The Australian Securities and Investments Commission (ASIC) decision to settle with Commonwealth Bank of Australia (CBA) over loans by the bank to Storm Financial customers has divided the legal fraternity.
CBA will make available up to $136 million as compensation for losses suffered on investments made through Storm. This amount is in addition to payments of approximately $132 million CBA has already provided to Storm investors under its CBA Resolution Scheme.
The compensation will be available to many CBA customers who borrowed from the bank to invest through Storm, including those who are members of the Sherwood class action that has been brought against CBA.
Now, for the rest…
The regulator will continue its unregistered managed-investment-scheme proceedings against Storm, Bank of Queensland and Macquarie Bank.
ASIC estimates the total loss suffered by all investors who borrowed money from banks to invest through Storm is approximately $830 million.
“ASIC’s objective of obtaining compensation for Storm investors has been achieved for CBA customers, without the need for a long, costly legal process that brings with it a level of uncertainty,” said ASIC Chairman Greg Medcraft
“Today’s compensation deal is a timely, fair and certain outcome for Storm investors who borrowed from CBA.
“Storm investors can be confident we would not have agreed to a settlement unless we thought the compensation was appropriate.”
The carve-out clause
Ben Hardwick, practice leader with Slater and Gordon’s commercial and project litigation group, said the announcement would be good news for clients represented by the firm as part of an earlier resolution scheme.
“For the past two and a half years our clients have been enjoying the financial benefits of the settlements we negotiated with the CBA,” Hardwick said.
He anticipates that hundreds of Slater and Gordon clients will have their compensation entitlements topped up as a result of the announcement on the basis that the settlements already negotiated allowed for an opportunity for them to also benefit from any subsequent deal struck by ASIC.
“Our clients were able to reach a form of closure back in 2009 and 2010, with the hope of something more, and today’s news is likely to deliver that.”
Under the terms of the deeds of settlements reached between Slater and Gordon’s clients and the CBA, a special “carve-out” clause was incorporated, so that in the event of the establishment of any settlement scheme between CBA and ASIC, they would have the same entitlement to participate as those who had not settled with the CBA.
Hardwick said the firm would contact its clients as soon as possible to notify them of today’s announcement.
Something borrowed, nothing gained
However, lawyer Stewart Levitt of Levitt Robinson, who is running a separate Storm class action representing about 300 victims, said in The Australian that the settlement represented a “disgraceful surrender” by ASIC.
He told the national broadsheet that Storm victims wanted to see justice rather than receive a settlement which amounted to “two-fifths of nothing” when compared with the actual losses suffered.
While it has been widely reported that the regulator will compensate up to 55 per cent of the money lost by investors, Levitt makes the point that investors introduced to Storm via the CBA would not recover 55 per cent of all money they lost, but just 55 per cent of the money that was borrowed from the bank in the form of margin loans to invest in Storm.
“This doesn’t cover any of the investor’s savings, any of their superannuation benefits or any money they were encouraged to borrow against their homes to invest in Storm,” Levitt told The Australian.
Fill the breach
Claire Wivell Plater, managing director of The Fold Legal, told Professional Planner Online it was unfair for the banks to take all the blame.
“While it is entirely appropriate that the victims of the Storm debacle are compensated to the greatest extent possible to ease the personal and financial havoc to which they have been subjected, one can’t help but feel a little sorry for the banks,” she said.
“Storm’s assets and professional indemnity insurance were never going to be adequate to compensate the afflicted investors. So, there’s really no alternative but to call on the banks’ deep pockets to fill the breach.”
Wivell Plater believes that the regulator had little choice but settle the matter as quickly as possible.
“Regardless of the strength of ASIC’s case against the banks, defending the litigation was always going to be an expensive exercise. No matter how many millions have and will be spent, the legal costs are likely to pale into insignificance against the adverse publicity as the banks’ internal workings are pawed over on a daily basis as the case unfolds,” she said.
“And given that a large part of the case would be about inappropriate lending, perhaps it’s not surprising that CBA has settled early. The coincident timing of the court case with CBA’s ‘can’ campaign lends itself to endless opportunities for parody.”
I agree with Allan’s comments, for over 20 years I know of professional advisers who have complained constantly about this particular individual’s business practices only to be ignored by ASIC, NCSC, ALA and FPA. etc. Yes all parties share responsibility but shouldn’t ASIC pay the most for their incompetence in allowing this fraud and greed to fester for so long?
Always lovely to hear from ASIC and the lawyers getting kudos and lots of money but no action against the perpetrators of the scheme and no acceptance by the plaintiffs that they were greedy. I have yet to see one person show how they were tortured to induce them to mortgage their homes having spent a lifetime paying them off. When will people accept responsibility for their own actions rather than always looking for somebody to blame.