ASIC’s decision to fine the directors of Storm Financial throws the light on executive responsibility. But what lessons can be learned?
It was a case that represented the worst excesses of the financial crisis. Storm Financial’s collapse in 2009 left many of its investors in severe financial trouble. The directors have always protested their innocence, but after almost ten long years, ASIC delivered their judgement.
Emmanuel and Julie Cassimatis, the husband and wife team which founded Storm Financial, each face fines of more than $70,000 under a Federal Court ruling for giving inappropriate financial advice to cash-strapped clients. During the hearings, the pair were found to have breached the civil, but not criminal, duties of financial directors as stipulated by the Corporations Act.
ASIC also took action against financial advisers at Storm Financial for the advice they provided. Carey Fraser, Trevor Alan Benson and David Robert McCulloch all agreed to enforceable undertakings as a result of the advice they gave to clients.
Fraser, agreed not to take part in the financial services industry for two years and to inform ASIC if she took employment in financial services for a further two years after that. Terence Edward Webb, who had been a corporate authorised representative of Storm, was found to have provided misleading and inappropriate financial advice. He has enrolled in continuing professional Education from an ASIC approved provider and agreed to cease providing financial services until the CPE is complete.
The decision has been hailed a significant moment and highlights the individual responsibility of directors to ensure the companies they run abide by the law, as Commissioner Greg Tanser said at the time.
“This is an important decision which emphasises the importance of directors’ duties to ensure that they do not cause the companies that they control, to breach the law,” he explained. “The decision also highlights the significant obligation on financial services licensees to provide financial advice that is appropriate to the persons to whom it is given.”
The couple maintain their innocence. While Emmanuel Cassimatis admitted it had happened on their watch, he insisted the financial crisis was to blame and that the advice they provided was not inappropriate. However, some of the people to suffer believe the fines do not go far enough.
The collapse of Storm left more than 3,000 people destitute. Because these investors were over the age of 50, retired or approaching retirement and had relatively little in terms of assets, they had little chance of rebuilding their finances. ABC News focused on the story of Vietnam war veteran Steven Reynolds who lost his house after being left with a debt of more than $1million.
He was quoted as saying:
“Is this fine enough? Because my legal bill trying to recover money that was lent by dodgy banks was almost $80,000.”
Reynolds, like many other people, fell victim to Storm’s approach in which clients were urged to invest substantial amounts in index funds using a double-gearing ‘Storm model’. They were encouraged to take out both a home loan and a margin loan to create a ‘cash dam’ with which they could pay Storm’s fees. They then encouraged clients to take step investments over time, significantly increasing their exposure. By the time the bank collapsed, many of these investors were in negative equity and facing financial ruin.
The fallout did not end with Storm Financial. A class action brought by Levitt Robinson Solicitors in the name of Leslie James Sherwood and Julianne Sherwood, and Sean Patrick June McArdle and Paula Joanne McArdle sought to secure compensation for the victims. Through this, ASIC pursued Macquarie, Bank of Queensland, Commonwealth Bank of Australia and Colonial First State Investments for their roles in the crisis. Macquarie and Bank of Queensland agreed to pay out $82.5million and $17 million respectively for their involvement in an unregistered investment scheme with Storm Financial.
Commonwealth Bank of Australia, meanwhile, agreed a number of settlements. In conjunction with Colonial First State Investments, they paid out an aggregate of $33.68million for breaches of contract and misconduct in relation to the management of CGI margin loans or the increases of borrowing in such loans after receiving advice from Storm. In related cases, they also agreed to make up to $136million available in compensation for losses incurred through Storm financial. This was in addition to the $132 million which it had already provided to affected customers.
Lessons to be learned?
The case sums up, in so many ways, what can go wrong in financial planning. The directors appear to have had little oversight of the products they were offering. Advisers were motivated to maximise revenue rather than look after the best interests of their clients. As a result, high risk strategies were routinely recommended with little, or no, regard as to whether they were appropriate for the client.
It also highlights the increased focus on personal accountability for directors when managing the products their company offers. By studying these cases, and the judgments made, companies can understand where Storm and other participants made mistakes and the stance taken by ASIC.
As with any case such as this good can – or at least should – come out of it. Regulators can adjust their approaches, products become more robust, client protections improve and companies implement changes to their culture. By looking at the unfortunate experience of Storm Financial and learning lessons, companies can avoid making the same mistakes.