For many, the ripple belonged to a larger source in the global financial crisis (GFC). Though for advisory firm Storm Financial, the ripple would soon morph into a flood, with the pipes of the business close to bursting with no means of stemming the flow. The Queensland-headquartered advisory business was a mid-tier operation that boasted a national reach, had pondered a listing on the Australian Securities Exchange and considered its business prospects as never ending.
However, despite Storm’s yearnings for greatness, the fate of the advice firm would be sealed on 18 December 2008.
The corporate regulator commenced an investigation into Storm on 12 December 2008, in connection with margin loans and related advice to Storm’s clients. The investigation found about 3000 of Storm’s clients had entered into a margin loan for market-linked investments. ASIC found over 450 clients owed their margin lender more than the value of their portfolios, equating to about $30 million.
Despite a last minute approach to Commonwealth Bank of Australia (CBA) to borrow a “sufficient sum” to recover Storm clients’ lost funds due to defaults on margin loans, the firm’s pipes finally buckled.
A flurry of activity followed, with partners of Worrells Solvency and Forensic Accountants appointed voluntary administrators of the company on 9 January 2009.
News of Storm falling into administration echoed throughout the industry, with many calling for blood, while others scrambling to shield their business and clients from any fallout.
As ASIC continued its investigation, the FPA stepped in to declare it too had begun an investigation into the firm, which had been a principal member of the association. Storm’s membership was officially cancelled on 12 January. “The FPA is absolutely committed to fully investigating all aspects relating to Storm and we will not tolerate any breaches of the association’s code of ethics or rules of professional conduct,” FPA chief executive Jo-Anne Bloch said.
“We want to make it very clear that we launched two investigations, one initially into Storm as a principal member and then separate individual investigations.
“We took the principal investigation to the situation where we actually laid charges against Storm, but unfortunately with Storm entering voluntary administration we were obliged under our constitution to terminate their membership, which means that investigation falls away.”
Three days later, on 15 January, CBA appointed Richard Buckby, Robert Hutson and David Winterbottom of KordaMentha as receivers of Storm and certain of its subsidiaries. The same day, Storm officially closed its doors.
The sheer volume of Storm’s collapse was deafening. It echoed down the halls of Parliament, prompting the Parliamentary Joint Committee on Corporations and Financial Services to announce on 26 February a new inquiry into the underlying issues associated with the collapses of Storm, stockbroking firm Opes Prime and financial services group MFS.
The inquiry would look at, among other things, the role played by financial advisers, the state of the general regulatory environment, the role played by remuneration models such as commissions, the role of marketing and advertising in financial product and service distribution, the licensing arrangements for those selling and marketing financial products and services, and consumer protection and insurance matters. The inquiry, which will deliver its findings on 23 November, received more than 400 submissions from industry and investors.
It was at this point financial planners began to watch over their shoulder. Investors seeking lost funds were out for blood.
The finger of blame had been taken off auto-pilot and now placed on manual, switched from Storm founders, to CBA, to other banking groups Bank of Queensland, ANZ, Macquarie, Westpac and National Australia Bank (NAB), and financial planners in general.
On 15 June, the PJC began a public inquiry into Storm. At the time, PJC chairman Bernie Ripoll indicated the committee would take particular interest in the involvement of the banks and lending institutions in providing finance to investors and their practices in regards to margin lending associated with those businesses.
While the consequences of Storm’s failure are yet to be known, the level of collapse is unfortunately not unknown to Australia’s financial services industry. In 2006, planners and investors alike fell foul of the Westpoint Group of Companies.
The investors in Westpoint-related financial products had an outstanding total capital invested of $393 million as at January 2006 when the group collapsed.
ASIC has taken action against directors of the companies as well as seven Australian financial services licensees.
