As the financial services industry awaits the sentencing of Storm Financial directors, Emmanuel and Julie Cassimatis, on charges that they breached their duties as directors under the Corporations Act, it is worth reflecting that little has changed within the Australian financial services regulatory system since the collapse of Storm in 2009.
Indeed, there is nothing contained in the Future of Financial Advice (FOFA) legislation or the changes to the powers and practices of the Australian Securities and Investments Commission (ASIC), which gives the objective observer much confidence that the Storm collapse, or something similar, will not occur again.
While ASIC proudly outlined its success in pursuing the Storm directors, it is worth noting that the regulator also admitted that the financial planning company had been operating and utilising its model since 1994.
The ASIC media release announcing the Federal Court’s findings with respect to Mr and Mrs Cassimatis stated: “Since around 1994, Storm Financial operated a system created by the Cassimatises, in which what ASIC considered to be ‘one-size-fits-all’ investment advice was recommended to clients. The advice recommended that clients invest substantial amounts in index funds, using ‘double gearing’ (Storm Model). This approach involved taking out both a home loan as well as a margin loan in order to purchase units in index funds, create a ‘cash dam’ and pay Storm’s fees. Once initial investments took place, ‘Stormified’ clients would be encouraged to take ‘step’ investments over time”.
The key point of reference is the year 1994, which means that ASIC actually had oversight of Storm Financial for nearly 15 years during which time it exhibited little or no interest in the firm or the manner in which it was handling the affairs of its clients.
As Money Management reported at the time of the Storm Financial collapse, it was a company which had ticked all the regulatory compliance boxes and had therefore done little to come to the formal notice of ASIC.
But as Money Management also reported in 2009, there had been no shortage of industry veterans who had privately warned ASIC of the dangers inherent in the so-called “Storm Model”. Indeed, one of those veterans told one of ASIC’s most senior executives that it was not a question of if Storm Financial’s model would lead to problems, it was only a question of when.
So, where Storm Financial was concerned, ASIC was very much the policeman who had been tipped off that problems existed but only acted after the damage was done.
And considerable damage has certainly been done, not only to those clients of Storm who lost substantial sums of money but also to the reputation of the Australian financial planning industry.
Anyone who wants to track the timeline that placed Australian financial planning on the hit-list of politicians looking to make a name for themselves need only look to the collapse of Storm Financial and the manner in which it fuelled the arguments of the industry funds, even though commissions were not involved.
The collapse of Storm Financial built the case for the FOFA changes and, arguably, contributed to other challenges such as the Life Insurance Framework (LIF) and it is probable that if the Federal Opposition were to succeed in forcing a Royal Commission into the banking and financial services industry, then the collapse of Storm Financial would be raised again.
So as the industry waits to hear what sentence will be imposed on those held by the court to be responsible for the failings within Storm Financial, it is worth reflecting that bad financial planning practices were only a part of the problem and that regulatory failures were also contributing factors.
Importantly, nothing has occurred since 2009 to ensure that Storm Financial, or something like it, doesn’t happen again.
