There is a Bill before the Commonwealth Parliament which will amend the definition of “financial product” to include a margin lending facility. Once this occurs, it will bring the operation of margin lending facilities within the regulation of financial products contained in Chapter 7 of the Corporations Act. In summary this will mean that:
- a person who carried on a financial services business involving margin lending facilities (e.g. financial product advice or dealing in relation to margin lending facilities), will require an Australian financial services licence
- the financial services disclosure • regime will apply to retail clients e.g. the requirement to give a retail client a Financial Services Guide, Statements of Advice or a Product Disclosure Statement in prescribed circumstances the consumer protection regime
- that applies to financial products will operate e.g. misleading and deceptive conduct.
- In addition margin lending facilities will be subject to their own provisions in relation to consumers. There will be responsible lending provisions which are intended to be broadly consistent with the provisions outlined in the National Consumer Credit Protection Bill 2009.
A margin lending facility is issued to a person when they enter into the legal relationship that constitutes the margin lending facility, as the client under the facility. A margin lending facility may be one or more of three types
- a standard margin lending facility
- a non-standard margin lending facility
- a facility declared by ASIC to be a margin lending facility (unless the facility has been declared by ASIC not to be a margin lending facility),
- unless the facility is of a kind that has been declared by ASIC not to be a margin lending facility.
The definition is stated to be intended to capture, among other things:
- the basic margin loan
- Opes Prime and Tricom style arrangements, where appropriate to ensure that products that are functionally similar to a margin loan (and advertised as a margin loan) are also captured
- hybrid products that utilise the key features of a margin loan
- a limited or non-recourse margin loan (where the amount the lender can recover is restricted to the mortgaged financial product)
- a margin loan where the assets securing the loan are more than just the financial products purchased through the loan, such as residential property.
The standard margin lending facility is a facility which amongst other things includes the following key features:
- who is the provider and who is the client and in this regard the client must be a natural person, which therefore excludes all lending to corporate entities from the definition;
- a requirement that the borrower must use the loan (wholly or partly) to acquire shares or other financial products or to refinance a margin lending facility
- that the loan must be wholly or partly secured over marketable securities (such as shares) or an interest in marketable securities
- that the client is subject to a margin call in circumstances where the current LVR of the facility (i.e. as the ratio of the outstanding debt to the security provided for the loan) exceeds the agreed threshold.
The non-standard margin lending facility is a facility which amongst other things includes the following key features:
- who is the provider is and who is the client in the context of transferred securities and in this regard the client must be a natural person, which therefore excludes all lending to corporate entities from the definition;
- the client receives transferred property which is the equivalent arrangement to the provision of credit or cash in a standard margin lending facility and may sometimes be referred to as collateral for the transferred securities
- the funds provided to the client must, as in the case of a standard margin lending facility, be at least partly used to acquire financial products so as to ensure that only facilities are captured which have a similar outcome to a standard margin loan
- the client is subject to a margin call in circumstances where the current LVR of the facility exceeds the agreed threshold.
The definition of a non-standard margin lending facility is intended to capture arrangements which use a type of securities lending agreement (with variations) to achieve a similar economic outcome to that of a standard margin loan. This type of structure was used by lenders such as Opes Prime and Tricom and the amendments are designed to capture these types of arrangements.The major difference between a non-standard margin lending facility and a standard margin loan facility is that in a non-standard margin loan facility, title to the security provided for the loan passes out of the client’s hands.
Responsible Lending Provisions
As stated above, there are separate responsible lending provisions that apply to margin loan facilities. In particular margin lenders are required, before issuing a loan or increasing the limit of an existing loan, to make an assessment to determine whether the loan facility is unsuitable for a retail client within 90 days before the loan is issued or the limit increased, or any other period as prescribed in regulations. The assessment must cover the period during which the issue or limit increase occurs. The lender must also have made the inquiries and verification as specifically set out in the legislation.
A loan is deemed to be unsuitable where a client who receives a margin call would not be able to comply with their financial obligations around a margin call, or would only be able to do so while suffering substantial hardship.
In making the assessment as to unsuitability, lenders must take into account information concerning the client’s financial situation, as well as other matters to be prescribed by regulations. The lender must also have reason to believe that the information provided was true, or would have had reason to believe that the information was true, if the lender had made the inquiries or verification required.
The assessment conducted by the lender must specifically address the ability of the client to cope with the potential consequences of a margin call, in particular the possibility of having to deal with negative equity situations. An important factor in the assessment is the time allowed to the client to meet the margin call. Where clients are allowed only a short period within which the margin call must be met, the importance of the client having sufficient liquid assets to cope with such situations is enhanced. However the potential sell-down of part or all of the portfolio to adjust the LVR to the required level does not imply substantial hardship.
Lenders will also be required to make reasonable efforts to notify the client when a margin call occurs.
Trustee Companies to be administered by Commonwealth
A new division is to be inserted into the Corporations Act which will result in Trustee Companies being regulated by the Commonwealth in stead of the States and Territories. There will be a requirement of trustee companies to be licensed. There are extensive provisions inserted regarding fees, duties and duties of directors of trustee companies. There will also be a 15% voting power limit (of a higher percentage if an approval for that higher percentage is in force) imposed as an unacceptable control situation in relation to licensed trustee companies.
Traditional trustee services are also covered by Chapter 7 (financial services provision). The provision of traditional trustee services will be deemed to be the provision of a financial service to a retail client unless otherwise provided by regulation.
Regulation of Debentures
New provisions governing the regulation of debentures are to be inserted into the Corporations Act.
The definition of “debentures” has been amended to exclude the former exception for promissory notes that had a face value of at least $50,000. This overcomes the decision in the Emu Breweries Case that held promissory notes of this size did not constitute a “security” (although in it was found there was a managed investment scheme that was required to be registered).
Within 14 days after the trustee is appointed, the borrower must lodge with ASIC a notice in the prescribed form containing the following information:
- the name of the trustee
- any other information related to the trustee or the debentures that is prescribed by the regulations.
The other information related to the trustee or the debentures that is prescribed by the regulations is likely to be:
- name and address of the borrowing company
- name and address of the trustee
- name of the trust to which it has been appointed
- the trustee‘s Australian company number or Australian Business Number
- date of the trust deed.
If there is any change to the information, the borrower must, within 14 days of the change, lodge with ASIC a notice containing the changed information.
ASIC is required to establish and maintain a register relating to trustees for debenture holders which will be available for inspection for a prescribed fee.