Commonwealth Bank statement to 60 Minutes re: Storm Financial

Hi Jonathan

Further to our conversation, as explained, in view of the Cassimatis litigation and ASIC inquiry the CBA does not believe it is appropriate for a representative to appear on your program.

We are, however, concerned and sympathetic to those who followed financial planning advice from Storm Financial and are seeking to assist them where feasible.

We have already assisted your preparation of your story and are providing the following responses to your questions to assist the accuracy of the 60 Minutes program. 

The Bank considers the collapse of the Storm Financial group to be serious, complex, and extremely unfortunate for those involved and the issues of responsibility are matters that are already  being tested in the appropriate forums.

A) How/why did were clients sold down in the ColonialFund?

Colonial Geared Investments (CGI)

•  Since the collapse of Storm Financial, there have been allegations aired in the media that CGI “dropped the ball” in relation to margin calls.  These allegations are untrue – CGI kept its part of the agreement in the margin call management process. 
• It’s important to understand the roles of CGI and Storm Financial (borrower’s financial planner) in the margin loan management process. 
• CGIs role is to keep Storm Financial up to date with the relevant information concerning their client’s margin loan. 
• The role of the Storm Financial (under the authority of the borrower) is to manage the portfolio regarding the level of indebtedness and the purchase or sale of security. 
• Storm Financial clients were sold down when Storm Financial advised CGI who and how much should be sold. When the clients’ Margin Loans went into margin call, Storm Financial advised CGI what should be sold / redeemed to clear the clients margin call in full.  This process worked well over the past decade. Storm Financial continued to meet its responsibilities even as the market started to fall.  In October and November 2008 Storm Financial instructed CGI to effect $672 million worth of sales to address clients’ loans in margin call. 
• However, as the markets continued to fall, Storm Financial’s instructions became inadequate to clear margin calls.  In November 2008, CGI was forced to step in to ensure all margin calls were addressed in full. If this had not happened, Storm Financial clients would have accumulated more losses as the market continued to fall. After attempting to obtain instructions from Storm Financial in line with the practice of the past decade, it became apparent that Storm Financial’s response to size and duration of the market fall was seriously inadequate.  CGI formed the view that Storm Financial was no longer fulfilling its role in relation to margin calls. 
• Under the margin loan, CGI reserves the right, if the borrower fails to address a margin call, to sell down the security on the margin loan.  We instructed redemption requests totalling around $178 million of CFS, Challenger and MLC in an effort to clear these clients’ margin calls. 

 

B) Do we have a responsibility to these clients– weren’t they our customers as a result of their Margin Loan being provided by Colonial Geared Investments?

• The Bank met its responsibilities to these customers, and our customers also have responsibilities to us.  Those responsibilities are governed by the terms of our agreements – in this case the Margin Loan terms and conditions. 
• Under the Margin Loan agreement, each Borrower expressly authorised CGI to deal directly with Storm Financial in relation to the margin loan and to take instructions from Storm Financial.  This is the case with all CGI’s margin loans, not just those of Storm Financial clients.  The arrangement reflects the fact that CGI’s margin loan is a product designed to be offered through licensed financial planners and the product model is for CGI to deal with the planner directly.  If borrowers want to deal directly with the Commonwealth Bank in relation to a margin loan, then they have the option of a CommSec Margin loan.  (Storm Financial did not recommend the CommSec Margin loan to its clients.) 
• CGI offered the tools through which these investments could be geared – ie the CGI Margin Loan. CGI did not offer any advice; its role was that of lender. 
• All investment advice to Storm Financial’s clients was given by Storm Financial under a formal Statement of Advice.  Pursuant to these Statements of Advice, the Storm Financial clients were mainly invested in CFS Funds, Challenger Funds and MLC Index Funds.
• CGI had the responsibility of keeping Storm Financial fully updated with data on every margin loan held by Storm Financial clients.  We took our responsibilities seriously, providing data to Storm Financial daily on each and every client’s margin loan.  On top of this we provided up to date data on our web site (for both advisers and clients) which can be utilised 24/7 to check the clients account.  Storm Financial accessed this data over 11,000 times. On two occasions this data did not transfer across to Storm Financial correctly. Storm Financial informed us and we sent a new file immediately.
• Our borrowers had the responsibility of monitoring their portfolio and taking any action required to avoid or clear a margin call.  At any time, any of these borrowers could have contacted Storm Financial and obtained the current details of their margin loan portfolio from Storm Financial (based on the information CGI supplied to Storm Financial on a daily basis). 

 

C) How Storm clients could take out home mortgages to fund their Storm investments?

• Customers use the security of their home loan investment for a number of reasons, including other investment categories. 
• The Commonwealth Bank provided home loans for Storm Financial clients who applied and met the Bank’s lending criteria.  We assume that these customers’ decision to apply for home loans with the Bank was taken on the basis of advice given by Storm Financial. 
• Any home loan customer of the Bank who is a former Storm Financial client and is having difficulty meeting their home loan commitments should contact the Bank to discuss their options.  The Bank has a range of measures available to provide flexibility for borrowers in financial hardship.