Banks fail in bid to have case thrown out

THE corporate regulator's damages case against Macquarie Bank and the Bank of Queensland on behalf of victims of Storm Financial will continue, after the Federal Court yesterday rejected the banks' bid to have the case thrown out.

By InvestSMART · 1 Dec 2011

By InvestSMART ·
1 Dec 2011

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Justice Lindsay Foster said he had not upheld the banks' challenges to the Australian Securities and Investments Commission's power to bring the action under both the ASIC Act, and the Trades Practices Act. However, he said ASIC would have to amend its pleadings in the case to conform with his judgment.

ASIC brought the proceedings on behalf of former Storm clients Barry and Deanna Doyle, "financially naive retirees". The Queensland couple approached Storm Financial in 2006 for advice as to how they should invest their assets for retirement.

Storm advised them to cash in their $650,000 in superannuation borrow from the Bank of Queensland by way of an investment home loan, and borrow from Macquarie through a margin loan. The Doyle's invested $2.26 million in a number of Storm indexed trusts.

They lost all their superannuation and cash, and owed the Bank of Queensland $456,000 which equalled the value of their home.

In 2010, as a result of its investigations into Storm, ASIC resolved to bring proceedings against the banks, with the Doyles as the second and third applicants in the case. Storm Financial collapsed in 2008, costing its clients $3 billion in lost investments.

In dealing with arguments from ASIC and the banks about some of the provisions of the Trade Practices Act, Justice Foster noted: "The ultimate issue here is whether the [banks] in the present proceeding can be made liable through the strict liability pathway ... for the alleged misrepresentations and other alleged contravening conduct of Storm. The substance of the allegation is that each of the [banks] was a 'linked credit provider' in relation to Storm."

He said while the banks argument may eventually "carry the day" in its contention the Doyles did not fall under the definition of "consumers" of services "of a kind ordinarily acquired for personal, domestic or household use or consumption", he could not conclude that ASIC had no reasonable prospect of establishing Storm's services were supplied to the Doyles as "consumers".

The judgment noted the banks had decided to defer their claims for the Federal Court case to be struck out because of two Storm cases in Queensland, which raised similar factual and legal issues.

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Frequently Asked Questions about this Article…

What did the Federal Court decide about ASIC's case against Macquarie Bank and the Bank of Queensland?

The Federal Court rejected the banks' bid to have the corporate regulator's damages case thrown out. Justice Lindsay Foster found that ASIC can continue the action, although ASIC must amend its court pleadings to conform with his judgment.

Who are the main parties involved in the ASIC case related to Storm Financial?

The proceedings involve the Australian Securities and Investments Commission (ASIC) bringing a damages case on behalf of former Storm clients Barry and Deanna Doyle, against Macquarie Bank and the Bank of Queensland. Storm Financial is the failed adviser at the centre of the dispute.

What are the banks accused of in the Storm Financial matter?

ASIC alleges the banks may have been 'linked credit providers' in relation to Storm Financial and could be liable, via a strict-liability pathway, for alleged misrepresentations and other contravening conduct attributed to Storm. Those are allegations the court will consider — they have not been proven.

What happened to Barry and Deanna Doyle after they followed Storm Financial's advice?

According to the article, the Doyles, described as 'financially naive retirees', cashed in $650,000 of superannuation in 2006, borrowed from the Bank of Queensland via an investment home loan and from Macquarie via a margin loan, and invested about $2.26 million in Storm-indexed trusts. They subsequently lost all their superannuation and cash and owed the Bank of Queensland $456,000 — an amount said to equal the value of their home.

Why does the legal definition of 'consumer' matter in this case?

Justice Foster flagged that a key issue is whether the Doyles qualify as 'consumers' under law — meaning services 'ordinarily acquired for personal, domestic or household use or consumption.' If they are not consumers, certain Trade Practices Act pathways for liability might not apply. The judge said he could not conclude ASIC had no reasonable prospect of proving the Doyles were consumers.

Does this Federal Court decision mean the banks are definitely liable?

No. The judgment simply allows ASIC's case to proceed rather than being thrown out. The article makes clear these are allegations that will be litigated; Justice Foster noted the banks' arguments might still ultimately succeed on some points as the case continues.

Are there other related cases that could affect the outcome?

Yes. The banks chose to defer their strike-out application in part because two Storm Financial cases in Queensland raise similar factual and legal issues that could influence the Federal Court proceedings.

What does this case mean for everyday investors worried about leveraged advice or margin loans?

While the article focuses on the court dispute, it highlights that regulators like ASIC can pursue banks over the role they play in complex, geared investment strategies promoted by advisers. For everyday investors, the case underlines the potential risks of borrowing to invest and the fact that legal and regulatory scrutiny can follow major adviser failures like Storm Financial's collapse.