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The collapse of Opes Prime
Acknowledgement of effect on clients
The committee acknowledges the devastating effect that the collapse of
Opes Prime has had on a range of clients who entered into an Australian Master
Securities Lending Agreement (AMSLA) with Opes Prime Stockbroking Limited. When
Opes Prime was put into administration, these clients had no legal title over shares
that many believed they still owned, and they had no opportunity to redeem
their financial positions.
Media reporting about the collapse may have created a general impression
that the majority of Opes Prime's clients were sophisticated, high-wealth
individuals or corporations who understood the risk that they were taking in
entering an AMSLA. However, evidence before the committee suggests that this is
an erroneous oversimplification of the situation. According to Mr Robert
... they [Opes Prime's clients] are a disparate grouping, from
corporate high flyers who knew exactly what AMSLA's were, went into dealing
with Opes up to their ears in stock lending, down to the small retail investors
who were put into Opes by their brokers who were anxious to scalp a half a per
cent commission on the margin loan interest plus an introduction spiv.
Following the collapse, the ANZ Bank has acknowledged the diversity of
people caught up in it:
Since the collapse of Opes Prime, ANZ has come to understand
that Opes Prime's customer base was diverse ... However, throughout ANZ's dealings
with Opes Prime, Opes Prime consistently described its clients as high net
worth individuals and sophisticated investors, as well as several stockbroking
firms and fund managers.
Although the committee has received far fewer submissions on Opes Prime
than in relation to the collapse of Storm Financial (perhaps because more time
has elapsed since the collapse occurred), the submissions that have been
received paint a grim picture of the effect on individual clients.
The committee also received a number of confidential submissions that further
detail distressing consequences of the decision to enter an AMSLA with Opes
Prime, including loss of retirement savings, forced sales of family homes,
breakdowns in personal relationships and ill health.
The committee sincerely thanks those submitters and witnesses who have
contributed to its deliberations on the collapse of Opes Prime.
Limitations of the committee's inquiry
The committee's understanding of the Opes Prime business model, the
company's collapse and the subsequent effect on clients has been informed by a
range of sources, including:
submissions from affected clients;
a submission by the ANZ Banking Group;
a submission by the regulator, the Australian Securities and
evidence taken at public hearings;
media reporting; and
other information in the public domain, including on relevant web
The causes of the collapse of Opes Prime, and the consequential effect
on unsecured creditors, are complex and contested. The committee's sources
disagree in many details, including the true nature of the business conducted
by Opes Prime, the relationship between Opes Prime and ANZ Bank, the obligation
(if any) of ANZ Bank to Opes Prime customers, and the sophistication and understanding
of clients who entered into AMSLAs with Opes Prime.
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 from this collapse.
It is important to emphasise that the committee is not a judicial body
and has no power to make criminal findings or 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 it.
It should also be noted that the committee's terms of reference focus on
financial products and services. A broader array of issues surrounding the
collapse of Opes Prime, including market supervision aspects and the operation
of the voluntary administration provisions, will not be reported on explicitly.
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 the occurrence 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.
The Opes Prime business model
Having considered all the information put before it, the committee
understands the operation of the Opes Prime business model as set out in the
Opes Prime provided securities lending (including equity finance)
facilities to its clients. These facilities have been described to the
committee as follows:
In general terms, securities lending refers to the transfer
of securities from one party to another in return for cash or other securities
("collateral"). The party who receives the securities is generally
obliged to return them (or equivalent securities) either on demand or at the
end of an agreed term, subject to repayment of the collateral.
Equity finance is a particular subset of securities lending
in which the value of the cash collateral advanced to the party providing the
securities ("customer") is generally less than the value of the
securities received by the party providing the cash collateral
The principal distinction (from a legal perspective) between
margin lending and equity finance is that with the latter the customer
transfers all legal and beneficial interest in the securities to the financier.
Opes Prime Stockbroking offered clients a version of an Australian
Master Securities Lending Agreement (AMSLA).
Under this agreement, beneficial ownership and interest in the securities
passed from the original owner to Opes Prime in exchange for cash collateral.
Opes was then able to do what it wished with the shares. This included
using some of them as collateral for finance, from ANZ Bank and from Merrill
Lynch, but also lending stock on to hedge funds for short selling or shorting
the stocks directly, thereby exerting downward pressure on stock values.
A point of difference between Opes and other providers of similar
facilities was that Opes did not restrict the range of stocks in which clients
Opes Prime allowed clients to invest in more speculative
shares than many other providers of loans for share purchases, thereby adding
to the risk of the business.
ASIC has characterised the product on offer from Opes as follows:
The distinctive feature of the Opes business model was that
it enabled retail clients to engage in securities lending, an arrangement that
is usually only entered into between wholesale parties. From the clients’
perspective the securities lending arrangement with Opes had the same
commercial effect as a margin loan, that is, the clients accessed cash, using
their securities as ‘collateral’. However, the legal effect was quite different
because title to clients’ securities was transferred to Opes, rather than
mortgaged in favour of Opes. The use of securities lending, by retail
investors, as a means to access cash, using securities as collateral is not
Under the terms of the AMSLA, when Opes Prime was put into
administration, financiers of Opes Prime including ANZ Banking Group and
Merrill Lynch sold down the securities that they were holding as collateral for
the finance advanced to Opes Prime. The original owners no longer held the
title to these securities and had no opportunity to redeem their financial
Events surrounding the collapse of Opes Prime
ANZ has portrayed the collapse of Opes Prime in the following terms.
More details are contained in ANZ's submission to the inquiry.
These events are broadly in accordance with what has been reported by the
In early 2008 ANZ implemented a revised loan to value ratio (LVR) model
and put agreements in place with Opes Prime that they would migrate their
accounts to reach this new standard, with the first milestone due to be reached
in mid March. In March 2008 ANZ was advised that Opes Prime would not be able
to meet the agreed milestone, due to two significant events:
the discovery of 'irregularities' in a major customer's account, whereby
'ANZ was told that it appeared that Opes Prime's records had been manipulated
to make it seem that the customer was within margin, when in fact this was not
a customer request for the redelivery of securities worth approximately
ASIC has explained that Opes was not well placed to withstand such
... Opes was not well capitalised and, as a result, when a
number of its clients faced significant losses in the market downturn, it was
not able to cover the shortfall.
ANZ agreed to an emergency support plan to assist Opes Prime, including
a $95 million loan and a seven-day 'stand-still' on margin calls. In return, amongst
other conditions, ANZ appointed Deloitte as an investigative accountant to work
with Opes's financial adviser, Ferrier Hodgson, in assessing Opes Prime's
situation in detail. The documentation for this agreement was executed on 20
Once Deloitte and Ferrier Hodgson commenced their assessment, it became
apparent that 'there were further issues and irregularities in Opes Prime's
The directors of Opes Prime appointed Ferrier Hodgson as voluntary
administrators on 27 March 2008. On the same day, ANZ appointed Deloitte as
receivers and managers pursuant to a registered charge.
Critically for those Opes Prime clients who had signed an AMSLA, ANZ's
understanding of their position after the appointment of the administrators is
Upon the appointment of administrators to Opes Prime, its
customers lost the ability to recall securities that they had transferred to
Opes Prime, and instead became unsecured creditors for any 'netted' amounts
owed to them under their Equity Finance arrangements with Opes Prime.
This understanding of the consequences of the AMSLA has been supported
by a Federal Court test case, in which Justice Finkelstein found on 2 May 2008
that Beconwood Securities (a client of Opes Prime) did not have a legal claim
to recover its shares. His Honour found that the AMSLA in place was such that
full title to the shares had passed from the original client to Opes Prime and
that the Opes Prime client did not retain a beneficial interest in those
When Opes Prime went into administration, ANZ Bank and Merrill Lynch
acted to protect their positions by selling the shares they held as collateral
against the finance advanced to Opes Prime. Clients of Opes Prime who had AMSLAs
subsequently discovered (if they were not already aware) that they no longer
had any entitlement to the shares they had borrowed against and were not able
to redeem their position.
Opes Prime was wound up and put into liquidation in October 2008.
Client understanding and perspective
The nature of the lending agreement
In the immediate aftermath of the collapse, many clients seemed to be
genuinely unaware that they had entered into a securities lending agreement
with Opes Prime. They were under the belief that they had taken out a standard
margin loan and that they, rather than any other party, retained beneficial
ownership of all shares. This meant that when ANZ exercised its contractual
right to sell the securities, clients believed that 'their' shares had been
'stolen' from them.
Some submitters noted that they were long-time successful users of
margin lending arrangements to gear their portfolios and, when entering into
arrangements with Opes Prime, were assured that they were entering a similar
retail margin loan agreement and would retain ownership of their shares:
...the broker stated that our previous Leveraged Equities
Margin Loan account Manager ... had moved employment to OPES PRIME STOCK BROKING
and had assured us and broker that the OPES PRIME Margin Loan facility is a
normal margin loan secured by equities... At all times we were assured we were
beneficial owners of our shares.
In this submitter's view, their savings have been 'confiscated' by the
The committee has been told that the Opes Prime Stockbroking Financial
Services Guide (FSG) and the Trader Dealer website advertised margin lending
products at a favourable loan to value (LVR) ratio 5 to 10 per cent higher than
those being offered by other providers.
The committee has also heard of financial advisers promoting Opes Prime as a
provider of margin loans.
Some submitters have acknowledged that they clearly did not sufficiently
understand the product for which they signed up:
I had read through the fine print of Opes Prime's lending
facility terms at the back of their FSG before signing up, and although I found
it to be quite complicated in parts I had not noticed anything particularly
untoward. I now however realise that I had quite obviously not understood some
critical parts of this agreement.
... For example, there was absolutely no mention whatsoever
about the Australian Master Securities Lending Agreement (AMSLA) at the rear of
this FSG that we were all unwittingly signing, whilst thinking it was a fairly
standard margin lending agreement instead.
Other clients have made similar statements:
I am an investor who has suffered significant financial loss
as a result of the collapse of Opes. I am not a greedy person attracted by the
promise of high returns ..., rather I am an educated, financially literate person
(at the time I entered into the Opes agreement I was working as a Licensed
Adviser), who was misled and deceived by Opes personnel as to the true nature
of their 'margin lending' product.
... as far as I am aware, no effort was made by Opes personnel
to inform or educate investors as to the unique differences and higher risk of
their product versus the traditional margin lending arrangement. Opes would
certainly have been aware that the majority of the retail clients transferring
to them were moving their accounts from traditional margin lenders.
Opes clients were not sufficiently apprised of the key
features of the AMSLA that they were entering into, with the majority of Opes
clients believing that they were entering into a standard margin lending
Submitters indicated that they did not become aware of the true nature
of the agreement they had entered into until after Opes had been put into
We discovered that our securities, lodged through Opes into
ANZ Nominees were not held in trust on our behalf but had been used as security
for Opes to conduct an AMSLA arrangement with the ANZ. This information was
never communicated to us at any time.
The news filtered out that this was an absolute transfer of
title to the Bank and that our only claim was against Opes Prime stockbroking.
My world had effectively ceased to exist.
The role of the ANZ Bank
Submitters expressed their view of the ANZ's role in the collapse and,
particularly, its aftermath:
I ... have been absolutely dismayed at the lack of regulatory
response to the despicable nature of the banks in this Opes Prime affair. I
have lost a substantial amount of money, some of it cash, lost a fiancé and lost my job over
this. The lack of any empathy [from] ANZ has been bluntly disgusting ... To then
put a proposal forward where if successful, relinquishes the right of everyone
seeking to prosecute the ANZ in the future is an outrage.
Others acknowledged that they failed to sufficiently understand the
nature of the arrangement they entered into with Opes but still consider the
bank failed in its duty of care:
My wife and I invested shares and capital in that agency
[Opes] in the belief that it operated as a Margin Lending Business ...
OPES operated with the support of ANZ at a time when it was
failing in its fiduciary duty to its clients.
There has been strong criticism of the bank's quick action in selling
off the securities held against the loans. There is some belief that the bank
had a moral, if not a technical, obligation to the Opes Prime clients who
viewed the bank's involvement as an endorsement of the Opes operation:
Many investors were using the Opes product reassured by the
prominence of ANZ in their marketing materials, replete with ANZ logo
describing them as 'banker and custodian bank' ...
The precise role of ANZ i.e. that they were in the position
of providing finance to Opes in exchange for Opes clients stock was never made
... ANZ ... seized and indiscriminately sold down the Opes book,
with no regard for the many underlying clients who would have re-financed their
margin loans given the opportunity. This would then have left ANZ to pursue
those Opes clients who should have been margin called and never were. I find it
hard to believe that the outcome of a more orderly rundown of the Opes book by
ANZ could have possibly resulted in a worse situation than the one in which
they now find themselves; and it would certainly have avoided the reputational
damage, bad press and litigation that they have now incurred.
It is the contention of some that they were intentionally misled:
In short, Opes Prime and ANZ Bank duped us into believing
that we maintained "beneficial ownership" of our shares brokered with
them, only for the latter (along with Merrill Lynch) to swipe them when the
circumstances suited and "fire-sale" them into the market back in
March 2008, leaving our financial positions in tatters.
The position of the ANZ Bank
It is ANZ Bank's clearly stated position that its relationship with Opes
Prime was purely a business relationship, as a finance provider, and that it
had no direct relationship with, or knowledge of, Opes Prime's customers:
ANZ's own involvement with Opes Prime was limited solely to
its capacity as a financier to Opes Prime. In respect of its dealings with Opes
Prime, at no time did ANZ have any relationship with Opes Prime's customers.
Furthermore, although ANZ recognises the difficult financial circumstances
many former Opes customers now find themselves in, the bank does not consider
it is responsible for these circumstances:
ANZ acknowledges the hardship faced by many clients of Opes
Prime as a result of their relationship with the stock broking firm advisory
group and the impacts of the global financial crisis and the significant
downturn in world debt and equity markets. While ANZ does not consider this to
have resulted from its actions, ANZ recognises that at times there were
deficiencies in the management of its equity finance business and its
relationship with Opes Prime.
When asked to explain what happened in the Opes Prime case, ANZ made the
Customers of Opes Prime are understood to have signed
agreements providing for the transfer of ownership of securities right at the
outset. This had consequences for them when Opes Prime went into administration.
Opes had in the meantime disposed of some of those securities to ANZ. To
recover in part the funds advanced to Opes Prime ANZ sold the securities at the
best price it could obtain. This is quite different from margin lending, where
customers retain ownership of the securities and may sell them to recover their
loan obligations. This difference was not widely reported and ANZ suffered
considerable reputational damage as a result.
The ANZ also made comment on this matter in its written submission to
While customers of Opes Prime are understood to have signed
agreements providing for the transfer of ownership of securities, when a broker
such as Opes Prime becomes insolvent, ANZ is seen to be, and in fact is,
holding the securities that Opes Prime's customers may have expected would be
returned to them. In realising these securities to protect its position, ANZ is
regarded by some (including customers of Opes Prime) as acting in its own
interests and at the expense of the customers of Opes Prime.
Some of Opes Prime's customers assert that they regarded
their arrangements with Opes Prime as some form of margin lending. Some claim
that they did not understand that theirs was a full transfer of legal and
beneficial title in securities to Opes Prime, and that Opes Prime was then free
to deal with these securities without restriction, including transferring them
ANZ's ability to protect its own position by selling the securities was
reduced due to the fact that Opes held many small, speculative stocks on its books
(e.g. mining exploration companies). The ANZ acknowledged this problem in
verbal evidence to the committee:
... we did not cover ourselves in glory. We took stocks as
security that were outside ASX200. Another one of the financiers to Opes Prime,
Merrill Lynch, was able to liquidate the stocks it had as security much more
quickly, as we believe, because they confined themselves largely to ASX200
The bank maintains that, because it had no direct relationship with Opes
Prime customers who entered into securities lending agreements, it has no
knowledge of the communication that occurred between Opes Prime and its
We do not know exactly what disclosures were being made
between Opes Prime and its customers.
Furthermore, the bank has told the committee that it did not receive
information about who the Opes Prime customers were:
ANZ did not have a direct relationship with Opes Prime
customers. ANZ was not party to the contracts between Opes Prime and its
customers and, where securities were transferred to ANZ, ANZ was not provided
with documents evidencing the identity of the person from whom Opes Prime
obtained the relevant securities.
ANZ's knowledge of Opes Prime's customer base was necessarily
limited given that ANZ did not have a direct relationship with Opes Prime's
customers. Given that Opes Prime held legal and beneficial ownership of the
securities, Opes Prime was not obliged to inform ANZ of the identity of the
person from whom they had obtained the securities that it transferred to ANZ.
ANZ executives outlined to the committee the steps that the bank took following
the Opes Prime collapse:
ANZ undertook a review of the securities lending business,
chaired by ANZ CEO Mr Mike Smith, who was assisted by respected company
director David Crawford. ... The review found that at times there were
deficiencies in ANZ's identification and management of risks within the
securities lending business. A remediation plan was instituted and six staff
and two senior executives left the bank.
The ANZ review has been made public at the bank's website and can be
ANZ Bank has admitted to making mistakes in relation to the business it
conducted with Opes Prime:
...our understanding of that business was less than it should
have been within the bank ...
... Our internal processes were inadequate ... I do not think we
properly studied and appreciated that in ... a falling market this product would
operate differently from margin lending.
However, ANZ Bank also sought to put the Opes Prime collapse in the
context of economic cycles and the circumstances leading up to the global
The collapses of Opes Prime, Storm and other similar
businesses followed 17 years of strong economic growth and booming equity and property
markets. Cycles turn and people tend to lose sight of the fact that asset
prices fall regularly as well as go up. Regulation will not change that.
My broad observation would be that clients of both Storm and
Opes were very much caught up in the times and people were generally seeing everything
going up and nothing going down in terms of value. I suspect people lost sight
of the fact that markets are volatile, economies do go up and down and did not
appreciate the risk they were getting into. In that sense ... they were not
alone. The world was caught up in that to a large extent.
ANZ Bank executives also told the committee:
There were various factors that led to Opes Prime's collapse.
One was that the market was going down along with the value of the shares
tendered as security. There were also perceived to be some irregularities
within the Opes Prime business.
ANZ does not believe that the Opes collapse is a result of regulatory
ANZ is not aware of any evidence that the collapse of Opes
Prime stemmed from any deficiency in the regulatory framework.
The bank does not take any responsibility for the degree of gearing Opes
Prime clients engaged in:
That was their model and what they were doing with their
clients—not to do with the bank.
Perhaps the starkest acknowledgement from the ANZ that its involvement
in Opes Prime represented poor judgement is the bank's decision to withdraw
from all securities lending:
When you ask about our experience with this, it is summed up
in one of the central conclusions of our published securities lending review:
we are out of that business. We are not continuing to provide funding to that
sort of business.
We believe it is not the sort of business that a bank should
be in. We have admitted very publicly that it was not. It was a type of model
that was always, in retrospect, prone to misunderstanding. We have admitted we
made a mistake there and we have quit that business. To the extent that we
acted sloppily, we have imposed sanctions on the people who were involved in
that and the sanctions were very serious right up to two of the direct reports
to the managing director.
During 2009, ANZ reached agreement with the liquidators to implement a
scheme of arrangement between ANZ, Merrill Lynch, Opes Prime, and related
parties and creditors. This scheme will return to creditors a portion of the amounts
owed to them by Opes Prime, as a result of ANZ and Merrill Lynch contributing
to a settlement fund in excess of $250 million. This scheme of arrangement, including
the conditions attached to it and responses to it, is discussed further in
The position of the regulator
ASIC has been constrained in the information and comment it has been
able to provide to the public inquiry process:
We are not able to go into a lot more detail because of the
investigations. ...We do want to assist the committee but at the same time we
cannot risk prejudicing those investigations, in particular prejudicing retail
investor actions or potential parties that could be involved.
The committee acknowledges the paramount importance of ASIC being able
to take unencumbered legal action if it has evidence to suggest that there is a
case to be made against any of the parties to the Opes Prime stock lending
operation. ASIC's investigations into the conduct of directors and officers of
Opes Prime are continuing, as well as investigations into any other third
parties that may have engaged in market misconduct before or after the
However, the committee notes the significant amount of time that has
passed since the Opes Prime collapse and strongly urges ASIC, and in turn the Commonwealth
Director of Public Prosecutions, to deal with any potential actions in a timely
ASIC has made the following general public comment in relation to the
... the securities lending and equity financing business
operated by Opes Prime was based on a model traditionally used in the wholesale
market in which participants are more sophisticated and have a clear
understanding of their rights and obligations. Of concern to ASIC was that Opes
took this model to the retail market where some investors may not have been
aware of their rights and obligations.
ASIC has also countered public criticism that it did not act to prevent
Opes Prime from offering AMSLAs to retail investors or to ensure the provision
of an accurate and appropriately clear product disclosure statement (PDS) to
clients. ASIC commented on recent legislative changes and their effect:
The FSR regime regulates disclosure in relation to financial
products. Margin lending and securities lending under an AMSLA are not defined
as financial products and accordingly the disclosure requirements (such as the
PDS requirements) do not apply to these types of arrangement.
Under the Corporations Legislation Amendment (Financial
Services Modernisation) Bill 2009, margin loans (including securities lending)
will be regulated as financial products under the Corporations Act. ASIC
welcomes this Bill. When the Bill commences, a PDS will be required for margin
loans (including security lending).
Opes Prime scheme of arrangement
ASIC was involved in multi-party talks that led to a settlement offer
put to, and ultimately accepted by, Opes Prime creditors (including customers
who signed AMSLAs). The terms of settlement included an agreement by the
regulator not to pursue ANZ and Merrill Lynch for an alleged contravention of
the managed investment provisions of the Corporations Act 2001 (Corporations
Act). ASIC also agreed not to pursue directors of ANZ for civil penalty and
compensation claims under section 181 of the Corporations Act.
In accepting the scheme of arrangement, the Opes Prime liquidators and clients
also renounced all claims and legal proceedings against Merrill Lynch and ANZ.
In August 2009 ASIC welcomed Federal Court approval of the scheme of
arrangement, starting that:
ASIC believes that the settlement accepted by the creditors
and approved by the Court, achieves the purpose of the mediation and makes
commercial sense. Importantly, it avoids the need for costly litigation by the
liquidators and the clients of Opes Prime.
The estimated dividend to creditors is 37 cents in the dollar.
The committee notes that not all parties are equally pleased with this
outcome. In particular, it notes Mr Robert Fowler's unsuccessful appeal against
Justice Finkelstein's decision to sanction the scheme.
ASIC has also put in place an enforceable undertaking (EU) from ANZ.
This includes an agreement from ANZ to improve compliance in various areas,
including reconciliation processes, resourcing and risk management.
Lessons to be learned
Inappropriate provision of a
sophisticated product to retail investors
The following statement by a submitter sums up the committee's
understanding of what has occurred:
A situation existed where a product – the Australian Master
Securities Lending Agreement (AMSLA) – designed and intended for use by
sophisticated corporate investors operating in wholesale markets – was on sold
to unsophisticated retail clients for whom this type of product was
inappropriate and who did not have, or were not provided with, sufficient
education or guidance to appreciate the unique terms and conditions and higher
risks of the AMSLA.
Consequently, it has been suggested that consideration be given to
restricting the availability of complex financial products designed for market
counterparties, on the basis that such products may not be appropriate for the
The committee agrees that the AMSLA was not appropriate for many of the
individual retail investors who signed up with Opes Prime. However, the
committee does not believe it is necessary to interfere with the financial
products market to the extent of banning certain products from sale to retail
investors. Instead, the committee considers that a range of factors in
combination will lead to the same effect of such products not being made
available to an inappropriate customer base in the future:
increased investor awareness and scepticism following recent
increased caution from banks with regard to engaging in the
securities lending business;
the passage of the Corporations Legislation Amendment (Financial
Services Modernisation) Bill 2009, which amends Chapter 7 of the Corporations
Act to capture products of this nature within the definition of a 'financial
product', thereby extending the range of protections available to investors and
the powers and responsibilities of ASIC; and
increased obligations on financial advisers with regard to the
standard of advice they give to their clients.
These matters are discussed further below and in Chapters 5 and 6 of
The same submitter has questioned whether the personnel selling the Opes
Prime product understood the product sufficiently:
All investors and advisers relied on the Opes representatives
who should be expected to know their product thoroughly. However they either
did not – and so were unable to disclose the higher risk nature of the product
– or they were fully cognisant of the higher risks but obscured them rather
than jeopardise their sales commission.
The concerns raised here go to such matters as the qualifications of
advisers, the legislative obligations imposed on them with regard to the
standard of advice they give, and the potential for commission-based
remuneration arrangements to result in poor or conflicted advice being given.
These issues, and proposed reforms to the obligations, licensing, remuneration
and oversight of financial advisers, are discussed in detail in Chapters 5 and
Some submitters have suggested that enhanced disclosure arrangements
would have been of assistance, in that had they truly understood the product being
offered by Opes they would not have entered into the AMSLA. For example:
If a client had been required to sign a simple Risk
Disclosure statement stating, for instance, that the client acknowledged that
they had lost beneficial ownership of and legal title to their shares; and
furthermore that their shares were being used as collateral by Opes for
financing purposes – many people would not have signed.
The effectiveness of disclosure in enabling investors to make informed
decisions about their financial affairs was a central and recurring theme of
the inquiry. Many submitters to the inquiry raised the matter of whether risk
was appropriately conveyed to, and in turn sufficiently understood by, clients
of financial advisers. Some questioned whether financial advisers themselves
had proper knowledge of the risks inherent in the products they were selling.
Many commented that current disclosure documents are lengthy and confusing, and
that they would gain clearer information from short-form, plain English
documents. These matters are addressed in Chapters 5 and 6 of this report.
The need for federal regulation of
At the time of the collapse of Opes Prime, margin lending facilities and
facilities of similar character to margin loans (including securities lending
agreements marketed as being margin loans) did not fall within the definition
of a financial product as set out in Chapter 7 of the Corporations Act.
Consequently, these products did not lie within ASIC's regulatory oversight
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 lending arrangements,
as well as Opes Prime-style securities lending arrangements, 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.
These measures are intended to increase 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.
The committee welcomes the passage of this legislation and, through such
mechanisms as its regular oversight hearings with ASIC, will monitor its
implementation and effect in the marketplace, particularly its ability to
protect investors from the inappropriate sale of complex securities lending
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