Storm case grapples with definition of 'customer'

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 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 compensation suits over the 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 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 retired wife was receiving benefits of $7000 a year.

Both 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", precluding them from claiming as consumers under the then Trade Practices Act or the ASIC Act.

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.

The banks have applied for a permanent stay because similar proceedings are under way in Queensland.

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Frequently Asked Questions about this Article…

What is the Storm Financial case and why does it matter to investors?

The case arises from the collapse of Storm Financial and is being pursued by the corporate regulator, ASIC. It focuses on whether consumer laws protect people who borrowed from banks to invest — an issue that could create a template for further compensation claims related to the Storm collapse if ASIC succeeds. The dispute could affect how banks and advisers are held responsible for lending for investment purposes.

Who are Barry and Deanna Doyle and what happened to them in the Storm Financial collapse?

According to the article, the Doyles were a Townsville couple who became Storm clients in 2006 at age 62. Before joining Storm they owned a home worth $450,000, had $640,000 in superannuation and no debts. They borrowed from Bank of Queensland and took margin loans with Macquarie to invest about $2.2 million in trusts linked to the sharemarket. When the financial crisis hit their investments were sold for $1.7 million, leaving them with a mortgage of $456,000.

Why are Bank of Queensland and Macquarie Bank arguing that the Doyles are not 'consumers'?

Both banks contend the Doyles signed declarations between 2006 and 2008 stating their loans were 'to be applied wholly or predominantly for business or investment purposes.' The banks say those declarations preclude consumer claims under the then Trade Practices Act or the ASIC Act. Macquarie also argues the Doyles did not meet the Code of Banking Practice definition of a 'customer' who acquires a banking service wholly and exclusively for private or domestic use.

What is Macquarie Bank's stance on margin loans and the Code of Banking Practice?

Macquarie Bank's defence, as outlined in the article, argues that margin loans are not covered by the Code of Banking Practice. It also says the Doyles did not fit the Code's definition of a 'customer' because their borrowing was for investment purposes rather than wholly private or domestic use.

What is ASIC seeking in its action over the Storm collapse?

ASIC has launched the action on behalf of the Doyles to seek compensation and to establish a legal template for further suits related to the Storm collapse. A judge ordered ASIC to provide further particulars of its claims that the Doyles were eligible to claim under consumer laws such as the prohibition on unconscionable conduct in the ASIC Act.

What defences do the banks say they have in the case?

The Bank of Queensland denies the Doyles were in a position of special disadvantage and says it had no duty to warn or monitor the risks associated with the home loans. Macquarie says the Doyles signed acknowledgements that they had read and understood the risks of margin lending set out in a booklet accompanying their application forms, and that the bank was not obliged to advise them of other risks.

What were the Doyles' financial circumstances before and after investing with Storm?

Before becoming Storm clients in 2006 the Doyles owned their home (valued at $450,000), had $640,000 in superannuation and no debts. In 2006 Mr Doyle worked part-time earning $17,540 a year and his retired wife received about $7,000 a year. They invested about $2.2 million in market-linked trusts; after the 2008 financial crisis the investments were sold for $1.7 million, leaving them with a mortgage of $456,000.

When will the trial be held and are there any procedural developments investors should know?

No trial date has been set for the Sydney hearing. Justice Lindsay Foster ordered ASIC to provide further details of its claims. The banks have applied for a permanent stay of proceedings because similar cases are underway in Queensland, but the article does not report a decision on that application.