The Federal Government responded to the collapse of investment companies such as Storm Financial, Opes Prime and Lift Capital by announcing its intention to regulate margin lending as a financial product.
As a result, anyone issuing a margin loan, or providing advice about margin lending, will need to hold an Australian Financial Services Licence (AFSL) with relevant authorisations and comply with the provisions of Chapter 7 of the Corporations Act, including the requirements to:
- provide a Product Disclosure Statement, Statement of Advice and Periodic Statements
- fully disclose fees and commissions
- have adequate arrangements for managing any conflicts that arise between their own interests and those of their clients
- comply with new responsible lending requirements, as outlined briefly below.
Legislation effecting this change was introduced to Parliament on 25 June 2009. In the draft Bill a margin lending facility is defined broadly in the Bill to include a "standard margin lending facility" and a "non-standard margin lending facility". The definition of a non-standard margin lending facility is intended to capture alternative legal structures such as those used by Opes Prime and Tricom where the client transfers title or a beneficial interest in marketable securities to the lender and merely has a right to be given equivalent marketable securities in specified circumstances.
Responsible lending requirements
Margin lenders and those advising clients to enter into margin loans or to increase the limit of an existing facility will also need to ensure they comply with the new responsible lending requirements. Under these requirements, an assessment of whether the facility will be unsuitable for the client must be made by:
- making reasonable inquiries into the client's financial situation
- taking reasonable steps to verify that information
- making prescribed inquiries, including asking whether the client has taken out a loan to fund the equity contribution and, if so, whether the security for the loan includes residential property.
If the client is unable to service the loan or would only be able to do so with "substantial hardship", the facility is unsuitable.
Unless they are provided with a written Statement of Advice from a financial planner that is no more than 30 days old, margin lenders will have to reach their own assessment by making their own enquiries about any potential borrower.
In anticipation of the Bill being passed, ASIC has released consultation papers outlining how it proposes to handle the training, dispute resolution and financial adequacy requirements imposed upon margin lenders and advisers once they become Australian financial services licensees. ASIC has also foreshadowed releasing a model short form Product Disclosure Statement for margin lending. It is expected that there will be a 12 month transitional period to allow those issuing and advising on margin lending facilities to comply with these new requirements.
ASIC proposes to categorise margin lending facilities as Tier 1 products, which will mean that anyone advising on these products will need to have undertaken both generic knowledge training about the economic environment and specialist knowledge training on the actual features of margin lending facilities and the underlying investments made through the margin lending facility. As such, in most cases the only additional training advisers will need to undertake will be specialist training on the specific features of margin lending facilities, as they will have already met the other knowledge requirements.
All providers of margin lending services will be required to meet the base level financial requirements. For advisers who already have AFSLs but are seeking to include margin loans in the list of products they advise on, the financial requirements will not change. They will simply need to have positive net assets and be solvent, and have sufficient cash resources to cover the next three months' expenses with adequate cover for contingencies. An annual audit must be conducted to confirm this position.
Issuers of margin loans will also need to either meet the A$5 million net tangible asset test or employ a custodian who meets the test.
In addition, where a provider of margin lending services holds secured property on trust for the client, or has the power to dispose of the client's property under the margin lending facility, they will be required to hold surplus liquid funds of A$50,000. This provision will primarily be applicable to issuers, but may also apply to advisers where, for example, they operate under a power of attorney which enables them to dispose of clients' assets.
Finally, licensees that have a liability under a non-standard margin lending facility to transfer marketable securities to clients will need to meet a tiered adjusted surplus liquid funds requirement of between A$50,000 and A$100 million. This requirement is intended to reflect the risks inherent in non-standard margin lending facilities where the client merely has a right to be given equivalent marketable securities upon repayment of the loan, and the provision of those securities will need to be met out of the licensee's assets.
For margin lenders and those advising on margin loans, the dispute resolution requirements will be the same as those imposed upon other Australian financial services licensees. They will be required to:
- have an internal dispute resolution process that meets ASIC's requirements and approved standards
- be a member of either ASIC-approved external dispute resolution scheme, being the Financial Ombudsman Service or the Credit Ombudsman Service Limited.
This is intended to ensure that clients will have access to low cost external dispute resolution.
Comments on ASIC's proposals regarding the training and financial requirements imposed upon margin lenders and those advising on margin loans are due on 10 August 2009. Comments on ASIC's proposals regarding the dispute resolution requirements are due on 11 September 2009. It is currently proposed that the Corporations Act will apply to margin lenders and advisers three months after the legislation is enacted. Licence applications and variations will need to be lodged at least one month after the legislation is enacted but not more than three months after it commences.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.