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:
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:
(a) the retail client acquire the particular margin lending facility; or
(b) the limit of the particular margin lending facility be increased; and
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.
For further information please contact Kirsten Cadle, Senior Associate, on (08) 9288 6807 or firstname.lastname@example.org.