A Smart Investing reader has reacted with seemingly harsh words to the Commonwealth Bank’s compensation scheme for Storm Financial clients who had taken large margin loans through the bank.
Here’s a little of what he wrote to Smart Investing: “These people should accept responsibility for their own stupidity or greed.
“Sorry, but you live by the sword, die by the sword … and gearing is indeed a two-edged responsibility,” he added.
Details of the dispute involving clients of failed financial planner Storm Financial, who had taken substantial margin loans on its advice, and the bank is once again being widely discussed in the media.
In short, the bank promises to “put things right where we had done wrong” in relation to the margin loans. Depending upon the level of acceptance, more than 2000 investors could be compensated – costing the bank hundreds of millions of dollars.
Despite the opinion of this particular Smart Investing reader, these investors/borrowers deserve plenty of sympathy for the plight that many naively fell into by borrowing far more than they could afford.
Numerous Storm clients caught in this catastrophe – including low-income earners and retirees on the age pension – had followed a double-jeopardy approach to borrowing to invest. This involved borrowing against the equity in their homes to invest in shares that were, in turn, heavily geared using margin loans.
Hopefully, tougher consumer credit laws directed at margin lenders and financial planners will at least minimise such excessive borrowing in the future.
Returning to the comments by the Smart Investing reader, he certainly is correct in saying that gearing is a two-edged sword, as this column emphasises from time to time – including earlier this week.
The fact that average daily margin calls in the December quarter fell to 0.38 per 1000 borrowers – down from a record high of almost 10 per 1000 borrowers in the December quarter 2008 – is no cause for complacency.
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Robin Bowerman, Vanguard Investments Australia's Head of Retail, has more than two decades of experience in the finance industry as a writer, commentator and editor.
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