Margin lending has had a bad run, with the global financial crisis (GFC) and high-profile cases of failed gearing strategies. Simon Hoyle and Krystine Lumanta examine the impact of new rules on this sector.
CLICK HERE to view full .pdf version
It’s been a tough period for margin loan borrowers and lenders alike. The global financial crisis (GFC) and the high-profile failure of certain gearing strategies led to a significant drop-off in the number of clients willing to borrow to invest, and consequently in the volume of margin loans written.
In response to the losses sustained by a relatively small group of investors, the Government moved to tighten up the requirements for providing and advising on margin loans. The Corporations Legislation Amendment (Financial Services Modernisation) Bill makes margin loans “regulated products”, and imposes “responsible lending requirements” on lenders, to ensure that steps are taken to ensure that a margin loan is “not unsuitable” for a borrower, and to make it absolutely clear who is responsible for communicating a margin call to a borrower, should one arise.
The changes required the holders of Australian Financial Services Licences (AFSLs) to vary their licences to allow them to advise on margin loans. It required the AFSL holder to authorise its representatives to advise on margin loans. And it required those representatives to be adequately trained to do so. The deadline for achieving the appropriate training is June 30, this year.
It was perhaps fortunate that the legislative distraction occurred when there was a lull in interest in margin loans anyway; it has given AFSL holders and their representatives time to get organised in the event that clients’ interest in gearing strategies should be rekindled.
David Simon, an executive financial planner with Westpac, says clients are “certainly coming back to a certain degree”. But they’re coming back wiser, and somewhat more cautiously.
“Clients are really keen to ensure adequate stress-testing or simulation of their portfolios,” he says.
“They are actually looking at, and have seen the benefits of, quality financial advice, rather than setting up margin loans themselves and getting into all sorts of trouble where they previously didn’t think of the benefits of diversification and the like.
“Clients are a lot more keen to explore testing situations where interest rates [might] rise.
“Clients are still coming to us, they’re just a lot more aware of those things that I just mentioned, as well as making sure their portfolio is really adequately and comprehensively diversified to various asset classes, sectors, industries, countries.
“But ultimately, clients are really committed to having a well-prepared contingency plan – at what point would they go into a margin call? And if they did go into a margin call, what would be the most suitable strategy to get through that? And if a further margin call were to occur after that, what is the strategy again? So certainly clients are a lot more keen to understand the benefits of quality advice and they are seeking knowledge and expertise to really understand what a margin loan is and indeed its characteristics.”
Andrew Stewart, head of adviser distribution for Core Equity Services, says even though “planners aren’t writing as much margin lending this year as they have in the corresponding previous periods in years gone past”, gearing remains a relevant strategy for many clients.
“Certainly the legislative change has meant that for many planners, who didn’t have margin lending as a big part of their strategy previously, given what’s happening with their clients, and perhaps the sentiment of clients full-stop, they’re not writing a lot of new business, potentially. And on the back of that, margin lending volumes are down anyway.
“So I think that in combination, we’re seeing that margin lending volumes are lower than they have been for some time.
“Every time I see information coming though from the platforms – and I use that as a barometer for how the industry is going in terms of new funds flow – there’s a lot of funds flow that seems to be moving towards TDs and cash, so I think the margin lending flow is probably in-line with expectation, on the back of that kind of sentiment in the industry.
“And I think that, again, now is possibly the right time to be thinking about margin lending. We’re doing some work on some strategies that we can help planners provide to their clients [focused on] funding the superannuation gap, the tax-effective side of gearing and whether that’s appropriate for some clients. So we’re working harder than we have previously.”
Sarah Conte, manager of technical research at BT financial Group, says AFSLs and planners still have a few months to get sorted out to advise on margin loans, if they haven’t done so already.
Conte says the new margin lending legislation commenced on January 1, 2010, but there was a 12-month transition period for licences to be varied.
“On the training obligation, there’s an 18-month period on that, so 30 June, 2011, the RG146 component needs to be completed,” Conte says.
“We’ve got an interesting situation from 1 January until 30 June, in that provided you’re authorised under a licence, you can continue to give margin lending advice up until 30 June. Outside of 30 June, if you haven’t completed the RG 146 requirements, you will not be able to continue to give advice.
