Alert

Who does this affect?

Any person who provides "financial services" in relation to margin loans or securities lending arrangements. This includes margin lenders, providers of securities lending arrangements and financial planners.

What do you need to do?

Consider how the draft legislation will impact on your business and whether to make a submission by Friday, 29 May 2009.

Author
Kate Jackson-Maynes  
Senior Associate

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Katherine Forrest  
Partner
T +61 3 9643 4129

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Jim Boynton  
Partner
T +61 2 9296 2086

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The Corporations Legislation Amendment (Financial Services Modernisation) Bill 2009 was released today. This Bill (together with the National Consumer Credit Protection Bill 2009 that was released last week) implements phase 1 of the Government's Action Plan for the regulation of credit. The Bill will have a significant impact on any person that issues, or provides advice in relation to, margin lending or securities lending facilities.

The key features of the Bill include the extension of Chapter 7 of the Corporations Act to margin lending and securities lending facilities and the creation of responsible lending obligations in respect of such facilities. The Bill also creates new obligations in relation to trustee companies and debentures.

Submissions on the Bill are due by Friday 29 May, 2009.

Key features of the margin lending provisions of the Bill

The key features of the margin lending provisions of the Bill are:

Extension of Chapter 7 to margin lending and securities lending facilities

All credit facilities are currently exempt from Chapter 7 of the Corporations Act. The Bill removes this exemption for margin lending facilities by deeming such facilities to be a financial product. As a consequence, any person that provides a financial service in relation to a margin lending facility (for example, by issuing a facility or providing advice in relation to a facility) must:

• hold an Australian financial services licence authorising the licensee to provide that financial service or be appointed as the authorised representative of a licensee

• comply with the general obligations imposed on a licensee (including the requirement to maintain the competence to provide margin lending facilities and to ensure that representatives are adequately trained), and

• provide appropriate disclosure documents including a Financial Services Guide and Product Disclosure Statement (where relevant).

The term margin lending facility is defined broadly in the Bill to include two broad categories of facilities a standard margin lending facility and a non-standard margin lending facility.

A ‘standard margin lending facility’ is where:

• credit ‘is, or may be, applied wholly or partly’ to acquire one or more financial products (or a beneficial interest in one or more financial products), or to repay another credit facility which has been used to acquire one or more financial products;

• the security for the credit consists wholly or partly of marketable securities; and

• the client is required to maintain a loan-to-value (LVR) ratio;

A ‘non-standard margin lending facility’ is where:

• the client transfers one or more marketable securities (or a beneficial interest in one or more marketable securities) to the facility provider (transferred securities);

• the facility provider transfers property to the client as consideration or security (transferred property);

• the transferred property ‘is, or may be, applied wholly or partly’ to acquire one or more financial products (or a beneficial interest in one or more financial products);

• the client has a right to be given marketable securities that are equivalent to the transferred securities; and

• the client is required to maintain a LVR ratio.

This definition is designed to capture basic, ‘vanilla’ margin loans, protected equity margin loans, Opes Prime and Tricom-style arrangements, hybrid products using key features of a margin loan, limited or non-recourse margin loans and margin loans secured by residential property.

Creation of responsible lending obligations to retail clients

In addition to the existing obligations imposed on licensees the Bill establishes a responsible lending obligation in relation to retail clients. Responsible lending obligations arise when a margin lending facility is issued to a retail client or when the limit of a margin lending facility for a retail client is increased.

There are two key components of the responsible lending obligation:

• a requirement to make reasonable inquiries about a retail client’s financial situation and to take reasonable steps to verify their situation before issuing a margin lending facility or increasing the limit of a facility (the draft Regulations prescribe that inquiries about certain matters must be made), and

• a requirement to make an assessment as to whether a margin lending facility will be unsuitable for a retail client before issuing a facility or increasing the limit of a facility. A margin lending facility is unsuitable for a retail client if it is likely that the client would not be able to comply with their financial obligations under the terms of the facility if the facility were to go into a margin call or could only comply with substantial hardship.

Additional obligations

In addition to the existing obligations imposed on licensees and the responsible lending obligation the Bill also imposes a number of new obligations in relation to margin lending facilities including an obligation to notify retail clients in the event of a margin call and to provide periodic statements.

Commencement and transitional provisions

The obligations in relation to margin lending facilities will commence 3 months after the Bill comes into force. We understand this is likely to be late this year.

There is limited transitional relief for any person that applies for a new licence or a variation to an existing licence before the commencement of the margin lending provisions. However there is no transitional relief from the responsible lending obligations.