ASIC has released updated policy and regulatory guidance to assist issuers and advisers of margin lending facilities in complying with the new licensing, conduct and disclosure requirements set out in the Corporations Legislation Amendment (Financial Modernisation) Act 2009 (Cth) (Act).
The new regulatory guidance follows public consultation on training and financial requirements earlier this year and includes:
- updates to RG146 Licensing: Training of financial product advisers
- updates to RG166 Licensing: Financial requirements
- updates to the AFS Licensing Kit, and
- updates to Pro Forma 209: Australian financial services licensing conditions.
Set out below are key highlights of the policy and regulatory guidance as well as key dates for compliance.
1 What do you need to do now?
The commencement date of the Act is yet to be proclaimed and so at this stage you should be aware of which requirements you will need to satisfy so that when dates are announced you can easily comply.
Things to be aware of include:
- the training that your staff will need to complete (see 2.1 below). No courses are available yet on the ASIC Training Register but you should monitor this situation. While there is an 18-month transition period, courses are initially likely to be very popular
- consider how you will satisfy the financial resource requirements set out in section 2.2 below
- develop written processes to ensure that your business is able to comply with the Act including, for instance, in relation to whether the facility is ‘not unsuitable’ for your client. Written processes will now need to be included in a proof document that must be prepared in connection with the AFSL application or variation, and
- become familiar with the key dates for compliance so that you know what your obligations are and when they commence
2 Key highlights of the policy and regulatory guidance
2.1 Training standards – Regulatory Guide 146
‘Margin lending facilities’, which are now financial products, will be treated as a Tier 1 product for the purposes of ASIC training standards. This means that advisers who advise on margin lending facilities must complete:
- generic knowledge training of the environment in which the products operate
- specialist knowledge training on the actual features of margin lending facilities and margin lending as an investment strategy. A list of the areas of knowledge that an appropriate course must cover is now set out in RG 146
- if the adviser provides advice on underlying investments through the margin lending facility, specialist knowledge training in relation to other products on which advice is provided, and
- if the adviser provides personal advice, additional skills training.
Advisers will have 18 months (not 12 months as previously suggested) after the commencement of the Act to complete the training requirements. This extension of time will allow training courses to be developed and registered on the ASIC Training Register. As stated above, the commencement date of the Act is yet to be proclaimed.
2.2 Financial resource requirements – Regulatory Guide 166
The updated RG166 applies the current financial requirements to AFS licensees (Licensees) that deal in, or advise on, a margin lending facility with some amendments. Broadly, Licensees will need to comply with the following:
a.General financial requirements policy: Licensees, other than those regulated by APRA, must have adequate risk management systems in place which address risk to financial resources.
b.Base level financial requirements: Licensees must:
- be solvent at all times and have total assets that exceed total liabilities
- meet ASIC’s cash needs requirement by complying at all times with one of Options 1 to 5 of RG 166, and
- meet the audit requirement in RG 166.
c.Net Tangible Asset (NTA) requirements: NTA requirements in RG 166 will apply to Licensees. ASIC will seek to impose the NTA requirements on the issuer/lender that is the mortgagee or holds the collateral under a margin lending facility. The Licensee will either need to hold the NTA or appoint a professional custodian to hold secured property.
d.Surplus liquid funds requirements: A Licensee who holds property on trust for a client or has the power to dispose of a client’s property will be required to hold at least $50,000 in surplus liquid funds.
e.Adjusted Surplus Liquid Funds (ASLF) requirements: The ASLF requirements in RG 166 will apply to issuers of non-standard margin lending facilities who have a liability to transfer marketable securities to the client.
2.3 AFS Licensing Kit – proof document requires a description of processes to be used to ensure compliance with the Act
The AFS Licensing Kit has been amended to, among other things, include details of a ‘Margin Lending Facilities Provider Statement’ proof. The proof must be prepared when applying for or varying an AFSL. The proof must include a description of processes to be used by the Licensee to ensure that among other things:
- the margin lending facilities provided or limit increases are not unsuitable for the client
- the margin lending facilities are actively monitored to detect when the facility goes into margin call
- appropriate contractual arrangements are in place where an agent will notify a client of a margin call and that those processes will be followed, and
- clients are made aware of the significant risks associated with acquiring a non standard margin lending facility.
A standard form agreement that the Licensee intends to use in relation to their margin lending facilities must also be attached to the proof.
ASIC may call for a copy of the proof as part of the application process.
3 Key dates for compliance
Set out below is the transition timeline ASIC has released. The commencement date of the Act is yet to be proclaimed and so firm dates cannot be included in the timeline. ASIC will publish key dates on its website as soon as the commencement date is proclaimed.
To view diagram click here.