Notification of a margin call
Under the Act, a client may enter into arrangements with the provider of a margin lending facility and a financial adviser, whereby it is the adviser who will receive the notification of a margin call. If this arrangement is entered into, the lender must take reasonable steps to notify the adviser (instead of the client) of the margin call, and the adviser must take reasonable steps to notify the client. The notice must be given as soon as practicable, and be provided in a form that is agreed between the parties. If there is no such agreement, and in the absence of ASIC’s determination, notices must be given in a reasonable manner. Paragraph 1.115 of the Explanatory Memorandum states:
“ ‘Reasonable manner’ is considered to include electronic means such as the telephone, facsimile, SMS and email. Notification through a client’s individual account which is accessed by means of the client logging on through the lender’s website alone is generally not considered to be a ‘reasonable manner’, unless the client is simultaneously alerted through other means that an important notice has been placed in their account.” (Note 6)
A lender must not require the entering into of an arrangement for notification through third parties as a condition of issuing a margin lending facility. Advisers must ensure that, if a third party communication arrangement is entered into, they will have sufficient resources and supervisory arrangement to pass on the notices to the clients as soon as possible.
Australian Financial Services Licence requirements
Existing issuers and advisers on margin lending facilities should have applied to ASIC for licence authorisation to advise on, and deal in, margin lending facilities by now. Those who fail to do so and wish to commence such activities must not do so until the authorisation is granted by ASIC.
Apart from applying for authorisation to provide financial product advice on margin lending products, advisers must also consider whether, during the course of advising clients, they will also be engaging in dealing activities. Although advisers do not deal by issuing margin lending products to clients, their conduct in assisting clients via the explanation of the terms of issue, completing application forms, lodging the forms on their behalf and actively facilitating the transaction between the parties, could potentially constitute “dealing” in such facilities, which requires express authorisation. Applying for the correct authorisations is critical, as a licence with inadequate or deficient authorisations will lead to regulatory enforcement action and interruption to your business.
When applying for an Australian Financial Services (AFS) licence, or a variation to an existing AFS licence, the organisational competency is of paramount importance. That is, the nominated Responsible Managers (RMs) must meet the qualifications and experience requirements of ASIC Regulatory Guide 105. This generally requires the completion of a diploma or higher qualification in a financial services-related course, and three years of relevant experience in the past five years. In some circumstances, an applicant may be able to demonstrate competency by making a submission to ASIC of their RMs’ experience.
Applicants are, therefore, strongly advised to review the qualifications and experience of their existing staff and senior management to ensure that ASIC requirements are able to be met, and undertake recruitment if necessary. This is an important point because ASIC needs to be satisfied that the RMs, being the people who have primary responsibility of the organisation’s financial services business, are competent to provide, or supervise the provision of, the financial services efficiently, honestly and fairly. Applicants must specifically outline the relevant expertise and experience of the nominated RMs as it relates to margin lending, including details of any qualifications or courses which cover margin lending (or the underlying marketable securities over which margin loans have been issued), that the nominated RMs have completed.
When preparing the application, it is important to decide the type of authorisation required, and whether the financial services will cover both standard and non-standard margin lending facilities. It is also important to document any relevant processes or measures the applicant has implemented or developed specifically for the provision of margin lending facilities, which include:
• assessment of a client’s personal circumstances;
• selection of margin lending products;
• gearing policy, including LVRs;
• risk mitigation;
• client contact procedures where acting as an agent; and
• procedures for any deviation from the processes or measures.
Applicants must also ensure that the terms of their professional indemnity cover do not exclude margin lending products.
Training requirements
Finally, those who provide financial product advice in respect of margin loans must take note of the training requirements set out in Regulatory Guide 146. (Note 7) Those who provide advice on margin lending facilities must meet these requirements on and from July 1, 2011.
Advisers must complete the modules on generic knowledge, specialist knowledge and a skills component (where personal advice is given). Specialist knowledge on margin lending facilities must be completed, in addition to the specialist knowledge in respect of products acquired through the margin lending facilities. Licensees must, therefore, put in place a training regime now to ensure timely compliance.
Conclusion
The new margin lending regulatory regime includes a range of licensing, disclosure, assessment and responsible lending obligations, which can be difficult to navigate and handle. Issuers and advisers on margin loans must undertake a detailed assessment of their financial services businesses, review the compliance structure, and take appropriate steps to usher in the new legislative requirements.
