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What do you need to do?Develop a plan to transition to the new margin lending laws. This alert identifies seven steps to help you develop your plan.
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Damien Richard
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Legislation regulating margin lending as a financial product has been introduced into Federal Parliament. This alert provides seven steps to help financial planners and others involved in advising on and distributing margin loans to develop a plan to comply with the new regime.
When do I have to comply?
The new regime will apply to margin loans that are issued after the date of commencement of the legislation (Commencement Date), which is yet to be fixed.
If you provide dealing or advisory services in relation to relevant margin loans, you must comply with the new regime by the end of the transition period. The transition period is up to 12 months from the Commencement Date.
To have the full 12 months, you must apply for a variation to your Australian financial services licence (AFS Licence) (or a new AFS Licence if you are unlicensed) to cover margin loans within the first 6 months of the transition period. If you do not apply by the 6 month deadline, the transition period is only 6 months. If your application is refused, the transition period will end when ASIC notifies you of the refusal (subject to a minimum transition period of 6 months).
7 steps to comply
Now that the legislation has been introduced into Parliament, there is sufficient certainty to start developing a detailed plan to transition to the new margin lending regime. Below are seven steps to help you get started.
1. Assess impact
Assess the impact of the regime on your business. Do you provide services relating to “margin lending facilities” as defined in the legislation? There have been important changes to the legislation from the exposure draft, for example only facilities provided to natural persons will be covered. Remember that the regime will cover both standard margin loans and some facilities structured as securities lending transactions.
2. Prepare ASIC application
You will be able to start preparing an application to vary your AFS Licence, or to apply for a new AFS Licence, once ASIC’s licensing system for margin loans goes live. Under the legislation, applications can be accepted from one month after the Commencement Date.
3. Train advisers
If you provide financial product advice to retail clients on margin loans, you will need to ensure that your advisers comply will the training requirements under Regulatory Guide 146 in relation to margin loans.
4. Update client documents
Your Financial Services Guide and standard Statement of Advice will need to be updated to cater for margin loans becoming financial products. Service descriptions and remuneration and risk disclosure are some of the areas that will be impacted. There are also likely to be some specific content requirements.
5. Update compliance program
Your compliance documentation and procedures will need to be updated to ensure that margin loans are treated as financial products regulated by the Corporations Act. For example, Product Disclosure Statements and Statements of Advice will need to be given to retail clients when recommending margin loans.
6. Suitability assessments
Before margin lenders can issue a margin loan or increase a limit on a margin loan, a suitability assessment must be carried out. This process will need to be built into your compliance program, and procedures established to facilitate the assessment by margin lenders.
If a Statement of Advice is given which recommends a margin loan or a limit increase, in some circumstances margin lenders will not need to verify the client’s financial position as part of the suitability assessment. You may wish to discuss with margin lenders how your Statements of Advice can assist with the required suitability assessment.
7. Margin calls
The legislation contains strict rules on how margin calls are handled. It is possible for a margin lender to rely on another licensee to pass on margin calls to the client if certain conditions are satisfied. If you wish to take on responsibility for passing on margin calls, you will need to enter into an agreement with the margin lender and client, and establish procedures to pass on margin calls.