On 25 June 2009 the Federal Government introduced the Corporations Legislation Amendment (Financial Services Modernisation) Bill 2009 (Bill) in the House of Representatives. The Bill is expected to be passed in September 2009.
To the extent that the Bill deals with margin lending, its substance is essentially as set out in our update of 7 May 2009. However, it also includes the following main changes:
- ASIC has been given the power to declare that a particular kind of facility is not a margin lending facility;
- margin lenders will have to make their assessment of unsuitability no more than 90 days before issuing margin lending facilities or increasing limits whereas previously no time period was specified;
- consistent with the above point, lenders can now rely on statements of advice prepared no more than 90 days (previously 30 days) prior to the issue of the margin lending facility or an increase in a limit;
- the regulations can prescribe particular situations in which a facility is taken to be increased or not increased;
- assessments of suitability must specify the period covered by the assessment;
- only the information which satisfies both of the following can be taken into account when assessing unsuitability:
- the information is about the client's financial situation and any other matter prescribed by the regulations; and
- at the time of the assessment the provider had reason to believe the information was true; or the provider would have had reason to believe that the information was true if it had undertaken the inquiries or verification required by the Bill.
The exposure draft of the Bill previously referred to the provider having 'reasonably believed' as opposed to had 'reason to believe'. It appears that the amendment may have created a lower threshold as presumably it is easier to prove that you had a reason to believe something as opposed to proving that the belief was reasonable.
ASIC Consultation Papers
ASIC has released three policy proposals, Consultation Paper 108 Margin lending: training of financial advisers, Consultation Paper 109 Margin lending: Financial requirements and Consultation Paper 112 Dispute resolution requirements for consumer credit and margin lending, which outline how ASIC proposes to:
- apply training requirements to financial product advisers who advise on margin lending facilities;
- apply the financial resource requirements to Australian Financial Services (AFS) licensees who provide financial services in relation to margin lending facility products; and
- apply the dispute resolution requirements for credit providers, brokers and other credit licensees and their representatives, as well as for margin lenders and those who provide advice on margin loans.
Providers of financial services in relation to margin lending facilities will need to apply for a new licence, or variation to an existing licence within six months from commencement of the new legislation.
Consultation Paper 108 Margin lending: training of financial advisers (CP 108)
CP 108 sets out how ASIC proposes to apply training requirements to financial product advisers who advise on margin lending facilities.
Under the training requirements set out in RG 146, financial products are divided into two categories: Tier 1 products, which are more complex, and therefore attract more advanced training requirements, and Tier 2 products. CP 108 proposes that margin lending facilities be categorised as Tier 1 products.
ASIC's rationale for this is that where a product is market-linked, it should belong to the more complex Tier 1 category. The value of an investment (facilitated by a margin loan) fluctuates on a day-to-day basis in accordance with market movements, and therefore ASIC proposes that advisers on margin lending facilities should undertake Tier 1 training, which includes general knowledge training in the environments in which the products operate and specialist knowledge training of the specific financial products. Tier 1 courses are at the 'Diploma' level.
ASIC believes that, in many cases, the only additional training that existing (licensed) advisers will need to undertake will be specialist training on specific features of margin lending facilities.
ASIC proposes to allow advisers 12 months from the commencement of the new legislation to comply with the training requirements.
Consultation Paper 109 Margin lending: Financial requirements (CP 109)
CP 109 contains ASIC's proposals about the financial resource requirements we will impose on a licensee that provides financial services in relation to margin lending facilities.
The financial requirements to be imposed by ASIC on licensees will vary according to whether the licensee issues, or advises on, a margin lending facility and whether that facility is a standard margin lending facility or a non-standard margin lending facility (ie a facility that includes a securities lending component).
ASIC will impose the existing obligations under RG 166 including the base level financial requirements being:
- assets exceeding liabilities;
- having sufficient cash flow for a rolling three month basis; and
- audit requirements,
on all licensees that provide financial services in relation to a margin lending facility, subject to amendments that ASIC considers are necessary to ensure that RG 166 imposes appropriate financial requirements on licensees that provide a financial service in relation to a margin lending facility.
The consultation paper invites comment on proposals to amend RG 166 so that the Net Tangible Asset (NTA) requirement being:
- 0.5% of the value of secured property subject to a minimum of $50,000 and a maximum of $5 million; and
- at least $5 million NTA at all times that the licensee holds secured property under a margin lending facility; or
- any other person holds the secured property under the margin lending facility and that person does not have at least $5 million NTA unless they are an eligible custodian
to apply to an issuer of a margin lending facility in Section C of RG 166.
An issuer of a margin lending facility should be required to demonstrate that it is an entity of financial substance by complying with the NTA requirement. ASIC believes that issuing a margin lending facility creates particular risks in relation to the management of client assets, as well as risk in relation to transactional functions.
A licensee who holds secured property on trust for a client, or who has the power to dispose of a client's property under a margin lending facility will be required to comply with the surplus liquid funds requirement ($50,000) in section E of RG 166.
The Adjusted Surplus Liquid Fund (ASLF) requirement being a combination of:
- 5% of adjusted liabilities between $1 million and $100 million; and
- 0.5% of adjusted liabilities over 100 million,
subject to a maximum amount of $100 million in ASLF and will apply to a licensee who issues a non-standard margin lending facility. Under a non-standard margin lending facility, securities are transferred from the client to the provider subject to the client's right to receive equivalent securities. This creates additional counterparty risk if the licensee does not maintain adequate financial resources and is unable to return equivalent securities.
The ASLF requirement will not apply if a lender agrees to provide credit under a margin lending facility and the credit remains undrawn, or it is drawn down in tranches. ASIC recognises that imposing the ASLF requirement is inconsistent with the way that standard margin lending facilities generally operate and that imposing this requirement may have unintended consequences.
Consultation Paper 112 Dispute resolution requirements for consumer credit and margin lending (CP 112)
CP 112 sets out how ASIC proposes to apply the dispute resolution requirements once the National Consumer Credit Protection Bill and reforms around margin lending come into effect. The dispute resolution requirements will apply for credit providers, brokers and other credit licensees and their representatives, as well as for margin lenders and those who provide advice on margin loans.
The dispute resolution requirements are similar to those that currently apply to holders of an Australian Financial Services Licence (AFSL) and their representatives.
Those licensed to provide margin loans or advise on margin lending will be required to:
- have an Internal Dispute Resolution (IDR) process that meets ASIC's approved standards and requirements; and
- be members of an ASIC-approved External Dispute Resolution (EDR) scheme.