CBA admits acting without instruction on Storm

The Commonwealth Bank of Australia (CBA) has broken its silence on Storm Financial, admitting that Colonial Geared Investments (CGI) sold down Storm Financial shares without instruction when it felt the response from the financial planning group was inadequate.

CBA provided a written statement to current affairs program 60 Minutes last night rather than having a bank representative appear on television.

In the statement the bank admits selling down shares of Storm Financial clients worth $178 million without instruction from the financial planning group.

The bank said while its agreement was to take instructions from Storm about the sale or purchase of shares on behalf of Storm clients, it said the planning group failed to respond adequately to falling share markets.

The group’s statement to 60 Minutes said CGI, as the provider of the margin loans, reserves the right to sell down the security on a loan if the borrower fails to address a margin call.

“After attempting to obtain instructions from Storm Financial … it became apparent that Storm Financial’s response to the 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,” the bank’s statement said.

“In November 2008, CGI was forced to step in to ensure all margin calls were addressed in full.”

As a result, “we instructed redemption requests totalling around $178 million of CFS, Challenger and MLC in an effort to clear these clients’ margin calls".

The bank said “if this had not happened, Storm Financial clients would have accumulated more losses as the market continued to fall”.

The statement said CGI’s role was to keep Storm Financial “up-to-date with the relevant information concerning their client’s margin loan”, with the role of Storm Financial being to manage the loan portfolio. This included managing debt levels and the purchase or sale of any shares, with Storm acting under the authority of the borrower.

In normal circumstances, the bank said “Storm Financial clients were sold down when Storm Financial advised CGI who and how much should be sold”.

The CBA statement said in October and November 2008, Storm Financial instructed CGI “to effect $672 million worth of sales to address clients’ loans in margin call”.

This was around the time Storm sent letters to its clients advising them to switch up to 100 per cent of their portfolios to cash to avoid margin calls.

But as markets continued to fall, CBA said the dealer group’s response “became inadequate to clear margin calls”. The statement from the bank did not state whether the bank attempted to contact Storm clients with margin calls individually.

“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,” the bank’s statement said.

“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.”

The bank said it believes it maintained its responsibilities to its shared clients with Storm.

The bank said “any of these borrowers could have contacted Storm Financial and obtained the current details of their margin loan portfolio” at any time.

“On top of this, we provided up-to-date data on our website (for both advisers and clients), which can be utilised 24/7 to check the client's account.”

In regards to the home loans provided to clients of Storm Financial (which have come under question in recent weeks), the bank said “it provided home loans for Storm Financial clients who applied and met the bank’s lending criteria”.

The statement from the CBA said the bank is “concerned and sympathetic to those who followed financial planning advice from Storm Financial and are seeking to assist them where feasible”.