Margin lending disclosure in the spotlight

The fees and commissions paid by product providers to advisers who sell margin loans will be exposed as part of the new approach to margin lending disclosure, to be implemented on July 1.

Senator Nick Sherry, Minister for Superannuation and Corporate Law, has responded to last week’s Storm Financial collapse by ramping up the discussion around margin lending, its regulation and the practices of those involved.

The Council of Australian Governments last year agreed to the transfer of margin lending regulation from the states to the Commonwealth, and Sherry has promised single, standard, national regulation and supervision of margin lending by July 1.

As part of the new regime, any commissions paid to advisers from margin loan providers will be included in Product Disclosure Statements (PDSs), with all fees and charges paid to be included.

“It’s important that investors not only receive clear advice about why a particular product or strategy is being recommended to them, but also what’s in it for the person or firm recommending it,” Sherry said.

The Government’s Financial Services Working Group will this week begin consultations with industry on the new regime, with a focus on short form, ‘plain English’ PDSs.

Financial Planning Association chief executive Jo-Anne Bloch is a member of the working group. Bloch said the FPA has long supported uniform, consistent regulation around margin lending — an area which until now has fallen between the gaps.

Margin lending will be included in Chapter 7 of the Corporations Act as a financial product by July 1. The advice given by financial planners is already included under this legislation.

Under the new regime, margin lending providers must be licensed by ASIC and ensure their representatives are appropriately trained to provide advice on the product, Sherry said.

All margin lenders will be required to hold an Australian Financial Services Licence. They will also need to comply with general conduct standards which require them to deal with investors “efficiently, honestly and fairly”. Margin lenders will need to provide Statements of Advice and ongoing reporting, and will also be subject to enforcement measures regarding false or misleading statements and engagement in dishonest, misleading or deceptive conduct.

Australia in the Federal Court over what it believes to be misleading and deceptive conduct in relation to margin loans held by its clients.

“Conservatively geared margin lending may have a role in a balanced investment strategy for investors fully informed about how it works in both rising and falling markets,” Sherry said.