Ken October 30, 2009

Wonder who did all these loans?
Lo Doc?
Brokers?

George October 30, 2009

How are the banks to blame for the colapse of Storm or lending money to clients? Buyer beware!

Marcus October 30, 2009

Agree with all the above, when does responsibilty begin & end for oneself. Greed is not good & maybe these investors should have respected the age old rule higher return, higher risk!!! Storm were just parasites who took advantage of client greed.

Ted October 30, 2009

I am very dubious with claims now from these people. Whilst I feel sorry for them - and they may well have been duped - I cannot see how a bank is in the wrong if they are following procedures correctly.
The crux of the matter seems to be that a lot of people who should not have gambled on this style of investment were allowed to - or coerced to.

Broker in the 'burbs October 30, 2009

In the business of financial planning, one of the basic fundamentals required of all planners is to identify the ‘risk profile’ of an investor.

Risk profiling is a legal requirement. Allegedly, many clients of ‘Storm’ were pre retirees or actual retirees and had been ‘geared’ into direct share or investment portfolios which in anyones language, is at the upper end of the ‘risk’ scale.

Unsophisticated clients (which predominate Storms client base) relied on the trust and their relationship with their Financial Advisers, however yet again, by reason of their ignorance on financial matters, have been taken for a ride by another group of greedy individuals.

Geared portfolios (double & even triple geared) provide for leveraged commissions as well, so on the surface of it, planners didn’t discharge their reponsibilities (in terms of assessing client risk profiles)to maximise their own revenues and probably in direct contrast to the likley risk appetite of investors.

From what I know, the CBA did not use brokers with Storm, they used ‘in house’ lending staff. After it all went pear shaped, they eventually sacked the mobile lender & an Area Manager for reasons, not yet clear.

However, Lo Doc loans for retirees earning fantastic incomes on the basis of (well we don’t know how!)leaves us asking many questions.

In the final analysis, if the bank (the CBA) aren’t liable, they wouldn’t pay out or at least they’d fight it out. If the MD is apologising, then you know something is amiss. When staffers have been sacked, it doesn’t look good.

The moral to the story…..people still try sell what they can, irrespective of the suitability of the product sold.

‘Suitable product sales’ within the investment industry is law. It will become law in the mortgage game very soon too. Good.

The banks PR people have been very quiet on the ‘Storm’ front that’s for sure. Probably better to be a bit quiet on this one eh?

Carl October 30, 2009

These people need to look into their loan apps ie income declared, A/Ls.
Then seek redress from the lenders and the brokers.
Once again LoDoc.

Kevin November 1, 2009

The basic concept of gearing to invest is sound. Provided you stick to some basic rules and have safeguards in place, it can be a very profitable exercise. There are many other financial planning practices that draw equity, invest in shares and use margin lending for their clients that are still operating today. The safeguards that other have in place have worked. The lack of safeguards by Storm resulted in the losses made by Strom and their clients.

It is clear that some banks allowed loans that did not fit the normal lending criteria. The CBA has admitted this and is making amends. The other banks have stayed within guidelines, are unaware if guidelines have been breached or are yet to admit that error were made.

Who is to blame? It comes down to joint responisibility. In all cases the client must bear some responsibility. In many cases that is shared by Storm. In limited cases, the banks also have responsibility. Some clients went to Storm after their previous advisers warned them of the dangers, but they were not listening.

Broker in the burbs November 2, 2009

Kevin,

No arguments with the fact that for the ‘right’ person(s), gearing can be (and is) a sound strategy, however just for the record you said;

“other financial planning practices that draw equity, invest in shares and use margin lending for their clients”

If I’m reading this correctly, you’re talking about double gearing, i.e. drawing equity (probably from real property assets & more often than not, the family home) then investing in a portfolio of shares / managed funds using a margin lending facility. (which means borrowing funds against funds that were initially borrowed, ie double gearing.

Is this what you’re saying?

If it isn’t then fair enough, I’ve misread you, but if it is, I can assure all readers here, that many dealer groups do not allow double gearing at all. Not with any client, irrespective of their risk profile.

If as you say, some clients went to Storm after previous advisers warned them of the dangers, then Storm (as nil advice or execution only providers) would not be liable.

However clearly, if they were paid beyond the scope of just execution only, then they are likely to have provided advice. If that advice included significant warnings of the risk involved, then I would expect that these specific clients do have a problem. But from what I know about Storm, most of their clients were not in this category. Mum & Dads basically, being led by the nose.

Interestly, I would think that it would make sense that all SOA’s involving gearing, should be signed off by an independent solicitor, much like loan guarantors have to seek independent legal advice on their contingent liabilities.

Now that’d put the cat amongst the pigeons eh?

Imagine financial planners squirming over about that one, if it ever came to pass.

Kevin November 3, 2009

Broker in the burbs,

“If I’m reading this correctly, you’re talking about double gearing, i.e. drawing equity (probably from real property assets & more often than not, the family home) then investing in a portfolio of shares / managed funds using a margin lending facility. (which means borrowing funds against funds that were initially borrowed, ie double gearing.
Is this what you’re saying?”

Yes. This is a practice that occurs every day. An educated guess would suggest the practice is more commonly used with investment property than shares or managed funds.

There are many dealer groups that do not allow it and many that do. The vast majority that do allow it have strict controls in place. This is what Storm lacked.

“Interestly (sic), I would think that it would make sense that all SOA’s involving gearing, should be signed off by an independent solicitor, much like loan guarantors have to seek independent legal advice on their contingent liabilities.”

I’d have no problem with that, provided the same rules applied to every investor, regardless of the assetto every person who used double gearing to purchase investment property. All I ask for is a level playing field.

What I’d also like to see is real estate agents and mortgage brokers have to produce a similar Statement of Advice to what we do as financial planners. It’s something that I insist upon for my brokers, including formal written annual reviews. It takes time to set up the systems to manage the extra work, but it’s worth it. You end up with loyal clients who return to you every time, an excellent retention rate on your loan book and clients who go out of their way to refer friends and family to you.

It also creates quality referrals so I can look after their super, insurance, retirement etc.

Kevin November 3, 2009

Correction:

“I’d have no problem with that, provided the same rules applied to every investor, regardless of the asset. All I ask for is a level playing field.”

Broker in the 'burbs November 3, 2009

Kevin,

What are these ’strict controls’ you speak of? Other than implementing an options strategy regularly or a regime of stop loss orders, if the market progressively tanks, the compounding effect of capital losses within a double geared portfolio is magnified considerably.

Also, it’s been my experience that most double gearing occurs using the family home as this asset usually finds itself with the largest chunk of equity available to leverage.

I would also suggest that most (if not all) institutionally owned dealer groups (which caters for the vast majority of financial planning outlets) do not allow double gearing. The risks associated with this strategy are self evident. PI insurers also would place heavy burdens on practices that do.

But right for the ‘get go’, I did say that gearing is a viable strategy for the right investor. It just comes down to whether it’s (gearing) is the appropriate strategy recommendation for every client.

You see, some planning firms start off with the strategy first (as the front line sales spiel) and then ’sell it’ to the client.

It should be the other way around.

The Wizard November 3, 2009

Yes no loan Brokers direct to the Banks Cba even set up there own BSB for Storm. Bank of Qld well just greedy franchisee’s but mind you Mr Liddy still maintains nothing was wrong.

Kevin November 3, 2009

Some questions. If using the home equity as a deposit to invest is such a risky strategy which requires independent legal advice, then why are brokers doing it daily for residential property? Do you warn those people that they are placing themselves in danger? Do you undertake a risk profile analysis to ensure they are suitable for such a high risk strategy?

After all, if the property market progressively tanks, the compounding effect of capital losses within a double geared portfolio is magnified considerably. Look at the US where around 30% of property owners have negative equity.

The issue is not the underlying asset, but usually the level of debt and affordability. When previously with an institutionally owned major dealer group, the practice was allowed, but the margin loan could not exceed 40% gearing at the start and regular gearing had to be stopped if the LVR hit 50%. The home loan had to be 80% or less. Total debt (including rental properties) could not exceed 4 x income (including rent). They also had to be able to have enough cash reserves to meet 3 months living expenses & loan repayments. Clients had to be reviewed and cash reserves confirmed every 6 months.

If Storm had similar criteria, the majority of their clients would not have suffered the huge losses due to margin calls. Imagine how few investment loans the average broker would write following those guidelines.

The key is to keep the client in a sound position so they can keep investing through the downturn and continue to accumulate at lower prices. Most of the 4 major banks are trading at double their March lows.

I operate under similar, yet more cautious criteria to that institutional dealer group. Many prospects take time to become gearing clients as they need time to either reduce their debt levels or increase their income before I will accept them. While they are waiting, we look after their super, insurance etc. It would be something like 1 out of every 50 mortgages by the broking team that get referred to me as suitable for a gearing plan.

Broker in the 'burbs November 3, 2009

Kevin,

And your last sentance is exactly what I’m on about! Storm (allegedly) would have seen every client as a gearing oppportunity. You don’t.

And..

Kev: “If using the home equity as a deposit to invest is such a risky strategy which requires independent legal advice, then why are brokers doing it daily for residential property?”

Burbs: That was not my suggestion. The scenario I suggested involved guarantors. Lenders (as a credit policy requirement) who provide facilities where family &/or non family members act as ‘guarantors’ (investment or otherwise), often demand independant legal advice, ostensibly for two reasons.

1. To ensure the guarantor is aware of their contingent liabilities and 2. To protect the lender in the event of any future litigation in the event of default.

Kevin, I’m not anti gearing. I’m just anti anyone who pushes inappropriate products or strategies on unsophisticated investors/borrowers that’s all. I worked in the Funds Management industry for 12 years or so & also managed a large dealership for 3 years myself & I can assure you, some of the practices that went on simply left me gobsmacked sometimes.

And when I speak to a few twenty somethings who have been inculcated with the hubris surrounding high risk investment strategies as practically fail safe, which invariably have been ’sold’ to the unsuspecting ‘punter’….then the alarm bells start to ring for me, that’s all.

Kevin November 3, 2009

Broker,

I’m not trying to get into an argument. It appears we have similar outlooks. Gearing is good, but it doesn’t suit everyone and you should have safeguards in place to reduce the risk factors. There are bad things happening in the planning & broking world and just about every other industry as well.

However, you did say,

Burbs: “Interestly, I would think that it would make sense that all SOA’s involving gearing, should be signed off by an independent solicitor, much like loan guarantors have to seek independent legal advice on their contingent liabilities.”

And then,

Kev: “If using the home equity as a deposit to invest is such a risky strategy which requires independent legal advice, then why are brokers doing it daily for residential property?”

Burbs: That was not my suggestion.”

I could be wrong, but I believe I’m receiving mixed messages. Gearing by Financial Planners (SOA) should get independent legal advice, but gearing by brokers into residentail property investments shouldn’t.

I’m seeking clarification:-

Do you believe that ALL gearing requires independent sign-off by a solicitor?

To really even up the playing field, how about detailed SOA’s for every mortgage. Imagine mortgage brokers squirming over about that one, if it ever came to pass………. unless their brokers are already trained to do this.

Broker in the 'burbs November 3, 2009

Kevin,

I probably didn’t make it as clear as perhaps I could have. The analogy I was trying to make, was that *guarantors* are obliged to seek independent legal sign off for the reasons I’ve previously noted.

*Borrowers* don’t necessarily need legal sign off (although in some circumstances with some lenders, it is required) which is why I was making this distinction.

The other point I was making, was that SOA’s involving gearing could also be required to have legal sign off (similar to the guarantor example).

The reason why would be due to the relative complexity of the SOA and the possible negative financial impact of the strategy of investing in mark to market investments, particularly when margin calls are involved.

Banks don’t make margin calls against the family home for diminishing property values. Margin loans do (if you on invest here)…..which is why so often, when unsophisticated borrowers get stung, they plead ignorance.

If they’ve had independant legal advice from the outset, then they should have either rejected the strategy in the first instance (as inappropriate advice) or they should cop it sweet, if the market goes arse up.

It is also quite clear to even the most unsophisticated borrower, that when establishing a home/investment mortgage, if they don’t pay, they get sold up. If you’re suggesting legal advice for this, then I simply wouldn’t agree for the obvious reasons.

Cheers

Kevin November 4, 2009

I understand your point of view, but I don’t necessarily agree. Property investing can be complicated as well for the unsophisticated investor.

Last month, someone was referred to me by one of my brokers. They were “sold” a property gearing plan that appears to breach the ATO ruling in Hart’s case. They are low income earners with a small business and it was promoted to them as being tax effective and positively geared. The owner occupied home was re-financed to a higher interest rate than their previous loan. This was funded via lo-doc loans against their primary residence and new purchase.

I was called in to confirm they had been misled and show it was negatively geared by some $13,000 per year and what the taxation consequences could be. Their taxable income has them in the 15% bracket, so tax deductions are not their primary need. Their hand-written notes from their discussions clearly note they were to be cashflow positive. This appealed as they were looking to supplement their income, rather than rely wholly on their small business which could be subject to economic fluctuations.

With additions to the family they were looking to restructure and move to a larger home. They were horrified to learn the investment property valued up $65k less than what they paid for it, making the move to a larger home unviable. It appears the value of the property has never been close to the purchase price. The fact the banks haven’t called the debt in does not make the loss smaller. Not having mark to market makes the losses easier to hide.

There is no written confirmation of the “advice” they received about the positive cashflow effects. This is another case of an unsophisticated investor getting sold a lemon. Don’t they need the safeguard of having written advice that can be independently reviewed? At least with an SOA, you get written confirmation of what the advice is and why it’s being given. You don’t get that when investing in property, so it’s your word against theirs.

Investing in anything has it’s risks and there are rogues in all industries. Not all planners use the Storm model and not all property sellers follow the Henry Kaye model. I’m happy with whatever regulation is put in place. However, I’ll always argue that anyone giving advice on how to “invest” or fund investments should be operating under the same set of rules and regulations regardless of the underlying asset.

At the moment, planners have much stricter requirements than brokers. With the new regulations coming in brokers are starting to catch up, but there’s still a discrepancy between what I can do and what my brokers can. When recommending a home loan, even owner occupied, I have to complete a full fact-find and full SOA. Although my brokers do a fact-find and short SOA, that is my requirement, there is no legal obligation for them to do one.

Ted November 4, 2009

you are correct Kevin, and I suspect that many many mortgage brokers are overstepping their authority in providing some form of financial advice to prospective clients, unless they are also licensed financial planners as well as mortgage brokers. the proposed legislation might well sort out some of this problem, and, perhaps weed out some of the shonks.

Broker in the 'burbs November 4, 2009

Kevin,

With the scenario you present, I would be a fool to disagree with you. Clearly, this example shows how unsophisticated investors can be manipulated due to ignorance and that predatory types pervade all industries.

The key problem though, is that our legislators do not regard ‘credit’ as a financial product and by extension, it’s also about how do credit service providers apply the proposed disciplines required for appropriate credit advice and in what circumstances.

If credit is brought under the ‘financial product’ umbrella, then we could see that regulated advice models will follow i.e. providing advice with appropriate needs analysis and SOA like validation of any advice given.

I suppose that ultimately, the evolution of credit ‘advice’ will mirror the way the financial planning industry went, along the lines of CLERP and FSR.

However, the financial planning community got to where it got to after many years of regulatory amendment. The credit market (and service providers) will likely follow a similar path however it’s in it’s infancy now.

The next step will be national licencing and once in force and with the culture of ASIC ready to progress the credit industry, we will see tighter controls and codified methodologies for credit advice. Of course, this will be with the view that consumers are protected as best as they can.

The Financial Planning community (through the the FPA)also made many representations to ASIC to bring about short form SOA’s and other policy amendments, to bring about some commercial sense and more appropriate compliance mechanisms.

ASIC had a one size fits all compliance approach & that simply didn’t work.

Hopefully, the credit market will learn from the compliance developments learnt from the planning industry and hopefully, with sound industry leadership, we will develop the credit advice industry to a more professional standard.

Kevin November 5, 2009

I believe credit will eventually come under the financial product umbrella. The new licensing regime is the first step in that direction. As you said, the process is it’s in it’s infancy. I see credit as following what financial planning went through 10-15 years ago, with the same results in terms of numbers and profitability.

Just like the financial planning industry, the compliance will get tougher, more expensive and there will be a massive reduction in the number of businesses. Many older brokers will refuse to jump through the hoops required and eventually sell out rather than complete formal qualifications and continue with ongoing CE points. Others will merge with similar broking businesses to create spread the compliance costs.

I’ve seen it with financial planning and now it’s starting with broking. I would not be surprised to see the number of broker businesses less than half in 10 years. The average business will be bigger, but there will be less of them.