Banks weigh in on customer protection

A CASE brought by the corporate regulator over the collapse of Storm Financial is shaping up as a battle over how far consumer laws protect bank customers.

By InvestSMART · 16 Apr 2012

By InvestSMART ·
16 Apr 2012

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A CASE brought by the corporate regulator over the collapse of Storm Financial is shaping up as a battle over how far consumer laws protect bank customers.

In defence documents filed in the Federal Court last week the Bank of Queensland and Macquarie Bank challenge whether people who borrow to invest qualify as consumers.

Macquarie Bank's defence also argues that margin loans are not covered by the Code of Banking Practice.

On March 1, a judge ordered the Australian Securities and Investments Commission to provide further details of its claims that a Townsville couple, Barry and Deanna Doyle, were eligible to claim under consumer laws such as the prohibition on unconscionable conduct in the ASIC Act.

"This is a particularly contentious issue and [the banks] are entitled to know precisely how the applicants propose to put their case on the point," Justice Lindsay Foster said.

ASIC's action on behalf of the Doyles is intended to set a template for further individual compensation suits over the $3 billion Storm collapse if it succeeds.

Before the Doyles became clients of Storm in 2006, when both were 62, they owned their home, worth $450,000, had $640,000 in superannuation and no debts.

They borrowed from Bank of Queensland against their house and took out margin loans with Macquarie to invest $2.2 million in trusts linked to the sharemarket.

When the global financial crisis hit, their investments were sold for $1.7 million, leaving them with a mortgage on their home of $456,000.

In the statement of claim, ASIC said in 2006 Mr Doyle was working as a part-time council librarian earning $17,540 a year.

His wife had retired from her job in a bakery and was receiving benefits of $7000 a year.

The defences from the two banks say the Doyles signed declarations between 2006 and 2008 that their loans were "to be applied wholly or predominantly for business or investment purposes".

This precluded them from claiming as consumers under the then Trade Practices Act or the ASIC Act, they say.

Macquarie says neither of the Doyles fitted the definition of "customer" under the Code of Banking Practice, namely an individual who "acquires a banking service which is wholly and exclusively for his or her private or domestic use".

Both banks say the Doyles were acting under the advice of Storm, a licensed financial adviser.

The Bank of Queensland denies "that either of the Doyles were in a position of special disadvantage and could not judge or defend their own interests as alleged".

It had no duty to warn or monitor the risks associated with the home loans, it says.

Macquarie says the Doyles signed acknowledgments that they had read and understood the risks of margin lending set out in a booklet containing their application forms.

The bank was not obliged to advise them of any other risks, it says.

No date for the trial, to be heard in Sydney, has been set.

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Frequently Asked Questions about this Article…

What is the legal dispute over consumer protection in the Storm Financial collapse?

The corporate regulator ASIC has launched proceedings related to the $3 billion Storm Financial collapse. The case has become a battle over whether consumer protection laws apply to bank customers who borrowed to invest — with Bank of Queensland and Macquarie Bank contesting ASIC’s claims that some borrowers, like the Doyles, qualify for protections such as the prohibition on unconscionable conduct.

Who are the main parties in the Storm Financial customer-protection case?

The key parties named in the article are the Australian Securities and Investments Commission (ASIC), Bank of Queensland, Macquarie Bank, Storm Financial (the adviser firm) and the Townsville couple Barry and Deanna Doyle. Justice Lindsay Foster is the judge mentioned as directing ASIC to provide further particulars of its claims.

Why do Bank of Queensland and Macquarie Bank say some borrowers aren’t ‘consumers’?

Both banks point to declarations the borrowers signed between 2006 and 2008 stating the loans would be used “wholly or predominantly for business or investment purposes.” They say those declarations precluded consumer claims under the then Trade Practices Act and the ASIC Act, so those borrowers should not be treated as consumers entitled to certain statutory protections.

Does the Code of Banking Practice cover margin loans according to Macquarie Bank?

Macquarie Bank argues that margin loans are not covered by the Code of Banking Practice. It also says the Doyles did not meet the Code’s definition of a ‘customer’ — which the bank describes as someone who acquires a banking service ‘wholly and exclusively for private or domestic use’.

What happened to Barry and Deanna Doyle’s investments and home loan?

The Doyles borrowed about $2.2 million using their home as security and took margin loans to invest. When the global financial crisis hit, their investments were sold for $1.7 million, leaving them with a mortgage on their home of around $456,000.

What were the Doyles’ financial circumstances when they became Storm clients?

In 2006, when they became clients and were 62 years old, the Doyles owned a home worth about $450,000, had about $64,000 in superannuation and no debts. The statement of claim says Mr Doyle worked part-time as a council librarian earning $17,540 a year and his wife was retired from a bakery receiving about $7,000 a year in benefits.

What defences have the banks put forward in this case?

The banks’ defences include that the Doyles signed investment-use declarations and risk acknowledgements, they acted on the advice of Storm (a licensed financial adviser), and that the banks had no duty to warn or monitor the risks of the home loans. Bank of Queensland also denies the Doyles were in a position of special disadvantage and could not protect their own interests.

Will this case affect other victims of the Storm Financial collapse?

ASIC says its action on behalf of the Doyles is intended to set a template for further individual compensation suits arising from the $3 billion Storm collapse if the regulator succeeds. As of the article, a trial date has not been set and a judge ordered ASIC to provide further particulars of its claims.