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Financial products and services in Australia

CHAIRMAN —Welcome back everybody, and I welcome representatives of the Storm Investors Consumer Action Group. Would any of you like to make an opening statement?

Mr Weir —We appear before you, the representatives of the parliament of this great country in which we are privileged to live, safe in the knowledge that you are the custodians of a standard of social justice that is the envy of many and one which we all enjoy and probably take too much for granted. Needless to say it is in this context that you have convened this inquiry in the knowledge that there has occurred a breakdown in the fundamental elements of social justice that underpins the very structure of all civilised societies. The concept of social justice or as we colloquially know or term it in Australia as, ‘the principle of a fair go,’ is fundamental to the rule of law that has defined civilised society since human beings first began organising themselves into shared societies. It is the cornerstone of the framework that separates humankind from the animal kingdom and, as such, it should be nurtured lovingly and defended stoutly when threatened.

We stand before you today as humble representatives of a group of Australians whose lives and financial wellbeing have been gutted principally because the normal protocols of social justice and fair play were not observed. The chaos leading up to the collapse of Storm and the abject failure by the bank to exercise even a basic level of due diligence by informing its clients of the perilous position their financial affairs were in at the time, thereby snuffing out their income streams and the capacity to ride out the crisis, was indicative of a return to the law of the jungle.

Our members were the innocent victims of heartless predators who gave them no chance of survival. Ironically, the predators were the very people they trusted to chart their financial destiny through the tempest that befell them. That is why you, as representatives of the democratic nation that went to war to defend the principles of social justice and fairness for all, and we, representatives of a group of Australians who do not get a fair go by any definition of the term, find ourselves at this forum today.

The terms of reference of this joint parliamentary inquiry include a specific brief to, among other things, discover why this injustice has occurred, examine the events surrounding it and, hopefully, as an outcome, to put in place appropriate mechanisms to restore the balance and to ensure that such destructive events can never be repeated. In appearing here today as representatives of those who have suffered as a result of these cataclysmic events, we express our gratitude for the privilege of playing our part to assist in this process on behalf of all of those who have suffered.

As outlined in the submission to your committee, SICAG was borne out of a separate need to provide a support group and to attempt to get answers as to how members’ investment portfolios came to be entirely destroyed. Prominent in SICAG’s mission statement, formulated around a table in a member’s suburban backyard some eight months ago, was a call for the establishment of a parliamentary inquiry into the events surrounding the destruction of Storm Financial, and accordingly SICAG quite rightly takes some credit for the establishment of this inquiry.

It is not sufficient to identify the global financial crisis as the sole reason for these events although realistically it may be seen as the catalyst that set off a chain of destruction. It is also not necessary to dwell on why SICAG was and remains a crucial contributor to the continued wellbeing of those traumatised by the events under consideration. Having said that, we cannot overstate to the honourable members of this committee the magnitude of the appalling human despair these events have caused.

As honourable members of this committee will be aware, there are three stakeholders in the events leading to the destruction of the assets of our members: firstly, the members of the banking industry; secondly, Storm Financial; and thirdly, the one on whom the first two depended for their very existence, their clients. Much has been said and written surrounding the Storm investment model, and investigations are running concurrently with this inquiry into all aspects of that strategy. Once these have run their course, the resulting reports will either condemn or support the legitimacy of that investment model. Irrespective of that outcome, however, we are compelled to reinforce the view that all of our members, being representative of the complete spectrum of financial investment sophistication, were doing nothing less honourable than following what they perceived to be a legitimate strategy to generate wealth directed towards providing an independent retirement for them and their loved ones, or were already achieving or funding that objective.

We are compelled to say that there would not be one among our members who would have willingly entered into this strategy had they known that all of the mechanisms designed to manage the volatility of investing in the capital market were going to be repudiated in such a destructive manner and without warning. It is in this context that the distortion of the fundamental fabric of social justice has occurred. It came about because those players in the game who held all of the might and power—and let there be no mistake to whom we are referring here and that is the banking industry—recklessly misused that might and power when the going got tough by ignoring the fundamental rights of their clients. In their omnipotence and arrogance it was as if their clients did not exist. They clearly did not take into account the human consequences of their precipitative action to shut down the Storm indexed funds without warning. We simply became the sacrificial lambs on the altar of their own greed and self preservation at the very time when we needed the support of the institutions that we had trusted so implicitly to exercise a duty of care to their customers. As a consequence they allowed us to be totally destroyed.

We now see a scenario wherein the bank with the most exposure, the Commonwealth Bank, a key player in all facets of the Storm investment model, is behaving like a reincarnated Pontius Pilate in denying the symbiotic nature of its partnership with Storm. Evidence before this committee shows patently that the Commonwealth Bank had what can only be described as an umbilical connection with Storm Financial, one that has endured for many years. A key factor in the decision by the majority of our members to engage in the Storm strategy was the strength of the Storm connection with the Commonwealth Bank and its funds management division, Colonial First State.

When the full weight of evidence is considered by the honourable members of this committee, we believe it will be sufficiently compelling to cause you to conclude that a grave breach of the principles of social justice has undoubtedly occurred. Accordingly, we implore you to do whatever is within your power to censure those who deserve your strongest condemnation for their actions that have caused this disaster to reverberate widely through the community. The community will be carrying the burden and counting the cost of this unconscionable conduct for years to come. We fervently trust that the all-powerful banking industry might come to understand the power that they exert in society and that that must be matched by commensurate responsibility to behave with a conscience and a duty of care towards those to whom they owe their existence in this society. Ironically, these are the same ordinary Australians whose taxes were used to protect the banks against the icy winds generated by the current global financial crisis. Great damage has been done, not only to the financial and psychological wellbeing of our members but also to the reputation of the banking industry.

Our fathers and grandfathers trusted their bank manager implicitly and accepted their advice, safe in the knowledge that the banker would act in the customer’s best interests at all times. Sadly, that cannot be said of today’s salesmen-bankers, whose reckless lending practices and rapacious quest for profits at any cost continue to do irreparable harm to the banking industry’s integrity, credibility and once envied reputation.

We appear before you today safe in the knowledge that the good men and women appointed to serve on this committee share our concern for the preservation of the principles of social justice that I referred to earlier. We are hopeful that your findings will result in the events that have brought us together today never happening again. We are also hopeful that the bank may eventually admit to the full extent of their culpability in these events and then act with honour and do whatever is necessary to redress the pain and suffering their actions have caused.

Before I and my colleagues take our leave and allow you to continue your important work, I would like to leave you with a quotation from the United States President, Barack Obama, that succinctly sums up our members’ sentiments in relation to this inquiry:

If the people cannot trust their government to do the job for which it exists—to protect them and to promote their common welfare—all else is lost.

We thank you for this opportunity to tell our story and we wish you well in your deliberations.

CHAIRMAN —Thank you. I understand that you are representing pretty much all the investors that were involved with Storm. I assume that, in the many discussions and meetings you would have had, you have developed a fair sense of the issues and some of the things that happened within Storm. As we have heard from witnesses and submitters, a lot of trust was placed in the advisers—the people you dealt with directly. How would you describe that level of trust? How would you describe the amount of power that was bestowed upon those advisers to act on your behalf?

Mr O’Brien —Allow me to begin because I am not sure if the committee is aware that our son is our adviser and obviously there was trust between us and still is and always will be. There is no conflict of interest here, but it may be more appropriate for the other two gentlemen to comment further on that. We—I and my family and friends—had the greatest trust in our son as our adviser and we still do.

Mr Anderson —I have no problem with my financial adviser, but I do have problems with some of the things that were not declared by Storm Financial. My understanding of financial advice is that it is independent and it is suited to my needs. Since I have been involved with the committee of SICAG, I have found out that this is not the case and that two clauses appear on every statement of advice. They basically say:

We have identified that your current asset base is not large enough to fund the lifestyle that you desire now, or in the future. You have sought our advice on ways to expand your income streams so that you can become more financially independent from work and have lifestyle choices in the future. To improve the provision of capital growth and income for the future, the size of your asset base should be increased.

Attempting to purchase assets solely by using your surplus income would result in a relatively small change in the size of your assets base; hence there would be an excessive delay before your investment delivered a substantial change to your income or delivered significant growth.

We recommend that you mobilise your existing assets to produce an increase in the size of your asset base. This could be achieved effectively by purchasing liability and offering your existing assets as security for the loans. The liability would in turn be used to purchase high quality assets to provide capital growth. This capital growth will be converted to income streams over time. In doing so, you would be effectively purchasing the capital base that you require for real wealth creation.

Care must be taken that these liabilities are kept at levels that are safe and that the servicing of the liabilities is easily manageable, and both of these aspects have been of paramount importance in the construction of these recommendations.

To me, if that is on everybody’s statement of advice, I have a problem with that.

CHAIRMAN —What does it mean to you?

Mr Anderson —It basically means that you are going to have to borrow money to fund your retirement.

CHAIRMAN —Was that never explained to you?

Mr Anderson —It was explained to me, and in the way it was presented it made a lot of sense. But the fact that everybody got that same advice shows the cookie cutter mentality. That annoys me, and the fact that the financial adviser is basically being controlled by the directors of Storm. I find that a bit of a conflict as well.

CHAIRMAN —If I understand this right, you are generally saying you trusted the advisers—

Mr Anderson —I did, yes.

CHAIRMAN —but you did not necessarily trust Storm.

Mr Anderson —No.

CHAIRMAN —How do you separate the two? I am not sure how we would do that. How do you separate them? You trusted the advisers but not the people who employed them.

Mr O’Brien —I think things have changed. Our original relationship was with Jelich Jones in Redcliffe, in our personal situation, and I think this will apply to a lot of our members. We have to keep getting back to the members, because it is not about us. To answer that question, once Storm started to acquire these other businesses and took the power back to a head office scenario for control and for whatever economies of scale, the advice lost some of its personality, if you like. The advisers were still there for us—they were still available 24/7—but there were some restrictions on the parameters of advice that they could give. We have heard previously that one out of four went down that cookie cutter trail, if you like.

CHAIRMAN —Sorry, one out of four investors or advisers?

Mr O’Brien —One out of four investors came along with the Storm philosophy.

CHAIRMAN —Were you ever concerned as this change was taking place, or did the advisers or anyone else acting as their representatives ever say that they were concerned about this change of culture?

Mr Weir —I guess as clients we did not think about it too much. From a personal point of view, I had had experience from the mid-nineties in using gearing to—I think this is the word that has been used; I don’t like it myself—supercharge investment strategies by using margin loans.

When it came time to retire, in 2004, I went through an exhaustive process of ascertaining how I might best fund my retirement. I suggested at one moment I might keep my interest in the taxi industry, lease them out and live on the proceeds. I looked at self-managed superannuation funds. I looked at freehold motels. I looked at allocated pensions. Because of the criteria that I applied to that decision-making process, none of them really met those requirements. I undertook close consultation with my financial adviser at the time, Mr Jelich. He was establishing a stronger connection with Storm Financial at the time and suggested that maybe it was time I talked to Storm. The rest is history, I guess.

We did not think too much about the rationalisation of the organisation. It seemed to be an extremely efficient process. Much has been said about the protracted time that is required to finally put your foot on the sticky paper, so to speak—to become an investor. We were impressed with the trouble that they went to in regard to what is referred to as the education process, which did place a lot of emphasis on the historical nature of the equities market: the fact that the equities market was an economic principle that underpinned the economies of most of the developed countries of the world, that we were investing in a representation of the most solid companies in the ASX 300. We were given the opportunity to understand the principles of volatility as opposed to real risk and at the end of the day we thought that the mechanisms or the stop-loss processes that were part of that process were going to work in our favour. There are times when I believe that they did tamper with the principles of the strategy, whereby we were supposed to keep a dam to enable us to withstand any down spikes in the market. My attitude was, ‘Why have that cash sitting there?’ At that point I should have been told that it is there for a purpose. My attitude was, ‘Get it into the market and get it working for us.’ That was one of the fundamental principles that was ignored. Also, as was addressed this morning, the 90 per cent LVR was a serious mistake in market circumstances that we had just been through.

CHAIRMAN —You talked about the power of the banking industry and that people once upon a time accepted advice from their bank manager and from their bank. With your investments, collectively as a group or individually, to the best of your knowledge how many times did you meet with bank representatives to accept their advice.

Mr Weir —One of the strategies that I chose was based on a self-managed superannuation fund provided by my bank. You will be interested to know that it had an element of subprime in regard to one of the aspects of that in that they were encouraging me to invest directly in projects whereby I might receive an enhancement in the rate of interest rather than invest in the bank’s products. In other words I was wearing the risk for that additional exposure and getting in return a couple of per cent in my return.

CHAIRMAN —Was that a Storm product?

Mr Weir —No, it was not a Storm product; it worked on the basis that another of the bank’s clients approached them for finance and they drew up a trust—

CHAIRMAN —Who are you talking about?

Mr Weir —Westpac. They would encourage their clients to invest directly in that portfolio—in that trust—

CHAIRMAN —So you were getting advice personally?

Mr Weir —Yes, from Westpac.

CHAIRMAN —And from Storm?

Mr Weir —No, this is nothing to do with Storm at all. This was a self-managed superannuation fund that was going to be set up and organised by Westpac.

CHAIRMAN —I am not sure if you understand: the one thing we are not doing in this inquiry is investigating into superannuation funds.

Mr Weir —Sorry, I thought your question was directed to—

CHAIRMAN —No. I just wanted to better understand it. Sorry, I am not sure if you understood that. You received advice from your adviser. Who was your adviser?

Mr Weir —This was prior to my joining Storm. This was an adviser I went to when I was determining what strategy I was going to use to fund my retirement.

CHAIRMAN —Are you representing SICAG, or—

Mr Weir —Yes.

CHAIRMAN —You are. In the good times obviously things are good, things go up and people make money. We all understand that and we understand the difficulties around those sorts of issues. Can you describe what was happening when the market started to fall so that we can understand what was happening at a client level and we can get a better idea of what people were thinking, what they were saying, were they worried, were they concerned and what were their concerns.

Mr O’Brien —I think that as the market started to fall at such a rapid rate we all had concerns about what was happening. The general feeling that we were getting was that part of the philosophy of our investment was to hang on to all the eggs we had in the basket or not to eat the chickens or whatever. One of the rules or beliefs was ‘don’t sell’. You do not have a loss until you sell. That really was part of it. We were continually being encouraged, through discussions among ourselves and financial updates, that our strategies were strong and that the company was very strong financially if things were to get very grim.

CHAIRMAN —Who was telling you that?

Mr O’Brien —Anybody that we spoke to, generally within discussions with clients, within discussions with our advisers. Obviously, there was never any discussion from the banks. Most of us in this room would not have received any advice in that regard from the banks, I would have thought, although whenever you had contact with banks, to re-establish a retail loan or whatever, it was common knowledge among all of the banks that the money was going back into the Storm fund with comments like: ‘Good on you! Well done! The market’s going well.’ So they were aware of where our investments were going. But to get back to the point, as the market started to slide we were all confident that we had enough steps in place and checks and balances through Storm Financial to help us ride out what we believed was an inevitable glitch in the market, if you like. So to hold on was of paramount importance.

CHAIRMAN —Do you know what steps they actually took rather than the ones they might have told you about?

Mr O’Brien —The steps were already built in. We all believed that we had enough buffer in there to ride out up to the most catastrophic collapse in the market. I think we have heard comments and read them in submissions that the world would have to come to an end or we would have to have a complete financial meltdown before we got anywhere near a margin call, and of course that is exactly what we had. So we believed that those checks and balances were in there and they were nice and sound and solid. Obviously, by the time we got to the situation where there was the point of no return we still believed, naively or not, that, had we not been sold out and cashed up or whatever, if only we had been left alone and supported by the bank that had shown so much interest. We were very proud that Storm was involved with CBA, and I think most of the advisers were too, because of the strength of the relationship. But when they finally cut the legs out from under us we had nowhere to go, and I believe the market has probably recovered about 40 per cent so far from its lowest point. So now we are sitting here without a cracker, let alone in the bank, and watching this go back up. Of course that just adds to all the stress levels. We believed totally—and when I say ‘we’ I am sure I am referring to the majority of SICAG people—that we were on a winner. By that I do not mean we were gambling and rolling the dice. We believed that we had invested in a very conservative product—that is, the economy of Australia, one of the strongest albeit one of the smallest economies in the world. There were no overseas investments. There were no flash, hot-shot ideas. We were looking for our 10, 11 or 12 per cent return annually in among the rises. Let us remember that when we first started in 1993 there were many years when there was no return through the All Ordinaries index at all. So when we started to get some good returns things were looking very rosy.

CHAIRMAN —Who was telling you that you could get 10 to 12 per cent annually?

Mr O’Brien —History. Over the last 100 years I think the All Ordinaries index has returned about 11 per cent.

Mr Weir —Being dividends reinvested. The historical statistical record of 100 years of investing in the equities market in Australia before the crunch was 12 per cent annually or thereabouts.

Senator MASON —Gentlemen, you say in your opening submission that a key factor in the decision by the majority of your members to engage in the Storm strategy was the strength of Storm’s connection to the Commonwealth Bank and its margin-lending division, Colonial. So it was a key factor in fact in choosing to engage with Storm. Is that right?

Mr O’Brien —It was very comforting to know that we had the support of the biggest bank, basically.

Mr Weir —Anybody with any knowledge of investing in managed funds would have been aware that Colonial First State had been a stand-out performer over any number of years. When I found that the investment in Storm was associated with First State then a lot of my apprehensions regarding the safety of my portfolio were dispelled.

Senator MASON —Could I just draw your attention to the section in your written submission under the heading, ‘Just who is responsible.’ Can we go there?

Mr O’Brien —Do we have the page?

Senator MASON —On page 23, at the bottom, it says, ‘Just who is responsible,’ and then we go over the page. So in a sense it is at the top of page 24 of your written submission.

Mr Weir —Is that the SICAG submission?

Senator MASON —Yes, SICAG. Do you have that, gentlemen?

Mr Weir —Yes. Thank you.

Senator MASON —When you established a relationship with Storm, was the LVR margin call trigger explicit?

Mr Weir —Absolutely.

Senator MASON —Righto; it was explicit. So you knew when the margin call would arrive.

Mr Weir —Absolutely.

Senator MASON —Was the process of the margin calls made explicit? In other words, what would happen? Who would action the margin call? Was that made explicit?

Mr O’Brien —I go back to 1993. Not long after starting our investments through Jelich Jones, in the MLC all ords fund at that particular time, we went to margin call. We received advice from the bank and then were contacted by the adviser that we had gone into a margin call. And then we were given instructions on how to fix it up. It was as simple as taking a handful of cash out of one bank and going to another bank and putting it into an account number that went into trust.

Senator MASON —I see. So the process was that you received a call from your bank and then a follow-up from the financial adviser.

Mr O’Brien —Correct.

Mr Weir —My product disclosure statement simply stated, ‘You will get a margin call.’ That document was owned by Colonial First State. It had a Storm badge on the front of it but it was owned and produced by Colonial First State, and I assumed that they would be contacting me for a margin call.

Senator MASON —Who would?

—Colonial First State. They owned the document.

Senator MASON —And they are bearing the risk, of course, because they are supplying—

—Colonial First State do not bear any risk. Colonial Geared Investment—

Senator MASON —Sorry, yes, CGI bears the risk because they lent you the money.

—That is right.

Senator MASON —All right; that is fine.

Mr O’Brien —Could I just make a quick comment about the margin call. We will not harp on it but there were not many of them.

Senator MASON —Prior to 2008, there weren’t many?

—Sorry; there were not many of them prior to 2008. In our association, and having had a portfolio back to 1993, there was one. So it was not a topic that was discussed frequently. I guess it was in the conditions—the ‘Ts and Cs’ someone was calling it yesterday—and it was not something that we all paid a great deal of attention to, I suppose. But all of us were always of the understanding that the banks had lent us the money and that it would be up to them if there was a margin call situation or, if they had any problem whatsoever with the lending process, that it would be up to them to contact their clients direct.

Senator MASON —You cite in your submission some evidence from Mr Paul Johnston, who was the head of Colonial margin lending from early 1996 until he left in 2003. You say that Mr Johnston is unwell but he is happy to give evidence if required. I take it the summation of his evidence is accurate.

—To the best of our knowledge, and knowing Mr Johnston’s integrity, we believe that that statement is authentic and true.

Senator MASON —On page 25 at lines 467 and 468 Mr Johnston makes the point:

The loan agreement is and always had been between the client and the borrower, not the agent—in this case Storm.

So the loan is between the client and the borrower. And that is what you said, Mr O’Brien, isn’t it?


Senator MASON —Then on page 26, lines 486-489 he says:

The margin call was always automatically generated by a computer system used by the bank called original MLS, now known as ‘EMPIRE’. A margin call notice could only be stopped through manual intervention.

Is that right?

Mr O’Brien —That is according to Paul Johnston.

Senator MASON —That is right. Mr Robert drew out some of the evidence earlier today from Mr Cassimatis that normally these are generated by computers and can only be stopped by manual intervention. In the next dot point Mr Johnston states:

I was instrumental in the writing of clause 4.2 of the terms and conditions which talks about ‘you’ receiving a margin call. My knowledge and practical application of that clause is that the bank contact the client in writing …

Again, is that your understanding?

Mr O’Brien —Yes; with a copy to the adviser. A carbon copy of that letter was sent to the adviser at the same time. That was our understanding.

Senator MASON —All right. Good. I am going to turn to a letter attached to Mr Jelich’s submission. On page 27, line 520, it states:

… the CBA might have a case to answer in regard to deceptive and misleading conduct by circulating a letter to clients asserting that Storm had sole responsibility for managing it and the bank’s clients’ margin loans.

Do you have a copy of that letter to clients?

Mr O’Brien —I can provide a copy. That was a copy that was circulated by Colonial following the sell down, and an interlocutory injunction was taken out by Storm Financial—

Senator MASON —I understand that, but you are asserting that the CBA, in that letter, asserts that Storm had sole responsibility for managing it and the bank’s clients’ margin loans. Is that right?

Mr O’Brien —That is their allegation.

Senator MASON —That is quite different from the evidence that Mr Johnston is putting forward about the normal process for margin loans; isn’t it?

Mr O’Brien —Absolutely. Obviously things changed after Mr Johnston left; we assume.

Senator MASON —Let’s get to that right now. In your submission you talk about a letter from Colonial Geared Investments to Mr Cassimatis dated 18 May 2007. Are you aware of that document?

Mr O’Brien —Yes; May 2007 agreement.

Senator MASON —Yes; that is the one. There are a couple of issues that I want to take you to here. It says:

Dear Emmanuel

Re: Margin Lending for clients of Storm Financial

Following your discussions with Colonial Geared Investments we are pleased to provide the following terms for margin lending facilities for your clients.

Subject to the expectations set out below, we will allocate a global LVR of 80% for those of your clients who invest in the following funds …

About 10 funds are then listed below. Were people notified of the change in LVR?

Mr Anderson —No.

Senator MASON —They were not?

Mr Anderson —No.

Mr Weir —We never received correspondence to that effect. It was delivered to us in a round of investor updates. The date escapes me but it would have been in 2007 at a meeting at Margate on the Redcliffe peninsula, where we were told, with a great deal of fanfare, that Mr Cassimatis had negotiated an 80 per cent buffer, a 90 per cent margin call. I have to say that, on the face of it, that was received pretty well by most people.

Senator MASON —Just remind me when that was, again.

Mr Weir —It would have been in 2007. It would be fair to say that that would have been received pretty well by most investors, knowing that you are not going to get a margin call to 90 per cent. Little did we realise that it was the old Achilles heel when things went bad.

Senator MASON —By changing the LVR, of course, you are changing your risk; aren’t you?

Mr Weir —When things go pear shaped, you have very little margin for error after 90 per cent.

Senator MASON —So the evidence you are giving to the committee, gentlemen, is that clients who invested in those funds were not informed by Storm or by Colonial Geared Investments.

Mr O’Brien —Only through verbal updates, as Mark just said. And it was accepted—

Senator MASON —Only through verbal updates?

Mr O’Brien —Yes. There was never any writing and there was no change of contract. It was used as a further sign of the support, if you like, that Storm clients had from CBA Colonial. It was used as a positive pointer to say, ‘Hey, we have so much faith in your portfolios that we are willing to extend to you, Mr Investor, through Storm an extended LVR’. Little were we to know that we would ever get to that level of 90 per cent. And in fact it was not 90 per cent. All the documentation will indicate that it was closer to 92, 93, 94 per cent, which was a glitch in the computer. That is as an aside. There are many Colonial statements around, and I can see Mr Robert—trust me, it was not 80 per cent; it was 82½, 83 per cent.

Mr ROBERT —In many cases it was 143 per cent!

Mr O’Brien —No, that is negative equity. That is where we ended up. However, this became an Achilles heel when the market did melt down because we essentially, at times, were two days away from being positive, being negative. I mean, a six per cent, two-day slide, and bingo, we are in trouble.

Mr PEARCE —Just to clarify Senator Mason’s point: you were provided these updates verbally at an investor update session by Storm?

Mr O’Brien —Yes.

Mr Anderson —If you were not there, you did not get the message.

Mr O’Brien —The updates were, I think, usually run—correct me if I am wrong—by the Cassimatis’?

Mr Anderson —Yes.

Mr O’Brien —They would do a road tour and come down and book a hall somewhere and we were all invited—

Senator MASON —That is extraordinary.

Mr O’Brien —They did not do a road tour just to tell us about something like this. It would be a general update on the market and the situations.

Senator MASON —You are being exposed to more risk and you are not being informed individually. Anyway, we have touched on that and there are plenty of other questions. I will go right to the end of the letter, to the second last dot point. It says, ‘In the unlikely event of a margin call, Colonial Geared Investments and Storm Financial will work in partnership to clear the margin call. Note, however, that Colonial Geared Investments reserves its rights under its margin lending terms and conditions in any case.’ This ‘will work in partnership’ strikes me as being nearly the nub of the entire issue. Is that right?

Mr O’Brien —Correct.

Senator MASON —What is the nature of this partnership?

Mr O’Brien —Well, the letter says it.

Senator MASON —You talk about a symbiotic nature and an umbilical connection, don’t you?

Mr O’Brien —Yes.

Senator MASON —Do you know of any document other than this that relates to this special partnership?

Mr Weir —In my role as chairman of SICAG, when the bank was active in delivering hardship resolutions to their clients earlier this year before this latest resolution process was negotiated between the bank and Slater and Gordon, we were very concerned at the manner in which they were going about this. We wrote to the head of that hardship process, a Mr Marabani. In his reply to me, he said, ‘We draw your attention to a commercial agreement that we had with Storm Financial that enabled us to hand over sole and complete responsibility for the management of margin loans and the calling of margin calls.’ I wrote back to him and asked if he could provide us with proof. After extensive and exhaustive investigations I was unable to provide or identify the origins of this commercial agreement. ‘Would you provide me with proof? Would you tell me what due diligence you required Storm Financial to undergo to discharge their obligations under the commercial agreement and could you tell me what legal requirements you placed to enable you to be able to hand over and abrogate full responsibility to those under the law, without Storm being just an agent and having ultimate responsibility?’ They failed to reply. I did not get a reply to my request.

Senator MASON —We will have some interesting questions in the future to ask about this.

Senator McLUCAS —Who was that letter from?

Mr Weir —That letter was from Fred Marabani, the head of the hardship team of the Commonwealth Bank. An extract from that letter is contained in my personal submission to the parliamentary inquiry.

Senator McLUCAS —To follow on from Senator Mason’s question, you were at the hearing in Cairns on Tuesday. You would have heard the two financial advisers who gave evidence at the end of the hearing when questions were asked about what they did in those days in November 2007 when the market was plummeting. Both of them indicated they had clients that had margin loans, and both of them indicated to the committee that they were monitoring—I think I am accurate in saying this—by the hour where the market was and where their clients were in terms of margin calls. They were not relying on the lending institution to do that. Do you have any idea why Storm did not act on behalf of its investors in the same way?

Mr O’Brien —I believe it gets back to this philosophy of hanging on. How gullible can you be? We were of the belief—‘we’ being the clients and ‘we’ being Storm—that the bank was going to stand by us and help us ride it out. Call me a fool if you like. With other companies outside of Storm, their clients were getting margin calls at 80 per cent. We were hearing this through the industry and through contacts. We were thinking to ourselves, ‘How lucky are we that we are still in there with a show with Storm.’ That is a true story.

Senator McLUCAS —Mr O’Brien, that is not really the question I am asking. What I am saying is that the other two financial advisers who have given evidence to this committee have said that, irrespective of what was happening with the banking institution, as part of their responsibility as the financial adviser to their client, they were ascertaining whether they were in margin call territory.

Mr O’Brien —They were working for another company.

Senator McLUCAS —No, they were financial advisers.

Mr O’Brien —Yes, but they were not working for Storm.

Senator McLUCAS —That is the point I am making. They were financial advisers. One of them called themself, I think, an independent financial adviser. They said they did not need the bank to ring them up and say that that client was in margin call—they were monitoring the share market; they knew how much their client had invested in various investment entities and they themselves could ascertain whether their client was in margin call.

Mr O’Brien —I cannot answer for them. I can give a suggestion that they probably realised themselves that their clients were getting into trouble and were starting to do the right thing. By way of explanation, I was involved in a discussion with another adviser firm in Townsville the other day and part of the discussion was that they had 90 clients with margin loans. They realised that the information was so corrupted on the Colonial website that they had to do something about it. So they had a very simple manual spreadsheet that they were monitoring on a daily basis on behalf of their clients. I think they had a client who had been in margin call for something like two weeks and they brought about steps to get him out of that situation. To this day Colonial still do not know that he had been in a margin call.

I guess in a situation where it was very small, advisers could be proactive and take the responsibility away from the bank. Having said that, this particular adviser in Townsville said that in his normal situation it was the bank that would be advising the client. But that system had fallen down. I said, ‘How did that happen?’ He said, ‘By way of an email every Monday morning. We got to the point where we could not rely on the emails because the information in them was of little value.’

Mr Weir —I do believe that those operatives within Storm were not exactly sitting on their hands during that very frantic period that Mrs Cassimatis alluded to this morning. I have seen emails that were sent from Carmela Richards to one of the operatives in Colonial providing a list of names for the next sell down before they went into margin call, making reference to other people that the Colonial-geared investments would have taken the initiative of selling down before they were in margin call.

I do not know too much about what was going on behind the scenes in Storm Financial, but I know that there was a lot of frantic activity going on. It is probably one thing to say that some organisations with fewer margin loan customers were able to do it manually. But the sheer weight of numbers that Storm had in these circumstances, and the lack of resources, meant that they simply were not able to do it.

CHAIRMAN —Can I just check a fact: you said you saw emails, and they were frantically selling people down?

Mr Weir —They were issuing instructions to Colonial to sell people down before they got into margin call.

CHAIRMAN —Did the people know they were being sold down?

Mr Weir —I think it was reacting to those authorities that we had signed.

CHAIRMAN —It was just to clarify, that is all.

Senator McLUCAS —I accept your evidence about these glitches in the computer. This is 2007 we are talking about, and it is a big glitch. We will talk to the banks about that in good time. Can I point you to line 370 of your submission? Without reading it out, it goes to the question of loan applications being routinely massaged. Can you tell me more about that please?

Mr Weir —That aspect of the relationship between Storm and the retail banking sector is the subject surrounding which the Commonwealth Bank have identified shortcomings in their relationship with their customers and Storm Financial. There has been a filing in the Federal Court against the Bank of Queensland by Slater & Gordon in connection with anomalies in loan processing, and in their submission to this inquiry the ANZ Bank has also identified that they had difficulties.

Senator McLUCAS —Now I know the genesis of where that is coming from, that will be pursued in another forum. Recommendation 1 of your submission, entitled Lender liability—”A duty of care” talks about establishing lender liability legislation. This goes to the essence of what this committee is all about, and that is making recommendations to government about what we should be doing in terms of our regulatory environment. Can you explain to the committee how, if we had lender liability legislation in place prior to the end of 2007 that would have assisted in ensuring that what happened did not happen?

Mr Anderson —We are basically talking about the aggressive marketing of lending. You could probably describe some of these banks as mortgage factories. They were sort of pushing the loans out without any sort of due care as to just exactly what their purpose was. Their prudential lending was more or less based on whatever security was available to give the loan, rather than the ability to service the loan. They relied heavily on the actual income from the investments, especially for people who were retirees. You can see the application forms, where they actually say, ‘The income is zero. Independent means.’ On the other side it is actually showing the margin loan as being a commitment but on the servicing side, again, it has got zero.

How can this be? That is not prudential lending. I spent 40 years at the Commonwealth Bank. A lot of the time you were doing people a service to decline their loan. They did not always appreciate it at the time but, generally speaking, if there was a reason why you could not give them the money, you were normally doing the right thing by them. They may have felt hard done by and gone somewhere else to get it. There is not much you can do about that part of it, but for a lot of cases you were doing them a favour. For some of these cases it would be just like giving a personal loan to an 18-year-old to buy the biggest motorbike in town, because you know he is going to go out and kill himself. It is just not responsible. Some of this, I think, is probably the same.

Mr Weir —I would like to make one further point. It has become evident to us that little else figures in the mind of a person considering the serviceability of a loan other than their ability to grab the security if all else fails. That figures prominently, at the end of the day, in whether or not that person should be extended that facility.

Senator McLUCAS —My very last question is one I raised with Mr Dalle Cort on Tuesday and you might want to quickly tell me about this. It goes to line 341 of your submission where you talk about trips overseas. I asked Mr Dalle Cort whether they were sponsored, or funded, by Storm Financial. He indicated to me that people paid their own way. Your submission does not seem to concur absolutely with his position. Can you give me an understanding—and you might not be able to do this, because you possibly do not know—of the value of the sponsorships from Storm, from Colonial Geared Investments and from Challenger that essentially supplemented the quality of that trip?

Mr Weir —It is hearsay only. I had the privilege of going on each of those trips and I can show you my cheque butts.

Senator McLUCAS —But you cannot show me the others, can you!

Mr Weir —There were some what I can only describe as quite magnificent value-added occasions that took place, sponsored by the banking industry. It is reputed that on the Cassimatis’ first trip to Canada several hundred thousand dollars of their own money was devoted to the success of the trip. I understand that the second trip, which was to Europe, was funded by the Cassimatis’ to the extent of about $1 million of their own funds. More recently, for a trip to South Africa, a similar amount was supplied to value add on that occasion. I understand that instead of travelling by bus between certain venues they funded air charters.

We were asked to write letters of appreciation to the banking industry following the Canada trip. There was no mention of that following the other two excursions. But, as far as we know, Challenger and Colonial figured very prominently in sponsoring value-added occasions on each of those trips.

Mr O’Brien —I might quickly add that economies of scale presented themselves. For the first trip, 150 people went. For the second trip, which we went on, there were 300 people. That was due to word of mouth. Then for the last two trips I think there were a couple of hundred on each. We were all put through travel agencies, and we all received upgrades because of the number of people involved. We went through a Townsville travel agency. They sent out the brochures and we paid accordingly.

Senator McLUCAS —Thank you for putting that on the record.

Mr PEARCE —I have a couple of quick question; I am conscious of the time. You represent a lot of Storm investors, some 1,500 or so at the moment. I know that each is unique in their own right, but could you tell me, on average, within your knowledge of Storm investors, from the time the investor became acquainted with Storm how long would they typically go before they became a client of Storm’s?

Mr Anderson —A hundred and eighty days is the number. Really it was like a cooling-off period. The average was around that. I think I spent more than that length of time.

Mr PEARCE —That is true, is it?

Mr Anderson —Yes, it is a fact. I do not know why we will not accept that.

Mr O’Brien —It was not a daily interrogation. Remember I am coming from an older relationship that was eventually taken over by Storm.

Mr PEARCE —I understand.

Mr O’Brien —It took my darling wife and I quite some time to consider the changes. But for new people coming in, they may go to a seminar and then not come back for three or four months. They would go back and talk to their families. So it is possibly a legitimate suggestion that it did take that long from day one to eventually becoming an investor.

Mr PEARCE —Okay. Mr O’Brien, earlier I think you said something along these lines, that you knew that the bank had lent you the money. I want to get to this question about who you felt you were dealing with. Do you believe that you as a client of Storm had a direct relationship with the bank, which bank that may have been, or were you a Storm client? What was your view on that?

Mr O’Brien —I was a Storm client and if I wanted any information regarding my loan I would go through my adviser, who could more quickly access someone within Colonial. We are talking about the margin lending. Our retail loan was with another bank. If I wanted any information regarding it, we would have a regular quarterly statement that would come out.

Mr PEARCE —But did you deal with the bank? Did you talk to the bank?

Mr O’Brien —No.

Mr PEARCE —Did you ever meet people at the bank?

Mr O’Brien —No.

Mr Weir —That is a unique characteristic of margin loans, though. Margin loans are secured by equities. They do not really look at your assets or liabilities, they know it is going to be secured, and even your ability to repay does not figure because on a lot of occasions the interest is capitalised anyway. It is an accepted part of that product. As for an across the desk interview for a margin loan, it is unheard of as far as I am concerned. You filled out a pro forma page at the back of a prospectus or a product disclosure statement, and that was a dual document that gave you your investment in equities and the associated margin loan that went with it. There was no such thing as a formal face-to-face interview in the process. Maybe if there is going to be stiffer regulation regarding those products it needs to be looked at. But I think the fundamental principle was that it was going to be secured by investment in an equities trust with appropriate pitching of the LVR levels. That was the protection of the lender.

Senator WILLIAMS —Mr Anderson, can I thank you and your organisation or group for the moral support you have given to a lot of people. I think you have done a magnificent job. The audience applause backs that up. You were with the Commonwealth Bank for 40 years. You obviously are a very experienced bank officer. I would take with that you are an intelligent man and you have seen a lot about the banking and finance industry. If I were to paint a hypothetical picture to you to say tomorrow you are running Australia and you can change some rules, what rules would you change to see that this sort of action never happened again?

Mr Anderson —I really think the one-stop shop of Storm, that people walked in the door, they gave the financial advice but they then had the ability to organise an investment loan for you and a margin loan for you. I think there has got to be a total separation of those roles.

Senator WILLIAMS —Righto. So you would look at financial advice and financial planning and how it is distributed to the people? That would be one issue?

Mr Anderson —Yes. It was just too cosy an arrangement. We saw it as being very convenient, but in reality that has been the total downfall because there was a huge conflict of interest. People were giving their information to the financial person. They were doing a profile on a computer disc. They were then sending that to the various banks to get a quote for the business. I have not seen my disc—I beg your pardon; I tell a lie. I have. It arrived in the mail only the other day from KordaMentha. The information on there was current at that particular time, but over time things changed. When I first made the application for a margin loan to get into the Storm part, we looked at it for several months, because borrowing money to get into the market was totally against everything that I had grown up with. However, over time we came to accept that part of the deal.

I was not investing in Storm Financial; I was investing in Colonial First State. That was the Commonwealth Bank, which I had worked for for 40 years. I totally trusted the bank and Colonial First State. I knew who had set up the thing. I even went to my own financial planner in my branch and said, ‘Can I buy this product through you rather than go through Storm, because I won’t have to pay the seven per cent?’ ‘Sorry, Graham. Can’t do it.’ The reason he could not do it was that it was exclusively badged to Storm Financial, so obviously this product had been set up by them exclusively for them. If the Commonwealth Bank or Colonial First State is going to have a product which is exclusively for this particular client, they must think they are a fairly good sort of operator to be able to do that for them. That is huge. I was investing not in Storm but in Colonial First State.

I was getting a range of stocks which were over the whole ASX 300. They actually had caps on some of those because it was not in the same percentage as what the market is built up with, because they will not have you with too much exposure to AMP, BHP or some of the bigger players. So it was balanced. That gave one confidence that it would happen. The plan that they gave to you actually had built into it interest rates increasing, so you might only have been paying six per cent for your loan but they had it worked out as if you were paying 10 per cent. On the other side, they actually showed that the returns you were getting on your money were not five percent; they were down at three per cent. They were also showing drops in the market. So that made one feel confident that you could be stress tested. I think that when we hopped into it our LVR would have been less than 50 per cent, so when the market went up it looked fine; we still stayed within that margin. It was only at the end of the day, when everything went wrong, that we ended up in negative equity. But I honestly believed when we signed those bits of paper in October to do the sell down to put us into cash that it was doing the right thing.

I do my banking on my internet. I looked at my accounts there and said, ‘Oops.’ There was a cash accelerator account that had been opened in my name. When I looked at it there was almost $600,000 in it. I thought, ‘Oh, they’re doing the right thing by me.’ A few weeks later I looked there and there was almost $1.8 million in it. I thought, ‘Jeez; they’ve salted away a hell of a lot more.’ So I thought they were doing the right thing and keeping me safe. When I got that phone call on 8 December, I almost fell out of the chair. I just could not believe what I was being told.

Senator WILLIAMS —What did the phone call tell you?

Mr Anderson —‘You’re in negative equity. You’re gone.’ So my life savings had just shattered. My superannuation of some $800,000 and half of my house had just gone down the chute, and I was not told. It was like that for everybody. Had I got a phone call when we were at 80 per cent, I would have had the option to make a decision, but we were not given that option. The product disclosure brochure says clearly in black and white, ‘We will advise you in writing that you must do this within’—whatever the time is—‘and, if you haven’t done it within five days, we will do that.’

Senator WILLIAMS —Who was ‘we’?

Mr Anderson —Colonial—their terms and conditions brochure. But, when you turn over to page 24, it says, ‘We don’t have to do anything.’

Mr ROBERT —Mr Anderson, why didn’t your Storm adviser call you when you had hit that 80 per cent mark?

Mr Anderson —I do not believe he knew when we had hit that 80 per cent mark.

CHAIRMAN —But hadn’t you already been informed of the 80 per cent previously at a meeting?

Mr Anderson —No, the buffer, not the LVR. They are completely different in terms of—

Mr ROBERT —Mr Anderson, how can your financial adviser not know when you have hit it? Their job is to provide you financial advice. You pay him an ongoing trail commission to maintain a watching brief. So how could someone you are paying to have a watching brief not be watching?

Mr Anderson —I assume what they were watching was not giving them the information. We have heard enough evidence to say that the information that was coming through was incorrect.

Mr ROBERT —Granted, but they would know exactly. If you have got $2 million worth of action, they would know that. If you are at 80 per cent LVR they do the maths quickly. But you are in an ASX 300 which follows the all ordinaries almost exactly on industrial resources.

Mr Anderson —Yes, it is pretty close to it.

Mr ROBERT —So they could actually just watch the slide. When the all industrials or resources closes 20 per cent down, or 18 per cent in one week, then that has slipped against your LVR almost 18 per cent. It is very simple maths. How could your adviser not do that simple maths to keep you advised?

Mr Anderson —I cannot advise you on that, but when they did sell down to cash—that cash that went into that accelerator account—then it was at 100 per cent borrowing. So that actually increased where you were at. It gave you that bit more of a buffer. So I cannot answer that, but—

Mr ROBERT —In holding a financial licence it is a requirement that a range of things occur.

Mr Anderson —Yes.

Mr ROBERT —And if your financial adviser is not doing that range of things then I would have to suggest there is a problem.

Senator FARRELL —Thank you for coming along, gentlemen. In your summary you give the committee some information about the age bracket of the Storm investors. You say that a majority are either retirees or approaching retirement. Can you break that down a bit more? Is it more than 50 per cent of the people who invested in Storm that—

Mr Anderson —It is closer to 80, I believe.

Senator FARRELL —80 per cent were retirees?

Mr Weir —I think our attachment with the results of our survey might outline that. I thought we contained that in our submission actually.

Mr Anderson —We surveyed our members and tried to break down those that used their—

Mr Weir —The breakdown of age sectors are shown below—30 to 49 years: 22.7 per cent; 50 to 59 years: 29.5 per cent—

Senator FARRELL —Yes, I have that. But I am really querying whether you can tell us exactly how many were retired? Do we make some assumptions that anybody over 60 is retired? The question I have is whether or not this particular product was ever going to be a good product for a person who was retired or retiring—whether you should ever offer this product to somebody who is looking at retirement? Has that question crossed your mind?

Mr Weir —It is a fair question, but wisdom in hindsight is a magnificent instrument and I guess that if I was going back into a geared leveraging strategy at the present time I would go back in with a great deal more insight and wisdom. As I have said to the fellows, as a result of our exposure over the last eight months we will come out with all the answers but nobody will want to ask us the questions.

CHAIRMAN —Hopefully you can tell us all your answers in here. That is what we are here to do. So we will be using your information.

Mr O’Brien —As we have to wind-up, I would like to give a closing summary. I apologise that in the first little section I will be referring to me personally. It is not about me, it is about SICAG; but I think I am probably Mr Joe Average so I have used me as an example.

CHAIRMAN —That’s fine.

Mr O’Brien —I thank the committee for granting us the privilege to appear before you today and await the outcome of your deliberations with interest. I appear today not just as a representatives of a group of some 1,600 Australians whose financial security was snuffed out earlier this year but also as a victim of the Storm debacle myself. I naively trusted Storm and the banks to look after me. When the share market got the staggers late last year and the global financial crisis hit this country I was wrong and I am now paying dearly for my misplaced faith. The numerous inquiries into this national disaster will eventually tell me who was to blame for the financial damage done to me and others and maybe, just maybe, there will be some restoration of my lost assets.

However I can say here categorically today that nothing will ever restore my faith in the Australian banking industry. As a client of Storm, the yellow and black logo of the Commonwealth Bank gave me courage and confidence that I had the implicit backing of Australia’s biggest bank. Storm’s partnership with the CBA allowed me to sleep at night, a luxury that I have not enjoyed now for eight months. I was proud to tell my family and friends that our money was safe because Storm had the backing of CBA, Australia’s biggest bank. Many O’Brien family members and friends trusted my judgement and also put their money into Storm. I do not think that you can imagine how difficult it is for me to look these people in the eye after the events of December 2008.

We all made the mistake of expecting Australia’s biggest bank to stand shoulder to shoulder with us in our hour of need. Australia’s banking industry is the envy of the other developed nations. The major banks are aptly known as the ‘four pillars’ because they underpin our nation’s economy. This was made clear earlier this year when our Prime Minister and Treasurer used taxpayers’ money to shore up the banks during the worst of the credit crisis. We ordinary Australian taxpayers stood by the banks during their hour of need. Surely it was not unreasonable to expect that the banks would do likewise in our hour of need.

Mr Chairman, you and your committee have a hard, hard task. We understand and we respect that. However I believe it is becoming obvious in the course of this inquiry that this is so big that the banking industry needs a complete overhaul before Australians will fully trust their banks again. I respectfully take this opportunity to urge you all to lobby your parliamentary colleagues hard to convince the federal government to undertake a new, broader inquiry into the Australian banking industry itself. At the very least we need plain English documentation common and to all lenders, legislated lender liability, a legislated code of banking practice, and a body with teeth to oversee the industry. That can only happen if you can generate the political will to fix the core problem that led to the collapse of Storm—and by the way, the Storms of this world will come and go but the banks will continue to be there—a combination of reckless lending and cold, unconscionable behaviour in abandoning customers in their hour of dire need. It is probably too late for my generation to regain its faith in the banks, but let us leave a better banking environment for our children and grandchildren. It is the right thing to do.

CHAIRMAN —Gentlemen, thank you very much. We really appreciate everything that you have done and your representation of all the people involved, all the investors, and we appreciate your time today as well. Thank you very much.

[2.53 pm]