In brief
On 7 May 2009, the Government released an exposure draft of the Corporations Legislation Amendment (Financial Services Modernisation) Bill 2009 (the Bill). Under the Bill, margin lending facilities will be financial products for the purposes of Chapter 7, with the result that providers of financial services relating to margin loans will be subject to the licensing, conduct and disclosure requirements in Chapter 7.
Submissions on the Bill must be made by 29 May 2009. The Bill will be introduced into Parliament in June.
Overview of the reform
At present margin lending is largely unregulated by any consumer protection legislation.
Under the Bill, a margin lending facility will be a Chapter 7 financial product.
As a result, all margin loan providers and advisers will have to:
- have an Australian financial services licence;
- comply with general conduct standards, including the requirement to deal with clients efficiently, honestly and fairly;
- provide a product disclosure statement, statement of advice (if personal financial product advice is provided) and ongoing reporting;
- comply with responsible lending requirements; and
- be members of an approved external dispute resolution scheme.
What is a margin lending facility?
There are two types of margin lending facility (with provision for ASIC to specify other types of margin lending facilities to deal with margin loan structures that may evolve over time that are not covered in the current definition):
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standard margin lending facilities – where a loan is provided to a client who intends to use the loan (wholly or partly) to acquire shares or other financial products or to refinance a margin lending facility, the loan is wholly or partly secured over marketable securities, and the client is subject to a margin call in circumstances where “the current LVR” of the facility (being the ratio of the outstanding debt to the value of the secured property) exceeds the agreed threshold;
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non-standard margin lending facilities – these cover the “Opes Prime” type securities lending arrangements where the client transfers marketable securities to the provider in exchange for funds provided to the client, the client applies the funds wholly or partly to acquire financial products, the client has the right to be given marketable securities equivalent to the securities transferred to the provider, and the client is subject to a margin call in circumstances where the current LVR of the facility exceeds the agreed threshold. These definitions are intended to cover margin lending arrangements that have these features, even if they form part of a broader facility with other features such as protected equity loans or margin loans where other assets have been provided as security.
The responsible lending requirement
Before a margin loan provider issues a margin lending facility to a retail client, or increases the limit of a retail client’s facility, the provider must make an assessment as to whether the facility will be unsuitable for the client if the facility is issued or the limit is increased.
In making an assessment, the provider must make reasonable inquiries about the client’s financial situation and take reasonable steps to verify the client’s financial situation.
The Government has been very concerned about so-called “double gearing”, where a client’s equity contribution to the margin lending facility has been financed by (for example) a mortgage over their family home. The draft regulations require a provider to inquire whether the client has taken out a loan to fund their equity contribution, and if so, whether the security for the loan includes residential property.
However, a provider will not have to make these inquiries if the client has received a statement of advice from an appropriately licensed financial services licensee recommending that the client acquire the facility or increase the limit (as the case may be), and the statement was prepared no more than 30 days before the facility is taken out or limit increased.
The provider must assess that the margin lending facility is unsuitable for the retail client if, at the time of the assessment, it will be likely that if the facility were to go into margin call, the client would be unable to comply with their financial obligations under the terms of the facility, or could only comply with substantial hardship.
Notification of margin calls
Margin loan providers must take reasonable steps to notify the client when a margin call occurs.
However, the provider may notify a financial adviser, instead of the client, if this is provided for in the contractual arrangements between the parties. In this case, the adviser must take reasonable steps to notify the client of the margin call.
Transitional provisions
Margin loan providers and advisers will have to lodge an application with ASIC for an AFSL (or variation of their existing AFSL) no later than three months after the legislation comes into force.
From the time the application is lodged until the licence is granted or varied, the margin loan provider or adviser can conduct their margin loan business without holding a licence, however they will be subject to the responsible lending and margin call notification requirements (including in relation to margin lending facilities existing before the new laws commenced).
What should margin lenders and advisers be doing, and how can DibbsBarker help
Margin loan providers and advisers should be reviewing the Bill and explanatory material, and considering how the new law will impact on their business.
In particular, margin loan providers should:
DibbsBarker can help margin loan providers and advisers comply with the new requirements. For example, we can:
- help you update your lending policies so that they comply with the new responsible lending requirements (where applicable, this could be done in conjunction with a review of your broader lending policies to ensure compliance with the corresponding responsible lending provisions in the new national consumer credit law reforms);
- assist in preparing your application for an Australian financial services licence, or a variation to your existing licence; and
- review and draft product disclosure statements for margin lending facilities.
The material contained in this publication is no more than general comment. Readers should not act on the basis of the material without taking professional advice relating to their particular circumstances.
