successfully as an intermediary
to clear the margin calls.
The committee heard in evidence that the CBA first made margin calls on
Storm clients on 18 September yet did not make direct contact with clients
until December—an elapsed time of approximately 11 weeks.
Even noting the CBA's evidence that it received some 'action' from Storm during
October, the committee views the length of the delay on the CBA's part as
inexcusable, and it contrasts poorly with evidence from Macquarie Bank that it
moved to make direct contact with clients within two weeks of realising that Storm
was not notifying their clients.
The committee therefore welcomes the commitment made by the CBA that,
following an internal policy revision, it will now notify all clients of margin
calls directly, rather than through an intermediary financial adviser.
This is discussed further below, starting at paragraph 3.104.
Limited oversight and regulatory
Investors feel substantially let down by bodies that they believed would
help to protect them from events of this nature:
Before joining Storm, we checked to see whether they were
members of the Financial Planning Association, as we believed this gave them
credibility. After sending the FPA a copy of a letter of complaint, the
response we received from them was extremely disappointing. We also believed
that the government watchdog, ASIC, was there to protect investors, yet we now
feel that this is not the case.
The Financial Planning Association (FPA) told the committee:
... as an association we certainly accept responsibility for
the fact that Storm Financial was a member of the FPA and we certainly wish
that we could have acted early and we wish that we could have prevented some of
the losses that have occurred. We acted very swiftly when we became aware of
the issues in October last year through a complaint that we made against Storm
as a result of a letter that they had sent to their clients ... In summary, Storm
promoted a very aggressive investment strategy which carried significant risk.
There are a number of reasons why we believe that Storm
failed and there are a number of actions that are under way, including margin
lending and credit regulation, which will address some of those issues. We as
an association have made some changes and are moving to make some more changes to
improve the nature of our audit process and to introduce a whistleblower policy
so that staff, clients and financial planners in the community feel that they
can blow the whistle in a safer environment ... We believe that we all have a lot
to learn as a result of Storm.
There has been significant criticism by investors of ASIC for not
identifying the risks posed by Storm's one-size-fits-all financial advice model
before the collapse occurred. ASIC does not have a role in assessing business
models for risk per se, but it does have a role in ensuring compliance with
current Corporations Act 2001 (Corporations Act) requirements in
relation to standards of advice, including the section 945A requirement that
advice takes account of the personal circumstances of each client and is
appropriate for that client. More effective risk-based auditing processes might
have assisted ASIC in recognising Storm's practices as being problematic at an
earlier point in time. This matter is the subject of further discussion, in a broader
context, in Chapter 6 of this report.
Critically for Storm investors, at the time of the collapse of Storm
Financial, margin lending facilities did not fall within the definition of a
financial product within Chapter 7 of the Corporations Act. Consequently, these
products did not lie within ASIC's regulatory responsibilities and were not
regulated at the national level. Because they were generally purchased for
investment strategies, they also fell outside state-based consumer credit laws.
This regulatory gap has now been closed, following the October 2009
passage through parliament of the Corporations Legislation Amendment (Financial
Services Modernisation) Bill 2009. This bill explicitly defines margin loans as
financial products for the purposes of the Corporations Act and sets out a
range of requirements on financial product providers and advisers when selling
these products to clients. The measures in this bill are intended to
substantially enhance protection for investors and to provide ASIC with powers
to take action where these facilities are not offered or managed in accordance
with the law.
This legislation will provide a new layer of protection for future
investors in margin loans and margin loan-like products. Treasury explained to
The main change that we have made in the legislation is that,
regardless of what advice you get from your financial planner, at the end the
responsible lending requirement rests on the bank or the lender. The lender has
to make an independent assessment of whether this loan is not unsuitable for a
particular client regardless of what the financial planner has said. So there
is a second line of defence.
The committee welcomes the passage of this legislation and, through such
mechanisms as its regular oversight hearings with ASIC, will monitor its
implementation and impact in the marketplace, particularly its ability to further
protect investors from inappropriate advice or inappropriate product sales.
The committee remains concerned about the process for notifying clients
of margin calls. During late 2008 when the market was falling rapidly, there
were unacceptable delays in clients being made aware of their true position,
such that by the time many became aware of their circumstances they either no
longer had the capacity to take their accounts out of margin call or had had
their portfolios sold down without their knowledge. The banks have indicated to
the committee that they followed standard industry practice of notifying the
intermediary financial adviser of margin calls and assuming that they would
take responsibility for notifying the client and actioning a response to the
The new legislation requires that, unless a client specifically elects
to have the bank deal only with their adviser, the lender is required to notify
both the adviser and the ultimate customer when their account falls into
margin. This is an improvement on the current (unregulated) situation but the
CBA, among others, has suggested that it would prefer to see a situation where
banks must contact the client in all circumstances. The committee agrees
that this may need to be the subject of future legislative amendment, to
further strengthen client protection. This matter is considered further in
Chapter 6 of this report.
Lender responses to the Storm collapse
On 17 June 2009 the Commonwealth Bank issued a press release
acknowledging that it carried some responsibility for the situation in which
Storm clients who were also customers of the bank found themselves.
Notably, Chief Executive Officer Ralph Norris made the following apology to
“In some cases we have identified shortcomings in how we lent
money to our customers involved with Storm Financial,” Commonwealth Bank CEO
Ralph Norris said.
“We are not proud of our involvement in some of these issues
and we are working toward a fair and equitable outcome for our affected
“Our customers can be assured that where we have done wrong,
we will put it right. I am committed to the identification and resolution of
all issues relating to the Bank’s involvement with Storm Financial,” he said.
Mr Norris said the Bank would meet its obligations to those
customers identified as being in financial difficulty as a result of any
shortcomings identified in the Bank’s lending practices.
“However, the Bank is not responsible for the financial
advice provided independently by Storm Financial to the Bank’s customers. That
was clearly the responsibility of Storm Financial, a licensed financial
advisory company,” he said.
These sentiments were repeated in the bank's first public appearance
before the inquiry:
... I echo Mr Norris's statement that we are not proud of the
bank's involvement in some of the issues faced by those customers ... customers
can be assured that, where we have done wrong, we will put it right ... Both
before and since that announcement we have been taking action to put wrongs
right. First, our customer assistance program established with customers on the
ground in Townsville and, second, our innovative resolution scheme.
Bank executives identified steps taken in the wake of the Storm
... the bank has learned from mistakes that we have made in
relation to some of our lending to Storm customers. Amongst the steps we have
taken to remedy the situation, we have improved our valuation decisioning tool,
known as VAS, ... we have tightened our loan approval processes, and we have
augmented our compliance and audit checking processes.
In acknowledging mistakes made, however, the CBA noted the involvement
of other parties:
... it needs to be recognised that there are other parties
significantly involved in the hardship suffered by Storm clients. CBA is not
responsible for either those parties or their contribution to the hardship
At the committee's final public hearing for the inquiry, Mr Norris and
senior CBA executives provided an update on the resolution scheme the bank has established
to assist CBA customers who were also Storm customers:
At this point, around 2,300 people have registered to
participate in the scheme, which is a little over 80 per cent of all the people
who had relationships with the Commonwealth Bank. Approximately 100 offers of settlement
are currently being considered by our clients, we have reached a resolution for
53 customers, and the independent panel is currently reviewing documents and
will be providing evaluations and determinations soon. Another clear and
important priority for the foreseeable future is to expedite as many offers and
settlements as we can. We want to help as many customers as quickly as
At the same public hearing, Macquarie Bank told the committee:
Macquarie has an established dispute resolution process and
we have been using that process to respond to complaints made by Storm-advised
clients who had margin loan facilities with us. We have made some payments for
certain account errors where delays in our processing of redemptions or account
closures may have contributed to financial detriment, but overall we have not
identified any recurring or systematic errors.
At an earlier hearing in Canberra, the committee heard from Mr David
Liddy, CEO of the Bank of Queensland, that:
... a number of BOQ customers were impacted by the collapse of
Storm and are suffering financial hardship as well as real emotional hardship.
We have every sympathy for those customers and have been actively contacting
them about our hardship assistance package ... we are working closely with a
number of those impacted to provide assistance and have also made a commitment
to work with those customers to keep them in their homes. Every customer and
every case is different. As such, we are working with any customer suffering
genuine hardship on a one-on-one basis to find the best solution for them.
Mr Liddy stressed, however, that he is not aware of any fault on the
part of BOQ:
We do not believe we have acted illegally or dishonestly in
our dealings with customers referred through Storm Financial.
Through MLC representatives, NAB informed the committee at its Melbourne
... we do share the committee's concern for Storm's customers ...
NAB has established an internal working group to fully assess its level of
involvement with the Storm Financial group and any customer relationships that
might exist between the two organisations. The working group is conducting a
comprehensive review of all related processes and policies and this work is
ongoing ... NAB is cooperating fully with the regulator and is devoting all
necessary resources to accommodate ASIC's requests.
Also at its Melbourne hearing, the committee was informed of ANZ Bank's measures
to assist Storm customers:
ANZ did not have a formal relationship with Storm Financial,
nor did we provide margin loans to our customers to invest through Storm. We
noted in our submission around 160 customers who may have borrowed from ANZ,
mostly via mortgages, to invest through Storm. We are continuing our review ...
and expect we will find additional customers who may have some connection with
... so far we have identified a small number where lending
decisions did not comply with ANZ's policies. We are contacting those customers
and will treat them fairly. Our approach will include assessing hardship on a
case-by-case basis and rectifying detriment that resulted directly from action
on ANZ's part.
The committee acknowledges that each of these lenders has made a public
statement of their position in relation to assisting Storm Financial clients. The
committee encourages any other lenders with exposure to Storm's clients to make
similar clarifying statements.
The committee also acknowledges Mr Ralph Norris's statement that:
... we [the CBA] are the only organisation to stand up and
comprehensively acknowledge its responsibilities.
The committee certainly welcomes the CBA's readiness to admit its
mistakes in the way it transacted business with Storm and Storm's clients who
are also clients of the bank. The committee appreciates the bank making the
effort to establish an innovative and fast-tracked resolution scheme for
The committee encourages other lenders, who in some cases are still
reviewing their internal policies, to be similarly candid about errors that may
have been made and similarly constructive in the manner in which they engage
with clients to redress those errors.
ASIC's response to the collapse
On 16 September 2009, ASIC updated the committee on its continuing
investigations into Storm Financial.
As one of the largest investigations ever undertaken by ASIC, considerable
progress is being made in scoping potential causes of actions and possible
legal proceedings. However, ASIC intends to evaluate material from all of the
committee's public hearings and the liquidator examinations that commenced on
24 September 2009 before making any public announcements about its next steps.
Importantly, ASIC confirmed that investors who participate in the CBA
settlement scheme will still be able to benefit from any actions that ASIC may
The committee appreciates that the regulator needs to ensure that its
investigations and potential recommendations for actions are not compromised by
premature public statements. However, the committee emphasises the
extraordinary public interest in these matters and the continuing hardship
being suffered by Storm investors, and urges ASIC to advance the investigation
as a top priority. The committee also urges ASIC to make timely and appropriate
public announcements regarding the progress of its investigations.
All share market investors were exposed to the dramatic market fall of
late 2008, and many realised losses on their portfolios. However, few now
find themselves in such dire circumstances as Storm Financial's former
As the events of 2008 demonstrated, Storm's model was not capable of
withstanding a severe market downturn. Its success was predicated on the market
continuing to rise indefinitely. The buffer and LVR settings proved to be such
that, when the market fell rapidly, there was insufficient time and capacity to
put accounts back into order before they fell into negative equity. The
responsibility for this failure to resolve margin calls may well be shared
between several parties, but that does not change the fact that the strategy
The committee is of a clear view that Storm's aggressive leveraged
strategy, in combination with the failure of multiple parties to appropriately
monitor and manage margin calls at the height of the market volatility, were of
disastrous effect for Storm's investment clients. The effects are greatest on
those for whom this strategy simply cannot be considered appropriate advice—that
is, those who were at or near the end of their working lives, with limited
capacity to rebuild from scratch in the event that all their assets were lost
and they found themselves in negative equity. This is not to detract from the
losses of other investors; they have also suffered markedly from the
combination of circumstances that occurred.
It is not the role of the committee to make findings of blame. It notes,
however, a recent statement by Mr Ralph Norris, CEO of the CBA:
In truth, a degree of responsibility rests on the shoulders
of banks, individuals and the regulator to a greater or lesser degree, and
primarily on Storm Financial, who provided the financial advice as a licensed
The committee also records its serious concerns with regard to the
the apparent provision of one-size-fits-all advice to Storm's
investment clients, without the appropriate regard for their personal
circumstances (including their life stage and asset base) that section 945A
obligations require of advisers;
the unacceptable confusion or disagreement between Storm and its
lenders about how margin calls would be managed and who was responsible for
which parts of this process; and
the inappropriate and ultimately devastating delay or failure,
particularly by the CBA, to make direct contact with margin loan clients when
it became apparent that Storm was not successfully acting as an intermediary to
clear margin calls.
Claims that the banks were unable to provide accurate information about
the status of margin loan accounts during the period of extreme market
volatility are also deeply troubling. However, the committee notes evidence
from the banks that they used the same approach to margin call management with
all the advisory groups they dealt with (numbering in the thousands), yet Storm
Financial clients were the only group who en masse failed to be
appropriately notified by their advisers of the true status of their margin
loan accounts. This points the committee towards the inescapable conclusion
that there was something about Storm— be it their staffing and resourcing
levels, their computing systems, the degree of leverage in their model, their
understanding of their responsibility in relation to margin calls, or a
combination of these and other factors—which led to an inability to receive,
handle and resolve margin calls during the critical period before their
customers went into negative equity and were sold out of the market. The
committee does recognise that the rate at which market conditions were
changing, taken together with the number of client accounts that would have
been going into margin call at the same time, would create a formidable
administrative burden. However, Storm is alone among the advisory groups in
having ended up in a situation characterised by such catastrophic losses for
Finally, the committee acknowledges that it is not necessarily
appropriate to recommend reform in response to a particular collapse or event.
Isolated corporate failures, no matter how painful their impact for those
caught up in them, are not necessarily indicative of, or caused by, regulatory
failure. The mass of evidence the committee has received in relation to the
collapse of Storm Financial has, however, contributed to the committee's
broader understanding of the current operation of Australia's financial
products and services sector and of the provision of financial advice. In
Chapter 5 of this report the committee considers problematic issues in the
sector in a broader context, and in Chapter 6 the committee makes a series of
recommendations for reform, which are in part informed by the committee's
extensive deliberations on the collapse of Storm.
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