“In our application forms we request that information, and we’re quite specific about the information that we request.
“An adviser is able to verify the financial position of a client for loans under $250,000 – this is in our application form; this is a CGI [Colonial Geared Investments] process – and we’ve said that in order to verify that an adviser has to have written an SoA for their client and that information should be relevant for up to 90 days, from the time of settlement of the loan.
“For amounts over $250,000 we would do that ourselves.
“It doesn’t change the cost to the client. The additional process, we think, is part of responsible lending; we’ve embraced those provisions, we think they’re reasonable and in fact we’re certainly complying with the requirements of the legislation and possibly taking it a step further to ensure that those who are not unsuitable are the ones who are investing.”
Conte says it’s instructive to look at the changes from the client’s perspective.
“They’ll still go through the same process that they go through with a financial adviser,” she says.
“They’ll get a different FSG that lists this different thing, and you [the adviser] will then put together the strategy. You’ll still go through the process of saying, ‘This margin loan, is this still an appropriate strategy for the client?’
“Advisers will be looking at what they normally look at. They’ll be looking at their income, their assets, their liabilities, their expenses, what they’re trying to achieve, and really working out is it appropriate for the client.
“The thing they’ll also need to consider is paralleling what they’re doing in the appropriateness of the strategy to what margin lenders will look at under the responsible lending tests.
“When the person issuing the margin loan looks at the responsible lending obligations, they’ll look at, in the event of a margin call, could that client comply with a margin call, or could they only comply with the margin call under severe hardship?
“And advisers would have been doing this previously – looking at how will that client manage a margin call? What type of assets do they have to put up as additional security? Have they got cash to be able to meet that margin call? From the client’s perspective, I don’t see a whole lot of change; it’s more the change when they go through process of applying for the margin loan.
“There’s a few other things that advisers will need to capture when they’re putting together SoAs; they’ll need to capture things like, where is the security coming from – is it debt itself? You need to understand that double-gearing position. Is there a guarantor to the loan? Is the guarantor clear about the risks and the obligations. And the adviser would want to know the other debt the client has, but that kind of information – particularly what type of debt they’ve got – is quite standard in their data collection currently.
“[Information] potentially gets used differently in the background. We talked before about when you go through the process of applying for the margin loan – from the margin lender’s perspective, going through responsible lending – that third step: gathering the information and verifying the information. That verification step is potentially where the SoA could be used.”
One change some borrowers might experience is when or if they experience a margin call. It’s now clearly the responsibility of the lender. Whether the adviser is kept in the loop will depend on the relationship between the adviser and the client, and the adviser and the lender.
“The obligation is on the lender,” Simon says.
“They’ve got to communicate and do it legally, in a reasonable manner. It’s about the upfront education the adviser provides the client so the adviser will say that part of the contingency plan is that if we go into a margin call, you’ll get a phone call from the lender, but we’ll be in contact before it’s called.
“So if we see a certain event that occurred that impacts the valuation of the portfolio, we’ll be on the front foot before the margin call occurs to either avoid or minimise the obstruction of a margin call. It’s about the preplanning upfront, not reacting at the end.
“It’s a lot more scrutinised now because there’s an accountability on the lender.
“We were doing contingency planning way before the GFC.”
Stewart says Core Equity has “put together a toolkit for advisers that goes through the detail around margin call processes”.
“We think it’s clearly our responsibility to communicate that to the client, but where appropriate we will also make the adviser aware of that.
“What we’ve said is that from 1 January 2011, in the interests of transparency, CGI’s policy will be to directly notify clients in each case of a margin call. Advisers will receive an e-mail that includes a consolidated list of all margin calls sent out to their clients on that particular day.
“So we’re communicating to investors, and we’re communicating to advisers. We think that’s an appropriate way to proceed.
“Our first responsibility is to notify the client, and that is clearly what we’re doing. There are a couple of ways we can notify advisers. They can access our website at all times and there’s information on their client lists on the website; but we’ll also attempt to notify them directly.”
