Attention shifts to the margins

In the fallout that has surrounded the collapse of Storm Financial it has been financial planners who have once again found themselves tarred by a very smelly brush.

That brush has been manufactured by reports of inappropriate use of margin loans and the extraction of higher than ordinary fees and commissions based on planners (allegedly) recommending strategies that resulted in clients being double leveraged.

But let us be very clear on one crucial point: Storm Financial was not a typical financial planning dealer group. Indeed, the degree to which it diverged from industry norms will no doubt become clearer as a result of impending legal action.

That Storm’s practices were atypical is now becoming conventional wisdom. That some key industry players were also aware of Storm’s atypical behaviour has also become conventional wisdom. That being the case, two key questions need to be answered: Who knew what and when? What should they have done about it?

First, let us deal with the regulator.

There are suggestions that officers within the Australian Securities and Investments Commission (ASIC) were aware of Storm’s practices and that some industry figures held misgivings about those practices. What, therefore, should ASIC have done?

The point seems to be that while there was plenty of industry chitchat about Storm, no one took to ASIC the type of formal complaint that might have triggered an appropriate investigation extending beyond a mere paperwork check. Further, all the evidence suggests that Storm ticked all the boxes with respect to fulfilling its regulatory obligations.

It follows that if the regulator, notwithstanding industry chitchat, could not find a reason to act, the Financial Planning Association (FPA) also could not find a reason to act.

Money Management has not been able to determine whether, or when, ASIC actually received a formal complaint about Storm sufficient to warrant an intervention, however, it understands that the FPA received no formal complaints about the company until after it had virtually collapsed.

The difference between Storm and Westpoint or Fincorp is that where Westpoint and Fincorp were concerned, the regulator had detected shortcomings well before the event and, in the case of Westpoint, had commenced court proceedings.

But if questions are to be asked about the role of ASIC and the FPA, then they might equally be asked about the companies that provided the margin loans to Storm’s customers and whether they applied the appropriate measures with respect to the suitability of the clients they were lending to.

There can be no doubt leverage and margin lending represent legitimate tools for financial planners wanting to build a client’s wealth, but it needs to be remembered that as recently as 2001, it could be said that margin loans were the preserve of mostly experienced and high-net-worth investors.

The bottom line is that while Storm Financial will be the subject of prolonged legal disputation and while financial planners will have to endure being tarred with the Storm brush, justice will not be served if the actions and practices of the margin lenders are not similarly examined.