Who owns the margin lending client?

Responsibility for notifying margin lending clients of potential margin calls will be placed firmly with either the margin lender or the financial planner of the client under new regulations being introduced.

Senator Nick Sherry, Minister for Superannuation and Corporate Law, said the new laws will clarify which of the lender or financial adviser is responsible for notifying the client of a margin call. The responsibility will default to the lender, unless arrangements are in place for the financial planner to do so, Sherry said.

The question of ‘who owns the margin lending client' has been a key issue in the recent Storm Financial collapse, where clients had their margin lending share portfolios sold down with notification from neither the lender or the dealer group.

Meanwhile, under the new laws, lenders will also be required to assess clients’ ‘true’ loan-to-value ratio, Sherry said.

“This means the lender can no longer assume the money brought to the table isn’t itself debt.”

Sherry said this move will significantly reduce the chance of margin lending clients losing their homes when faced with margin calls they cannot meet.

The minister said “double-debt” traps, where clients are advised to take equity out of their home to leverage into buying shares through a margin loan, are of “serious concern”.

Sherry said while “properly geared margin lending, backed by full disclosure” does have a place in the financial services landscape, consumers being “misled into grossly inappropriate margin loans that can cost a family everything they own” will not be tolerated.

Under the new rules advisers will only be able to provide or recommend a margin loan if they are “reasonably sure” the borrower can afford the loan without suffering substantial hardship.

Full disclosure of fees and commissions is also a key point in the new regulations.

“Many margin lenders use commission-based fee structures and there is an issue over whether this may see some people put into inappropriately leveraged and large loan facilities,” Sherry said.

As previously announced, under the new laws margin lending will be added to the Corporations Act 2001 as a financial product. Lenders will be required to hold an Australian Financial Services Licence and will be regulated by the Australian Securities and Investments Commission. They will also be required to be members of external dispute resolution bodies, among other requirements.