Margin lending - requirement for responsible lending

By the passing of the Corporations Legislation Amendment (Financial Services Modernisation) Act 2009 (Act) in late 2009, margin lending facilities are now defined as financial products.

The Act introduced a number of changes for the issuers of margin facilities including licensing obligations and conduct and disclosure requirements.

In addition to the extension of licensing obligations to margin lending services, financial service providers will now be subject to ‘responsible lending’ obligations. Details of these new responsible lending obligations are set out in this article.

Impact of responsible lending responsibilities on advisors and licensees 

Under the Act a financial services provider who issues a margin lending facility to a retail client or who increases the limit of a margin lending facility issued to a retail client, is required to comply with the new responsible lending requirements. The new responsible lending requirements for issuers and advisors of margin lending facilities will take effect from 1 January 2011.

Responsible lending requirements

As a provider you must, before issuing a margin lending facility to a retail client or increasing the limit of a margin lending facility to a retail client:

  • assess whether the margin lending facility will be unsuitable for the retail client or whether an increase in the limit of a margin lending facility will be unsuitable for the retail client;

  • carry out reasonable inquiries about the retail client’s financial situation prior to making the assessment;

  • take reasonable steps to verify the retail client’s financial information; and

  • make specific inquiries including, for example, whether the client has, in securing financing, provided security over residential property for such financing.

When to make the assessment

The assessment undertaken by a provider must specify the period that the assessment covers and must assess whether the margin lending facility will be unsuitable for the retail client if the facility is issued or the limit of the facility of the retail client is increased in that period.

The assessment of unsuitability of a margin lending facility must be made 90 days prior to the day of issuing of a margin lending facility to a retail client or the increasing of the limit of a margin lending facility for a retail client.

When no verification of information is required

As a holder of a financial services licence you are not required to take steps to verify the information about a retail client’s financial situation where:

  • you are authorised to provide financial product advice in relation to margin lending facilities and have prepared a statement of advice for the retail client; and

  • the statement of advice was prepared by you no later than 90 days before the day of issue of a margin lending facility to a retail client or the increase in the limit of the facility for such client; and

  • the statement of advice recommends that:

(a) the retail client acquire the particular margin lending facility; or

(b) the limit of the particular margin lending facility be increased; and

  • the limit of the margin lending facility, or the increase in the limit of the margin lending facility, is not greater than the limit, or the increase in the limit, recommended by the statement of advice; and

  • the statement of advice includes the information that was used for the purposes of preparing the statement of advice.

If a retail client in respect of whom an assessment has been made so requests, a copy of the assessment must be provided to the client in accordance with the provisions of the Act.

An unsuitable margin lending facility

A margin lending facility will be unsuitable for a retail client if, at the time of the assessment, it is likely that if the facility is issued or the limit increased in the period of the assessment, and the facility were to go into margin call, the retail client:

(a)        would be unable to comply with their financial obligations under the terms of the margin lending facility; or

(b)        could only comply with their financial obligations under the terms of the margin facility with substantial hardship.

If a margin lending facility is unsuitable for a retail client, a provider must not issue that margin lending facility or increase the limit of that margin lending facility.

Further information

For further information please contact Kirsten Cadle, Senior Associate, on (08) 9288 6807 or kirsten.cadle@lavanlegal.com.au.