Question

Q5: Application Question - Keeping Storm’s victims in mind

The dogs bark and the caravan moves on. The former Prime Minister Paul Keating’s aphorism about the transience of the public spotlight applies to the 3000 Australians who invested an estimated $3 billion through Storm Financial. These investors are now slipping from the public gaze as the caravan moves on.

There is little in the way of words that can explain the losses retirees who invested through Storm have faced since its collapse in late 2008. But a petition launched by Storm Financial investors addressed to the Prime Minister, Kevin Rudd, goes close to expressing the frustration of those who trusted in the Townsville financial planner.

After 17 months, a parliamentary inquiry and a settlement with the Commonwealth Bank, there are still plenty of reasons for Storm Financial’s investors to feel angry. They fell for a business model they trusted. Many say they relied on the fact Storm Financial held an Australian Financial Services Licence administered by the Australian Securities and Investments Commission.

The business model didn’t work, and the investors lost the lot. The Commonwealth Bank, to its great credit, has participated in a resolution scheme that nobody likes much but is better than nothing. Other banks — notably Bank of Queensland and Macquarie Group — have made no such public concessions about their treatment of Storm investors.

Sure, there are varying degrees in what went on. Those reasonably intelligent investors who thought they were on a rocket to the moon — well, really, what were they thinking? But those

elderly and unsophisticated investors who were mis-sold products (some were given official Storm documents that said their new debts were ‘Clayton’s debts’) have been given precious little assurance their post-collapse interests are being looked after.

Storm’s founder, Emmanuel Cassimatis, has himself likened his model of financial planning to that of a Big Mac or a Ford production line. The model didn’t care whether the client was rich, poor, mentally disabled or in the first stages of senile dementia — they all got the same rubbish.

Let there be no doubt, especially as Cassimatis uses this vacuum in any meaningful response by regulators to once again woo his former devotees, it really was rubbish: a house of cards waiting for the first serious downturn before it fell over.

Since the collapse, these investors have had nothing that could be classed as giving them comfort from ASIC. In March ASIC gamely said its investigation had moved from a ‘recovery options’ phase to a ‘commercial negotiations’ phase and ASIC set up — wait for it — a website.

On the plus side, there is a My Storm Investment back-end to the website, containing individual details for individual investors, that raises the hope ASIC is still on the case. Also on the plus side, ASIC grasped the nettle last year and took the unusual step of recommending to the parliamentary inquiry a policy position that all forms of commissions for financial planners should be banned.

However, the watchdog is perpetually constipated when it comes to explaining what it is actually doing in live investigations, fobbing off media and investor inquiries with various excuses and downplaying any emerging reportage.

(When its investigation into Storm raised media reports that ASIC chairman Tony D’Aloisio may be taking a personal interest in the matter, D’Aloisio promptly hosed the report down. You have got to wonder about how ASIC plays the public relations game when the boss uses the media to say he is not taking an unusual interest in a case that affected the livelihoods of 3000 Australians.)

ASIC is due to release a statement about its Storm investigation this month and it is to be hoped its work results in a better outcome than the comfortless position statements delivered so far.

Picture it for yourself. All your retirement savings gone, and no meaningful words from the corporate regulator about the course of the investigation more than 17 months after you lost the lot. The delay lengthens. A fickle media switches its gaze to more diverting topics.

No wonder Storm Financial investors are angry. No wonder they are signing the petition in droves. Source: Washington 2010.

3

Storm’s founder likened his model of financial planning to that of a Big Mac or a Ford production line. What do you think he meant by that? Why do you think the approach by Storm was not appropriate?

Why do you think that the collapse of Storm occurred in late 2008? Describe the economic circumstances of the time and their coincidence with Storm’s collapse.
(Background information: Storm advised clients to double gear in many cases. i.e. to borrow against their homes and invest in shares and then borrow again against the value of those shares. In many cases investors borrowed close to $1 million or more.)

What role does the writer ascribe to ASIC and why do you think he criticises ASIC’s actions?

Why do you think ASIC recommended to the parliamentary inquiry that all forms of commissions be banned? Do you think it would resolve the problem?

Answer 1

Storm’s founder likened his model of financial planning to that of a Big Mac or a Ford production line as the product was developed like a standard product just like the T model that was manufactured by Ford. There was no variation in the product offerings and the strategy offering was bases on the idea that one size fits all and suits all. The approach by Strom was not appropriate because it was devoid of efficiency, fairness, and honesty. Secondly needs of the clients were not considered.

Collapse of Storm occurred in late 2008 due to the faulty basis of its strategy. The strategy required asset value to increase. In the year 2008 with the advent of global financial crisis banks started recalling their loans. In majority of the cases the sale of shares was at loss and the objective of such sales was to repay the loans. In some instances the investors had to sell their homes in order to repay the loans.

The writer clearly points to the inaction on the part of ASIC. ASIC failed to intervene and failed to provide any level of comfort to the investors. He criticizes ASIC’s actions as ASIC did not act in a systematic manner. It first held an enquiry into the matter, and then eventually made a recommendation to the government to ban all forms of commissions to advisers.

ASIC recommended to the parliamentary inquiry that all forms of commissions be banned so as to project themselves as making recommendations for cleaning up different avenues of undisclosed commission that was being paid to advisers. No this will not solve the problem as it was not the commissions that led to the failure of strategy. Rather the strategy itself was implemented in a faulty and inappropriate manner.