Senator Nick Sherry, Minister for Superannuation and Corporate Law, has today released the Rudd Government's new national laws to regulate margin lending under a single, standard, national regime for the first time that better protects retail investors across all parts of Australia.
Margin lending is not currently regulated in Australia. The initiative is part of the Rudd Government's plan to modernise Australia's financial regulation for the 21st century.
The new laws, which deliver on a Rudd Government commitment made to the Council of Australian Governments (COAG), are contained in the Corporations Legislation Amendment (Financial Services Modernisation) Bill 2009 which Minister Sherry has today released for a period of public exposure.
"There have been several high-profile examples of margin lending arrangements that have caused financial pain to a wide range of Australians."
"Whilst properly geared margin lending, backed by full disclosure, does have a place in our financial services landscape, the Rudd Government will not tolerate ordinary Australians being misled into grossly inappropriate margin loans that can cost a family everything they own, including their home," said Minister Sherry.
Under the new laws, margin lending will be added to the Corporations Act 2001 as a financial product. Lenders will be required to hold an Australian Financial Services Licence, will be regulated by the Australian Securities and Investments Commission (ASIC), will be required to be members of low-cost external dispute bodies, will be required to clearly disclose fees and commissions before lending and will have to lend under a tailored margin lending-specific set of responsible lending obligations.
"Margin loan borrowers will greatly benefit from a new investor protection regime, including the requirement for all lenders and advisers to be licensed and for consumers to have access to timely, independent, and cost effective dispute resolution to resolve complaints."
"One area where we have had a high level of concern has been where people have been advised to take equity out of their family home and then to use this debt to leverage into buying shares through a margin loan. This "double-debt" trap, with a home as security, is of serious concern."
"Under our new responsible margin lending laws the lender will be required to assess a persons "true" loan-to-value ratio. This means the lender can no longer assume the money brought to the table isn't itself debt, a major new improvement that will see the risk of people losing their homes significantly reduced."
"Furthermore, under the new rules, advisers will have to provide advice that is not only appropriate to a consumer's needs and circumstances but will only be able to provide or recommend a margin loan if they are reasonably sure the borrower can afford the loan without suffering substantial hardship," said Minister Sherry.
"Many margin lenders use commission-based fee structures and there is an issue over whether this may see some people put into inappropriately leveraged and large loan facilities. Very clear upfront disclosure of fee structures and levels will make a significant contribution to addressing this concern," said Senator Sherry.
The Government's Financial Services Working Group will shortly release a simplified margin lending Product Disclosure Statement. The new disclosure regime will commence in conjunction with the new laws.
Finally, the new laws will clarify the operation of margin calls, which occur when the security provided by the borrower has fallen in value by a certain amount and the lender calls for additional security or cash to be provided, failing which the lender may sell down some or all of the investments provided by the borrower as security. Delays in these notifications and a consequent failure by borrowers to act quickly to meet their obligations may cause borrowers to fall into "negative equity".
The Bill will uniformly clarify for the first time which of the lender or financial adviser is responsible for notifying the margin loan borrower in the case of a margin call. The Bill provides that lenders notify clients of a margin call, unless arrangements are in place for the financial planner to do so.
The new laws come after an intensive consultation process with a margin lending-specific industry and consumer group panel.
"I also would like to thank industry and consumer groups for their valuable contribution to the process for the draft margin lending legislation released today," Minister Sherry said.
The Exposure Draft of the Corporations Amendment (Financial Services Modernisation) Bill 2009 is available at www.treasury.gov.au with further details on the margin lending also available at www.treasury.gov.au/consumercredit. The public exposure period ends on 29 May, 2009 and the Bill will be introduced into Parliament in June.
CANBERRA
7 May, 2009
Further Information on the Draft Margin Lending Laws
Financial services
As margin loans are generally used to finance investments in listed and unlisted securities, the decision has been made to regulate them as part of the financial services regime in the Corporations Act 2001.
Consequently, margin loan borrowers will benefit from the general investor protection regime contained in that legislation, including the requirement for lenders and advisers to be licensed and regulated by ASIC, for consumers to have access to independent, cost effective dispute resolution services and for advisers to only provide advice that is appropriate to the client's needs and circumstances.
Timeline
The issue of the Commonwealth regulation of margin lending was considered by COAG in March 2008, where agreement was reached to pass the full responsibility of margin lending to the Commonwealth to ensure that it is clearly and uniformly regulated.
The issue of the Commonwealth regulation of margin lending was raised by the Rudd Government in June 2008 through the Green Paper on Consumer Credit and Financial Services Reform.
In October 2008 the Rudd Government released the Action Plan to detail its plans to regulate consumer credit, including margin lending, nationally.
The Government has put in place an implementation timeline that will see the new laws operating as soon as soon as possible, but recognises that appropriate transitional arrangements are necessary to ensure lenders and advisers have sufficient time to prepare licensing applications. Most margin lenders and advisers already have an Australian Financial Services licence (AFSL) for other financial services they offer. Therefore, authorisation for providing or advising on margin loans will, in most cases, only require a variation to an existing licence based on the new margin lending-specific licence obligations.
Licence applications must be made within three months of the legislation commencing, and the Government expects most licences to be issued within a further period of six months. ASIC will assist industry to meet licensing requirements, thus ensuring minimum disruption to business.
Specific features
In addition, the regime will include specific measures that apply exclusively to margin loans. Care has been taken to draft a definition of margin loans that captures both standard margin loans as well as non-standard loans such as those used by entities such as Opes Prime. This is important as the non-standard loans contained some features that were not well understood by borrowers but which caused significant losses for them when the loan providers failed.