“It’s quite important to make the distinction between being authorised under a licence, versus having that accreditation, which is the RG146 component. They are two separate things. You have to have the authorisation to continue to give advice currently.”
Westpac’s Simon says the new regulations are “really designed to prevent the irresponsible usage of margin lending”.
“From a planner’s point of view, certainly a planner that provides quality financial advice, there is actually no change,” he says.
“One of the changes would be the notification of a margin call, that it’s got to be provided in a ‘reasonable manner’, and that includes electronic means such as the phone, fax, SMS. But that’s all really … the responsibilities of the lender not the financial planner.”
Simon says that for planners used to dealing with margin loans, “these incoming regulations are not much of a change”.
“Ultimately, if a planner is providing quality financial advice, [irrespective of] the global financial crisis, they would’ve been doing adequate stress testing, cash flow simulations and having those contingency plans in place anyway,” he says.
“The only change to a planner would probably be that the planner now has to supply the lender with relevant information on the client and they’ve got to do it within 90 days of the loan application. Apart from providing the information to the lender about the client, and [the fact] that actual loan-to-value ratios on stocks and managed funds are a little more prudent than what they used to be before the GFC, there really isn’t an amazing change to planners.
“The new regulation just means that planners have to conduct further training and accreditation. That’s really it, it’s not major for someone who’s already doing the right thing.”
BTFG’s Conte says responsible lending is “an interesting concept”.
“There are certain obligations in that section of the Corporations Law that say they must not issue, and they must not increase, a margin loan contract unless they have ensured that the contract is not unsuitable for the client, that it’s within 90 days of that assessment – so they are not issuing it outside of that timeframe – and they’ve made reasonable enquiries about the client’s financial situation, and that they’ve also verified that information,” she says.
“The type of information they’d be looking at are things like their assets, their income, their liabilities, their expenses, and verifying that – so they’re wanting to look at things like payslips. And that’s imposed on the margin lender.
“There’s another section of the legislation that says the margin lender can omit that verification step if that information has been captured in the SoA by the financial planner. But the obligation of responsible lending is not imposed at the financial planner level, it’s at the lender level.”
Conte says the lender still needs to make proper inquiries, it’s just the verification. And there are a number of criteria that need to be met before they can in fact us the SoA to omit that step.
Conte says the legislation is “trying to ensure that lenders are lending responsibility, so that a loan is being issued to someone where it’s appropriate to to be issued to them”.
“The premise behind the legislation is to protect consumers and to protect them by making sure people are licensed in margin lending and they have all the checks and balances in place to ensure that Tier One product is treated as a Tier One product,” she says.
“From where I sit, it does allow better protection of investors.”
Investor protection is also enhanced by the clear responsibility placed on the margin lender to advise the borrower of a margin call.
“In legislation, the obligation to communicate the margin call, or to take reasonable steps to communicate the margin call, rests with the margin lender,” Conte says.
“There is the ability for the margin lender, the financial planner and the client to enter into an agent agreement for the financial planner to communicate or take reasonable steps to communicate the margin call to the client.”
Conte says this requirement is designed to eliminate any confusion over who is responsible for letting a borrower know there’s a margin call.
“When you’re dealing with margin calls, it’s quite a timely situation,” Conte says.
“You have to address it quite quickly so as to get clients out of that position.”
Stewart says the responsible lending requirements of the new legislation have had, and will continue to have the greatest impact.
“I think the key is responsible lending, and the Government and the regulators looking to impose a requirement on financial planners – clearly that’s the case, given that margin lending is now a regulated product under Chapter 7 – but I guess it’s an attempt to impose some stricter criteria around responsible lending and ensuring that investors are not unsuitable for a margin loan,” he says.
“That’s the spirit of the legislation: ensuring that investors who shouldn’t be in a margin loan aren’t in a margin loan.
“As far as I’m aware – and again, this is a technical part – there’s no actual definition of ‘not unsuitable’ in the legislation. And so, as a business, we’ve taken a view that the spirit of the legislation is making sure that those who aren’t appropriate don’t get a margin loan, and we’re trying to enact that.
“What it means effectively is we have a credit assessment process in place for clients, and part of ‘not unsuitable’ talks about the ability to pay a margin call, and ensuring that if a client is [required] to pay a margin call they have to do that out of liquid assets and that in doing so, in meeting the demands of a margin call, they won’t be put into financial hardship as a result. So in that sense we look at the liquidity of the client – their ability to pay a margin call – we ask for more detail around income, expenses, assets and liabilities, and we look at the overall gearing level of a client.
