1.4 Early scandals

Scandals dating back to the GFC began to shed light on the conflicts and culture in the financial advice industry. Regulatory responses, however, focused on the remediation of specific instances of poor advice, rather than seeking to identify root causes within institutions and the industry. Those responses set the tone for future approaches to misconduct by financial advisers, that is, to compensate customers according to arrangements negotiated with ASIC while requiring few changes to the business itself.

1.4.1Storm Financial

Shortly before the second half of 2008, Storm Financial was a profitable company with $77 million in annual revenue and $120 million in consolidated gross assets.[1]

The business model of Storm Financial was to provide advice in standard or template form, with minimal tailoring to the investor.[2] Almost 90% of Storm’s clients were encouraged to take out loans against the equity in their own homes, to obtain a margin loan and use the funds from these loans to invest in the share market via index funds.[3] In late 2008 and early 2009, many clients of Storm Financial were in negative equity positions, sustaining significant losses.[4]

Many investors lost their investment, their homes and their life savings and still had significant debts outstanding. ASIC estimated the total loss suffered by investors who borrowed to invest through Storm was about $830 million.[5]

In December 2008, ASIC commenced an investigation into Storm Financial.[6] In early 2009, Storm Financial was placed into voluntary administration and liquidators were subsequently appointed.

ASIC commenced a number of legal proceedings in relation to the Storm Financial scandal including proceedings alleging that the directors of Storm Financial had breached their duties as directors and that Storm Financial had provided inappropriate advice.[7] In March 2018, the Federal Court imposed a penalty of $70,000 (from a maximum penalty of $200,000) on each of the directors of Storm Financial and ordered that each be disqualified from managing corporations for seven years.[8]

ASIC also entered into settlement agreements with various institutions to provide compensation for losses suffered:

  • In 2012, ASIC entered into a settlement agreement with CBA to make available up to $136 million as compensation to CBA customers who had borrowed from the bank to invest through Storm Financial.[9] CBA had already provided approximately $132 million to Storm Financial investors under its resolution scheme.[10]
  • In 2013, ASIC intervened in a class action brought against Macquarie Bank in respect of Storm Financial regarding the fairness of settlement arrangements. The Full Federal Court held that the distribution of the settlement sum was not fair and reasonable to all group members and a revised settlement arrangement was made. Macquarie agreed to pay $82.5 million by way of compensation and costs.[11]
  • In 2014, ASIC made a settlement agreement with the Bank of Queensland. BOQ agreed to pay approximately $17 million as compensation for losses suffered on investments made through Storm Financial.[12]

1.4.2Commonwealth Financial Planning (CFPL)

In 2010, a whistleblower raised with ASIC allegations of misconduct by financial advisers employed by CFPL, a subsidiary of CBA.[13] The allegations included that certain CBA financial advisers were advising clients to invest in profit-generating but high risk products that were not appropriate for them, switching products without the relevant client’s permission and forging clients’ signatures on documents.

As a result, when the GFC occurred, thousands of clients of CFPL, many of whom were nearing retirement or had already retired, lost millions of dollars.

CBA paid more than $20 million in compensation to clients who had received inappropriate financial advice from two CFPL financial advisers (Mr Don Nguyen and Mr Anthony Awkar).[14]

It later became apparent, however, that the misconduct extended beyond these two advisers and CBA subsequently implemented a second compensation program.[15]

In October 2011, ASIC accepted an enforceable undertaking (EU) from CFPL that required CFPL to review the advice given to clients by an additional 16 advisers, and pay to clients any compensation arising from that review. Three additional CFPL advisers and six advisers from another CBA advice arm, Financial Wisdom Limited, were subsequently identified as also having provided inappropriate advice and CBA paid compensation to those clients who had been affected by it.[16]

In 2013, Australian media reported misconduct by financial planners at CFPL, a systematic cover up by management, and inadequate offers of compensation to complaining customers.[17]

In July 2014, CBA commenced the Open Advice Review Program. The program was open to those who had been customers of CFPL and Financial Wisdom between 1 September 2003 and 1 July 2012. The program has offered a total of $37.6 million in compensation to customers.[18]

[1]ASIC v Cassimatis (No8) (2016) 336 ALR 209, 1023 [1]. See also ASIC v Cassimatis (No9) [2018] FCA 385, [6].

[2]ASIC v Cassimatis (No8) (2016) 336 ALR 209, 1023 [9].

[3]See ASIC v Cassimatis (No8) (2016) 336 ALR 209, 1023 [9]; ASIC, Media Release 18-081MR, 22 March 2018.

[4]ASIC, Media Release 18-081MR, 22March 2018.

[5]ASIC, Media Release 12-227MR, 14September 2012.

[6]ASIC, ASIC Investigation Background (28 October 2016) ASIC <https://storm.asic.gov.

[7]ASIC, Summary of ASIC Actions: Civil Penalty Proceedings against the Cassimatises
(28 October 2016) ASIC <http://storm.asic.gov.au/proceedings/summary-of-asic-actions/>.

[8]ASIC, Media Release 18081MR, 22 March 2018. See also ASIC v Cassimatis (No9) [2018] FCA 385, [98], [106].

[9]ASIC, Media Release 12227MR, 14 September 2012.

[10]ASIC, Media Release 12227MR, 14 September 2012.

[11]ASIC, Media Release 13-214MR, 12 August 2013.

[12]ASIC, Media Release 14244MR, 22 September 2014.

[13]Simon Hoyle, ‘For CBA He Was the Wrong Guy in the Wrong Place at the Wrong Time’, Professional Planner (online), 4 July 2014 <www.professionalplanner.com.au/featured-posts/2014/07/04/striking-a-blow-29119/>; Jeff Morris, ‘I Gift Wrapped Commonwealth Bank for ASIC and It Did Nothing’, The Sydney Morning Herald (online), 27 April 2018 <www.smh.com.au/business/banking-and-finance/i-gift-wrapped-commonwealth-bank-for-asic-and-it-did-nothing-20180427-p4zbyk.html>.

[14]Exhibit 2.277, Undated, Updated CFP Board Pack, 182–5; see also ASIC, Report 431, 23 April 2015, 27, 52.

[15]ASIC, Report 431, 23 April 2015, 6.

[16]ASIC, Report 431, 23 April 2015, 6–7.

[17]Adele Ferguson and Chris Vedelago, ‘Targets, Bonuses, Trips – Inside the CBA Boiler Room,’ The Sydney Morning Herald (online), 22 June 2013 <www.smh.com.au/business/
banking-and-finance/targets-bonuses-trips-inside-the-cba-boiler-room-20130621-2oo9w.html#ixzz3ls7bmVx0>; quoted in Adam Steen, Dianne McGrath and Alfred Wong, ‘Market Failure, Regulation and Education of Financial Advisors’ (2016) 10(1) Australasian Accounting, Business and Finance Journal 4, 9.

[18]CBA, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Submission, 29 January 2018, 10 [33].