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The chair of the recent Parliamentary Joint Committee Inquiry into financial services and products, Labor MP Bernie Ripoll, has voiced concerns about an uptick in margin lending.
Ripoll pointed to the latest Australian Bureau of Statistics data that showed an ongoing increase in the number of consumers holding margin loans, with 217,000 margin lending accounts registered. Ripoll said the fact that the number of clients with margin loans is now higher than before the global financial crisis (GFC) should “be of concern to banks and regulators”.
Ripoll gave perhaps the most pointed appraisal yet of the role played by the banks in recent margin lending disasters by pointing to their “zeal to sell a loan in any form through overbearing partners and branches”.
“No one it seems understood the debt ratios or paybacks for these loans, not even the banks.”
Ripoll is now concerned “the promised high returns of leveraging into risky products is … back in vogue since markets have bounced back spectacularly from the lows of the GFC”.
“Spruikers have reignited the flames of fortune for those willing to take a punt. For them, there is no downside accepting bigger commissions and bigger portfolios,” Ripoll said.
“Not unlike violent behaviour and compulsive gambling — changing habits is very hard to do.”
Ripoll warned investors that as “confidence marches its way back from obscurity and the spruikers come back in force — beware of what sounds too good to be true”, adding that the “most vulnerable are always the first targeted”.
Ripoll described the attitude to margin lending before the crisis, saying “the converted and their advisers” saw it “as the new secret weapon of the masses, wrested from the rich under a new economic era of growth”.
Those not “on board” with margin lending and high loan-to-valuation ratios were “simply missing out”, Ripoll said.
“So blinded by massive commissioned returns and self-conviction, some spruikers shouted their message to anyone with a heartbeat and a bank account. The pressure to get on board was enormous.”
He is now concerned the mistakes made prior to the crisis will simply be repeated, and that the lessons learnt by Storm Financial’s investors will not guide future margin lending practices.
Ripoll pointed to the Rudd Government’s changes to credit licensing and the recommendations made by his committee as positive steps towards protecting consumers. He did add, however, that the “best consumer protection would always come from good advice, well-informed decision-making and realistic investments that are affordable”.
