I had come under considerable criticism by one media outlet, for my role in selling structured products.
These structured products have been a significant source of pain for some of my clients, me and everyone involved.
This page is not to diminish the anguish, pain and suffering caused to some people through their investment in these products.
But the reporting was very biased and really did not take into consideration at all everything we did to try to help clients with these products.
By the time you take into consideration my own investments, the amount we had to spend to get the products out of cash lock and transfer our clients and the amount we paid out in compensation which I funded personally, and then through borrowing I lost over $9million.
Having said that I can’t just lie down and allow the media to kick me, misrepresent what happened, and present a biased, un-researched version of what happened, when we did everything I could possibly think of at the time to help any client of ours affected by this investment, so I have added this page by way of explanation of what we did to help.
Before we began
Firstly, we (I) genuinely believed these products were revolutionary and we’re going to create enormous wealth for everyone involved. In hindsight I’ll accept I drank my own cool aide but at the time I was very excited. We had seen the projections from Macquarie and the stress testing they had done on performance, even against previous market crashes and I was confident they would hold up.
If I could go back in time and do it differently I would, but we genuinely believed we were selling products that would benefit just about everyone who listened to both the upside AND the risks and assessed them as worthwhile.
And despite some people’s memories I was VERY clear in the seminars, our advice documents and PDS what the primary risk was – if the investment did not perform you’d need to pay the interest and costs to the end of the loan and I said to people over & over that is how they should determine how much to invest – how much they could afford to lose.
We did not deliberately sell to people who could not afford them
My team were under strict instructions not to sell the products to anyone marginal on the investing criteria. Sceptical? Well you don’t need to trust our integrity, there was also a practical reason for this. We were so overwhelmed with the response we couldn’t handle the volume so why spend hours doing up advice documents for investors on the margin? Stick to those who it suited and could easily afford it. Simple.
In addition, the lender had to approve the loan so that was a fall back position. Even if we or the customer thought they could afford it the lender had to be convinced as well and they did, in fact, decline a number of applicants.
Commissions and Fees
For the record we were paid 0.75% commission on these products when the industry average was 2% and the interest rates on them varied between 7.5% & 8.5% when the average for equivalent loans was 12%+. So our products looked great by comparison- we thought we were on a winner.
Relatively small group of clients
Much has been made about the “mass marketing” of the products. Freeman Fox was a large firm. We had around 13,700 clients invested. Of those “only” 1,700 approximately invested in structured products. To say that we sold them to all comers is simply not true.
And we weren’t the only firm in the country who sold similar products – there were hundreds of them and billions (literally) involved. And yet, for some reason a particular channel of the media has chosen to blame me personally.
And these weren’t the only products we sold. We sold products from Perpetual, Colonial First State, Merrill Lynch, AMP, BT, IOOF, Ausbil Dexia, Deutsche Asset Management, Aberdeen, Eley Griffiths Group and many more.
The vast majority of our clients had diversified portfolios of fairly vanilla investment products which were in the top 25% of performance according to Morningstar.
Some Degree of Foresight
We knew a crash was coming. We told our clients that regularly and it’s why the products had capital protection and profit lock ins but what we did not predict was that the crash would happen so quickly (& we were Robinson Caruso on that one) and that both the market and bond yields would drop.
Our Response: 1. Fix the Problem with the Product.
As soon as I realised what was happening I knew it was going to be bad but even I didn’t know then how bad.
We invested $2m in getting the Macquarie products out of cash lock and rolled them into a new product that actually performed ok. We went without any commissions or fees on that investment as was appropriate.
This product “Volition” was made available to every client in our structured products, it was free for them to transfer and there were no penalties or downsides for them to do so.
We ran a nation wide series of seminars plus made them available on webcast to advise clients of the issue, explain our solution to them and help them understand their options.
We wrote to every client who had invested and explained in plain English what the problem was, what we did to “fix” it and the options they had. We called every client who invested (advice or non-advice) and explained it to them as well.
I’d guess we made over 5,000 calls by the time we were finished and I devoted my entire team of advisers and customer service people as well as our senior management and compliance officers – over 45 people in all – to the project which lasted 3 months.
83% of our clients rolled over into that new investment.
ALL of those investments had a capital gain from that point. (Clients may still have lost money due to interest payments but their losses were substantially lower because of the action we took).
No other financial services firm in Australia did that for their clients to my knowledge
If the clients didn’t roll over, they were stuck in an investment going nowhere. There was nothing we could do about that – it was their choice.
Our Response 2: Deal with Initial Complaints
During that process a number of complaints came to the surface, plus, once we understood the magnitude of the problem we started to get proactive.
Freeman Fox held an Australian Financial Service License. We were required to maintain capital adequacy (enough funds to pay all our liabilities including complaints plus extra), have professional indemnity insurance (covering clients for poor advice), a detailed complaints handling procedure which we were required to assist clients with and be a member of a disputes resolution process, in our case the Financial Industry Ombudsman Service (FiOS).
To explain the process…
A “complaint” was defined as any written (an email was enough) complaint where the client asked for financial compensation.
As complaints came in we assessed them. Just because a person lost money does not mean that they were entitled to compensation.
A client was entitled to be compensated where it was determined that the advice they were given at the time did not adequately deal with their investment objectives, needs, risk profile and personal position.
We tried to deal with clients and where it was obvious we were wrong, offer compensation. A client was rarely entitled to 100% of their losses as FiOS, the courts and any reasonable person would expect the client to take some degree of responsibility for their actions. After all no investment was made under advice without risk warnings, and the clients’ permission to proceed. Generally, clients were offered between 30% and 70% of the losses depending on the case.
If it was deemed that the advice, at the time it was given was reasonable, of course no compensation was offered.
All cases in the first instance were reviewed by our Compliance Officers and then their recommendations were sent to the Department Manager to deal with.
If we were unable to reach an agreement with the client their case was referred to FiOS.
This was a free service to the client but cost us between $20,000 and $30,000 per case. So, we wanted to be sure we were not going to lose in this circumstance and so tried everything we could to settle before it got this far. In some cases our settlement offers exceeded what the client was eventually awarded by FiOS.
Once a number of our clients went through the FiOS process we got an understanding of what they were looking for, the processes they adopted and the areas we were weak in.
This framed how we conducted the complaints process – in other words wherever we knew we would be unlikely to win a claim at FiOS we automatically offered to compensate the client. It was simply liability management.
Our insurers were on board with the process and wherever a client met a preset criteria they were offered compensation.
Our Response 3: Proactively Seeking Out Clients in Need
After a review by ASIC of our complaints handling our Management team decided we needed to be more proactive with identifying and dealing with complainants.
Again, this was just good risk management on behalf of the company.
First we established a risk list. We interviewed all staff and any person they were aware of who had invested and were unhappy, in financial distress or upon review of the Advice Document it because obvious they may have received poor advice, and those clients were put on this list and allocated a senior manager / compliance offer to deal with.
They were all communicated with by their case manager and if that then translated into a complaint they were put on our Complaints Register and joined our Complaints Handling Procedure.
After that we decided we needed to do even more.
All of our investors were emailed and asked to come forward if they matched the complaints criteria and / or if they were in financial distress so we could manage them.
In total we handled 230+ formal complaints. Frankly some of them were trying us on – people with higher risk profiles who knew what they were getting into, but we did turn up a number of genuine cases who, in hindsight, should never have invested.
Settlement in those cases ranged from around 30% of deemed losses to 100%.
Even if we didn’t give them formal advice in some cases we were deemed to have given advice and therefore found liable by FiOS regardless and because the “advice” was therefore moot we were liable 100%.
So that sparked another internal review which found more clients who qualified. We also ran a series of education seminars on line that explained the complaints process to clients and again asked them to come forward if they were in financial distress.
In some cases we offered settlements purely on a commercial basis (usually around 30% to 50%) because even though we knew the client was having a go we’d lose at FiOS anyway. In some cases FiOS eventually awarded the client far less then we had offered to settle.
To be fair it was an adversarial process, but it was through.
$3million+ in Compensation Settlements Paid
We paid out in excess of $3million in settlements. Most of our cases averaged around $30,000 which was below our Professional Indemnity Insurance threshold so we had to fund 100% of the settlement. Our insurers paid out even more. In total I believe their settlements totaled around $4.5million. So a total of $7.5million in compensation. Considering we “only” received around $5million in commissions from these products in the first place this crippled us.
And to handle all the clients I still needed to maintain a team of 50+ staff and this all took place over three years.
I Mortgaged My Home
I even borrowed money from my bankers and mortgaged my home to keep the process going because for every $1 we paid in compensation it also cost us probably another $1 in costs. The bank loaned me an additional $2.7 million to keep going.
Now, think about this, if I was so rich because of these products why did I need to borrow money to keep going?
And if I didn’t care about my clients why didn’t I just put the company into receivership at that point and walk away?
We thought we would eventually come to the end of the complaints, get through it and return to profitability and everyone would be (relatively) happy.
It’s worthwhile mentioning that whilst there were big numbers involved the vast majority of our investors did NOT formally complain.
The majority of our clients were aware of and accepted the risk, even if, after 5 years of interest payments they wished they hadn’t, me included.
Response 4: My Personal Involvement
I personally handled every complaint in the final year I owned the company. We made provision on our balance sheet for every single complaint that we received so that we knew if we could afford it (just) and that when I sold the business any new potential owner would be aware of the liability before buying.
I called the clients (over 100 of them) personally, listened to their complaint, sometimes their abuse, and heard their story. I asked them questions to determine for myself if they were genuine (usually I find people whose story’s are consistent are genuine), and if I believed them to be so, I tried to work something out. That process alone resulted in me approving compensation for 30+ people.
I honestly explained the situation to them, whether in my view they were entitled to compensation or not and how much that was likely to be. I explained that we compensated clients because of a moral obligation but also because of a legal requirement. I explained the terms of our Professional Indemnity Insurance and how far we could go to help them and what our Insurers would do (defend everything rigorously regardless) if they didn’t accept my offer. Most did. Some fought on.
Where I thought that trust in me and my company was too low for the client to see things reasonably we employed an independent arbitrator to try to put both cases.
If that didn’t work, we referred them to FiOS.
And every person that FiOS deemed so, was compensated. EVERY person. If we didn’t we would have lost our AFSL. Simple as that.
By this stage I knew I had to sell the company – the bank lost patience and once you lose the support of your bankers it’s all over, because without their support we simply didn’t have the money to go on.
So I sold in March 2013 knowing I had done everything I could. I was not involved with the company after it was sold, I am not aware of what the new owners did nor was it appropriate for me to be involved.
I made sure that everyone left in the complaints process at this point was referred to FiOS so that the potential liability was locked in and written off on the balance sheet so potential buyers were aware through their due diligence they were liable for it.
I entered Financial Services with a net worth of $20million+. I left it with virtually nothing.
My deal with the nab was that I would sell all my assets and pay down my debt with them, and they would release me for any personal guarantee on the remainder (which was $10m+ by this stage), which they did.
Maybe foolishly I took this seriously and didn’t stash anything under the bed but I thought, naively, I would get credit for what I had done and I would keep earring good money in the future and everything would go back to normal.
I lost my house, my investments, and everything I had worked for twenty years to achieve. AND my reputation. So I fully emphasise with people who say they lost everything, so did I.
As I have done in the past, I apologise unreservedly to anyone who lost money and my part in that.
People Who Fell Through the Cracks
It has become obvious that some people may have fallen through the cracks in this process.
Frankly I don’t know how. We made thousands of calls, emailed and mailed people. Obviously where we had given the client advice our liability was easier to determine but still we attempted to contact every person who invested whether we gave them advice or not.
Here’s the thing – based on their stories many probably would have gotten compensation IF they had gone through our process.
So why did they not lodge a formal complaint (that just needed an email and it would have been handed over to our compliance officer and added to the list)? Why did they fall through the cracks when we spent months trying to contact everyone? That I can not answer.
But the time for them to be compensated was when I owned the company, when I had money and the deep pockets of our insurers. And to be included in the complaints that were referred to FiOS knowing they would get a fair go no matter what our opinion of their claim.
There is also a limitation on claims of this nature of seven years and as most of these products were sold before 2008 this limit has now passed.
We went twenty years without any credible negative media.
Ironically a week after I settled the sale of the business the first ABC report came out, and I don’t care what anyone says 80% of that report was BS. Based entirely on the lies of former staff who were desperate to keep the $80k+ sign on bonuses they had been paid to leave our company and used the media as their tool, hook line & sinker.
No balance in reporting, 17 factual errors despite me responding with correct answers, clients left confused and bewildered and my reputation completely destroyed.
After that report I got death threats, property destroyed, physical violence, and abuse. The stress put me in hospital with heart failure. Ok, you might think, fair enough.
But people also looked up my mother who was listed in the White Pages and egged her apartment, abused her on the street and set fire to her garbage bin. She was 87! And terrified. We had to move her. I have no time for those people – I don’t care how much they lost. And I have no time for the media. None.
And they said we flew under the radar of ASIC – what rubbish! We had an ongoing relationship with them, as did any firm of our size with regular (at least 6 monthly) reviews and our own dedicated case officer. They had already conducted a nine month review of our processes post GFC which included at least 7 of their staff and thousands of documents. They found nothing of serious note and we were issued with a letter of “no further interest” at the end of the investigation- the holy grail of interaction with them.
After the report they investigated again and I wasn’t even there to “defend” myself.
The more recent reports were at least more factually accurate, focused on the clients (which is fair) but were still puerile in their personal attacks and name calling on me.
They reported none of what is on this page and these pages have been on this site for two years – it’s public access. They made it out like I didn’t care and I heartlessly ripped people off and then did nothing about it. So untrue.
Showing 15-year-old images of me driving one of my Ferraris and so on was useful to no-one. The report didn’t even make it clear that I had sold the company and made it out like we were still operating.
I appreciate for some, including you possibly, what I have done will not nearly be enough. But I did everything I could think of to help my clients.
So today I lead a reasonably frugal life, largely supported by my friends (most of whom also lost money with these products too), probably better than a lot of people but hardly the extravagant lifestyle people think I have. I do some consulting and run some seminars on presenting.
I’m not hiding anything, I have little resources and thought this was all done for the betterment of the clients. For the media to make fun of me achieves nothing.
I left the financial services industry years ago and I am never going back. Honestly, I found the whole industry soul destroying.
For ME to be labeled the snake oil salesman amongst that lot, knowing what I know goes on, was laughable. If I was, I was lightweight. You think you know – you don’t. The whole system is rigged against anybody getting ahead.
Where was the media when something could have actually been done? The limitations statute has now passed. Where were they when I actually offered to help and had the resources to do so? They ignored that and ran with rubbish that diverted resources away from clients and had the new owners ducking for cover.
Find one other firm in the country that did what we did for our clients!
And why tell you all this even though you probably won’t care or believe it? Because it’s all public record, you, or any journo could find it if they wanted to, but few people care about the full truth, only those parts of the truth that supports their version of me.
People who know me know that my goal was always to help people, to create wealth for them and for me. That I always acted as best I could.
And in the end you have to be able to look yourself in the mirror.
If I had my time over I would do it all differently. But we are never given that opportunity.
We just have to keep putting one foot in front of the other and do the best we possibly can with the resources we have.