"THE REASON WHY WE (VICTOR AINSLIE & HELEN GILLIES) WERE PERSUADED TO INVEST IN STORM FINANCIAL.
Helen wanted one financial planner with a known reputation to handle all our financial investments. Storm Financial was recommended to us and we met with Mr. Stuart Drummond, a Storm Representative, in Storm’s Brisbane office in the early part of 2007 to discuss our needs.
Our brief to Storm was very clear. We were looking to grow our asset wealth by investing in the stock markets using Storm’s expertise. However, we stressed more than once that we were not looking for spectacular growth. Rather, we were looking to grow our share portfolio by investing in low risk companies. We clearly had enough assets at that time to last us the rest of our lives without investing a penny in the share markets.
Storm chose to ignore the facts and recklessly advised us to borrow against our house, convert all superannuation to cash and invest any surplus money as well in the share portfolio it had constructed for us. In hindsight, this was clearly for the benefit of Storm and to the detriment of us, its client. It has now become clear that Storm’s sole aim was to line its own pockets with fees and its advice was directed to this end.
We were told when we initially met with Storm’s representative, Stuart Drummond, that unlike an allocated fund, our assets would never erode. Rather, they would grow significantly over a period of years. The risk would be minimal because trigger-points (safeguards) existed to protect our investments when the markets fell. Further, our cash reserves would be sufficient to counter any emergencies that arose.
There was also another important element that led us to believe that our money was safe. That issue was trust. We had no idea, and I’m willing to bet that Storm’s other clients had no idea either, that financial advisors have no fiduciary responsible for the advice they give, nor, it appears, for the actions they take on behalf of their clients. This is an extraordinary state of affairs that none of us thought could exist in common law or legislative statute law. A financial advisor’s legal obligations and liabilities should be made known to his clients at the outset.
How did we get embroiled with Storm Financial and end up broke is the question that all former Storm clients are asking themselves? Storm Financial was a company with a reputation and its credentials seemed impeccable. In 2008 Emmanuel Cassimatis with all his assets was, according to an article that appeared in your newspaper, one of the richest men in Australia. This, together with Storm Financial’s arm-in-arm relationship with the Commonwealth Bank and the Macquarie Bank gave it enormous credibility. We had no reason to doubt Storm Financial’s integrity or the financial advice it was giving its clients.
I will now highlight the matters that, I feel, need thoroughly investigating. I have not confined my remarks to Storm Financial but also include the Bank of Queensland and the Macquarie Bank who all form part of this Holy Trinity.
I’ll start with Storm’s involvement in this:
A. STORM FINANCIAL’S PLAN FOR OUR FUTURE WEALTH
Storm’s plan was simple enough. They diagrammed it on page 57 of the 107 page 'Statement of Advice' dated 15th May 2007 which they presented to us.
How did this operate in practise?
1. Convert all assets where possible including our house to liquid cash for investment in the share market on a broad front.
This was a high-risk policy although we, Storm’s clients, were not aware of this at the time. Storm’s employees were experienced financial advisors that should have been well aware of the risks in such a strategy, which they failed to emphasize to their clients. There is no doubt now that Storm was motivated by the bottom line and its clients suffered as a consequence. All Storm’s fees were deducted from borrowings it recommended, be that loan a housing investment loan or a margin loan.
In our case, we borrowed $344,000.00 on our house. Storm’s fees of $43,437.00 were deducted from this amount by Storm Financial. A further $1,732.60 was deducted for loan fees, which left $298,830.40 to invest. This meant in essence that we not only paid Storm “up front” but we were paying interest on Storm’s fees as well because such fees were paid out of borrowings Storm recommended. Responsible financial advice? I think not! It’s not hard to see where Storm’s interests lay. Unfortunately, like many others we were too naïve at the time to spot the obvious flaws in such a policy. Then again, we had no reason to believe that Storm Financial was anything but what it claimed to be; a sound financial advisor.
2. All dividends and capital growth from so doing would be reinvested in the market place or flow into the Dam Account (Cash Reserves) if required.
Dividends and capital growth proved negligible. Any monies in the Dam Account were basically our own. We met any expenses paid from such including our living expenses, not from dividends and capital growth as originally advised. We were told that the Dam Account would feed itself as dividends and growth occurred. This never happened
3. Tax credits would also flow into our Dam Account.
I’m not sure of the figures in this regard but I would be willing to bet that it was insignificant.
4. A yearly living expense of $100,000 would be guaranteed.
We were led to believe that our living expenses would be well and truly covered by our investments. This never happened either. We were paying our living expenses from our own money, which eroded away our assets; the complete reverse of what Storm Financial had stated in our agreement. Storm, incidentally, stated falsely that we had an income of $100,000.00. This was entirely untrue because any earnings were completely reliant on our returns in the share market
5. No insurance premiums would be required based on Storm’s assessment.
On page 20 of Storm’s agreement “Insurance Position” it states the following:
“Currently you both do not hold income protection and life insurance policies.
We note that you do not hold any insurance cover at this time. Whilst we generally recommend to our clients that additional insurance cover is a necessity as part of the safety parameters for our Plan, given your age and stage of life it is likely that cover would be difficult to obtain and be quite costly
We are agents for MLC Limited, The Colonial Mutual Life Assurance Society Limited, ING, AXA, AC&L, Tower, Credit Suisse and various others, and will be happy to source these quotes and implement any additional cover for you. Alternatively, please discuss the matter with your insurance agent.”
At no time did Storm Financial indicate verbally that it would be wise to take out insurance cover. In fact we were told that in view of our assets and our age, such a precaution wasn't necessary. Nor did Stuart Drummond of Storm who dealt solely with us detail what such a cover entailed.
Incidentally, I presume that some clients did take an insurance cover through Storm? If so, how many have so far been paid out?
I have previously stated that I find it hard to believe that Storm Financial was allowed to take out such a low insurance cover ($40 Million if Mr. Cassimates is to be believed) when the value of the portfolios collectively were so far in advance of such a sum. Further, why were we, Storm’s clients, not protected under the law for any wrongdoings by Storm’s employees? It’s a basic right of every man to pursue any wrongdoings in law but Storm’s clients have been denied this right because Storm has limited liability insurance in terms of the amount involved and no financial means to repay us.
Liability insurance should automatically include wrongdoing by employees and not be seen as a separate and additional insurance. It’s no comfort for us that Storm’s directors may be prosecuted. We need some financial recompense for the wrongs that have been perpetrated and we need it quickly.
Storm Financial acted recklessly and irresponsibly and we, as a consequence are paying the price. Whilst Mr. Cassimatis and his wife are squarely in the gun sights, why is it that his fellow conspirators, namely the financial advisors that sold the “Storm line” being let off the hook? They should be brought to account for totally misrepresenting our wishes and placing our assets at risk.
B. THE BANK OF QUEENSLAND
Whether the Bank of Queensland was equally reckless and irresponsible in its dealings with others and us is not for us to say. However, if Storm’s relationship with the Commonwealth Bank is anything to go by, there has to be lingering questions that need answering. I believe that the loose way Storm did business with its financial associates such as the Commonwealth Bank permeate all the way through to The Bank of Queensland and the Macquarie bank.
I’ll now briefly comment on our involvement with the Bank of Queensland and the Macquarie Bank and let you be the judge.
The Bank of Queensland’s North Ward branch was a key conduit for Storm, lending more than $20 million a month at the height of Storm's popularity in 2007. Thousands of clients were financially destroyed with highly geared share market investments, launched with borrowed funds secured by mortgages on their homes. In the case of Bank of Queensland, funds were gained for some of Storm's most fragile clients, the elderly and pensioners, with the use of low documentation loans normally used for lending to business owners.
Property data shows the branch's owner-managers Declan Carnes and Matthew Buchanan benefited significantly from the lending. They went on a spending spree in the four years leading up to the Storm collapse, amassing about $10 million worth of industrial and residential land, flats and houses in Townsville.”
Mr. Liddy, the Managing Director of The Bank of Queensland, claims that Caesar’s wife would not be out of place in his Bank. There were one or two minor infractions but nothing too untoward. It will be interesting to see what the Senate Committee, Worrells, and ASIC finally uncover.
With regard to the investment loan we took out against our house, this is a separate issue that will need to be scrutinised in order to establish its legality. At this time, we cannot comment on this because it’s something that has to be decided by other parties. However, the issue raised in my copy documentation to Mr. Liam Walsh about the authenticity of the refixing loan rate is of concern. You already have copies of my correspondence to The Bank of Queensland. I am now enclosing the Bank of Queensland’s responses to such as requested by you.
C. THE MACQUARIE BANK
So far the Macquarie Bank has managed to avoid any public scrutiny. No doubt, its day will come! When we found ourself in negative equity with our margin loan, we had to meet the difference between our asset value in the portfolio and the negative equity factor. The margin loan was over one million at that stage.
The ratios the Banks use for margin loans are totally misleading. By the time Storm deducted its fees and the Macquarie Bank deducted its interest payments we were completely disadvantaged. The so-called ratios that formed the basis for Storm’s trigger-points were completely distorted. So too were the Macquarie Bank’s. Its failure to obtain the true value of our portfolio (monies borrowed in the portfolio over our own personal equity) further distorted our position leaving us entirely vulnerable. When the markets crashed, Macquarie Bank’s fuzzy margin loan ratios combined with Storm’s failure to take prompt remedial action exacerbated the losses that followed.
In my submission to the Parliamentary Committee I have pointed out these failures and offered some solutions. I suggest that you review my submission when considering this matter.
Before closing I would point out that I met with one of your reporters recently and forwarded the following article to him. Unfortunately, I cannot recall his name but this is what I sent to him."
“When we met in the lobby of the Convention Centre prior to the Senate enquiry meeting on Thursday, you asked me how it felt to be a victim of Storm Financial. For me personally, “angry” would be a good word to describe my feelings at this time. Yes, I’m angry at Storm’s betrayal of our trust. Yes, I’m angry with the Banks that fully participated in this Australian tragedy. But most of all, I am angry with our Government past and present that has failed to sufficiently regulate financial advisors in this country.
I was staggered to learn during this Senate enquiry meeting that financial advisors under the Act do not have any fiduciary responsibility. How can this be? It appears that any unqualified person can hang up a “shingle” and call him or herself a financial advisor if they want to do so without being fully accountable.
The subject of “fiduciary responsibility” cropped up several times. Yet, no one made mention of the legal obligations imposed on parties to a contract. When we signed an agreement with Storm Financial a legal contract came into existence whereby both parties were bound by the conditions of such a contract. Storm Financial never met the conditions of the contract as outlined in its Statement of Advice thereby breaching such an agreement.
Are we to assume that financial advisors’ legal obligations under the law when entering into contracts with their clients are null and void? Are they immune from prosecution? All clients signed a legal contract with Storm Financial. Do they throw those contracts out the window because they were dealing with legal advisors? Of course not! I believe the Committee should have included someone such as Graham Perritt – MP for Moreton, a former solicitor of the Supreme Court, who would readily understand the legal ramifications involved here and would be able to answer some pertinent questions in this regard.
There is little doubt that Storm Financial is liable under the law. The problem is that
Storm Financial has no money, or so we are told. They did have liability insurance but no one can find out the name of the insurance company. Mr.Cassimatis in response to Mr. Ripold’s enquiry as to whether Storm Financial had insurance stated that Storm did indeed have a 40 million dollars liability insurance cover. We, my partner Helen and I, once owned a small supermarket. We were obliged under the law to insure such for a 20 million dollars public liability. It seems strange, therefore, that Storm Financial needed only 40 million in public liability when the value of the portfolios being handled in total were so far in excess of this amount? As a consequence of inadequate insurance, Storm’s clients have now been denied their basic right to sue Storm Financial through its insurers for blatant negligence! Whose fault is this if it is not our Government’s for failing to regulate in this respect.
We therefore have two issues here: (1) an Act that allows financial advisors to operate without the burden of fiduciary responsibility and (2) financial advisors being able to conduct business without sufficient insurance to protect clients from any wrongdoing. Unfortunately, we cannot sue Governments for incompetence (a never-ending process if past track records are anything to go by) but we can expect our Government to make restitution when its failings has led to the financial straits that former Storm clients are now experiencing. When the financial markets collapsed last year, the major Banks in this country were bailed out by the Government using our money despite the fact that the Banks had been making enormous profits for years. Why, therefore, are the clients of Storm Financial denied the very same opportunity when the chief destroyers of Storm’s client’s assets have been those very same Banks who have been in bed with Storm for some time. Here was a relationship made in heaven if ever there was one! They all had the same goals! Make as much money as possible with their clients’ interests as a secondary consideration.
Mr. Cassimates’ attempts to shift all the blame to the Banks when things went pear-shaped were, to say the least, feeble. Yet there is some truth in what he says! The Banks involved are certainly culpable. The Commonwealth Bank who once held itself up as “The Peoples’ Bank” (what a joke) and the other Banks concerned were married to Storm in such a way that Storms’ clients were given preference and loans were extended based on asset fixing and leveraging that can only be described as shocking.
Mr. Macardle in his statement to the Committee questioned why the Banks involved were only called to account by the Committee following a general outcry. Before that, the Banks weren’t even part of the process. Mr. Ripold, the Chairman of the Committee, strongly denied this. You would not expect otherwise. Mr. MacCardle was spot on, however. The people of Australia are sick and tired of the hypocrisy in Government whereby institutions such as Banks seem to be protected from public scrutiny. It seems to many as though they are a law unto themselves. My sincere hope is that this Committee and ASIC has the political will and the intestinal fortitude to investigate fully the involvement of the Banks in the operations and eventual demise of Storm and impose regulations, long overdue, that curtail the Banks insidious practices that impact on every Australian.
The men from SICAG were magnificent representatives and their members should be proud of them. I was also impressed with the Committee’s commitment. However, to my mind the Committee wasted too much time trying to establish Storm’s responsibility in relation to its clients when such seems clear enough. As Mr. Ron Jelich (a man that seems to be genuinely honest and sincere) said to the Committee, “If you employ a builder to build your house and that builder employs sub-contractors to do the work, whom do you hold responsible if your house subsequently collapses?”
The Committee to its credit was diligent in trying to assess what caused the Storm debacle but it seemed to be groping in the dark at times to come up with obvious solutions. To me the answers are clear enough. They need to ensure that financial advisers work within prescribed guidelines: (1) unambiguous paperwork (2) accountability in the form of fiduciary responsibility, (3) draconian penalties for abuse (4) adequate obligatory insurance cover to safeguard against criminal wrongdoing by the financial advisor concerned and so forth.
If our Government cannot get it right this time, we should change the name of our country to Muppetland and put Kirmet in charge. At the moment he would probably do a better job!”
I hope this gives you a clearer picture of the situation.
VICTOR (Frank) AINSLIE - 17th September 2009