Margin Loans To be Controlled In Consumer Shake-Up

Financial Services Minister Chris Bowen said the wide reaching amendments to the Corporations Act will protect consumers from harmful lending practices and reduce the risk of them losing their homes.

Margin lending has dropped away in the past 18 months as the stockmarket slump saw thousands of consumers sold up when they missed calls for more margin from lenders.

Some high profile corporate executives were involved: ABC Learning's disgraced CEO, Eddie Groves and some other members of the company's board were one group that came to light in 2008 as losing their holdings in the company when they couldn't meet margin calls, or were forced to sell shares to meet loans.

Tricom and Opes Prime were two high profile groups exposed: Tricom has survived in a much reduced form (it funded executives at Babcock and Brown among thousands of others), Opes Prime failed and the ramifications of that failure are still playing their way through the courts, especially for the ANZ Bank, its major funder.

The Adelaide and Bendigo Bank continues to grapple with the impact of margin loans and other advances to investors (especially for Managed Investment Scheme products) from the old Adelaide Bank lending book.

Margin loans rose sharply, from $4 billion in June 1999 to $37 billion in December 2007, which is when the market started collapsing after the Centro Property group failed.

"Over the past 12 months, in the fallout from several high profile financial collapses, many investors lost hundreds of thousands of dollars due to margin loans," Mr Bowen said in Parliament yesterday.

"And in some cases they even lost their family homes.

"While properly-geared margin lending, backed by full disclosure, does have a place in our financial services landscape, we cannot tolerate ordinary Australians being misled into grossly inappropriate margin loans that can cost a family everything they own."

For the first time margin loans would be covered by specific rules, Mr Bowen said, adding lenders and advisers would have to be licensed.

Before giving a margin loan, lenders would have to consider whether it could cause the borrower substantial hardship - including, specifically, the loss of the family home.

"If that is the case, the law says that the loan must not be provided," Mr Bowen said.

The new system also clarifies the responsibilities of lenders and advisers to tell a borrower when a margin call occurs.

"In the past, delays in margin call notifications due to disagreements between lenders and advisers have contributed to losses suffered by consumers," he said.

Mr Bowen said important changes to the legislation were made following public consultation and include a lengthening of the transition period allowed before key provisions in the new legislation begin to apply.

This is particularly the case for the responsible lending requirements, which will introduce a new requirement for margin lenders to assess whether a proposed loan is unsuitable for a consumer.

The Government recognises that implementation of this new requirement requires significant efforts on the part of lenders, including the development of new systems and processes, as well as training of staff. Margin lenders will now have 12 months to prepare for the new regime, as compared to 3 months in the exposure draft.

The new regime will make margin loans subject to the investor protection regime in the Corporations Act. It requires margin lenders and advisers to obtain a licence and be subject to supervision and enforcement by ASIC. It will also give borrowers access to free and fast dispute resolution services where they have a dispute with their provider.

Margin loan lenders will be subject to responsible lending requirements which will only allow them to provide a margin loan if they are reasonably sure that the borrower is able to afford the loan without suffering substantial hardship.

A new provision is included which clarifies whether lenders or financial advisers are responsible for notifying borrowers of margin calls.

Mr Bowen also said he was introducing laws to change the control of trustee companies.

"For the first time, there will be a single, national market for trustee services, with transparent licensing requirements overseen by an appropriately resourced regulator", Mr Bowen said.

"Trustee companies will need to have adequate resources and meet the other conditions of their licence."

The legislative amendments will harmonise the regulation of trustee companies, thereby reducing the regulatory burden on them. Traditional trustee company services will be regarded as financial services under Chapter 7 of the Corporations Act, and trustee companies will be required to hold an Australian financial services licence covering the provision of the relevant services.

The amendments will also protect consumers by establishing a national consumer protection and disclosure regime under the Corporations Act and the ASIC Act (further details will be set out in regulations). Trustee companies will also need internal and external dispute resolution mechanisms, providing a simpler, cheaper way for consumers to resolve complaints.

The legislation provides that fees must be fully disclosed to the public via the internet. Fees charged to non-charitable trust clients are limited to the trustee company's latest published schedule of fees.

Also, fees charged to charitable trusts and foundations will be regulated to ensure that beneficiaries of these trusts are protected. Specifically, fees charged to "new client" charitable trusts will remain subject to capping based on the Victorian Trustee Companies Act 1984. "Existing client" charitable trusts will have their fee levels frozen to ensure the fees do not rise as a result of the new regime.

And the same bill amends the regulation of debentures and promissory notes and creates a register of debenture trustees.

The changes harmonise the legal regime to require all retail debentures and promissory notes to be subject to the consumer disclosure and protection measures currently applying to debentures. This includes the requirement to have a trust deed and trustee arrangements, and to issue a full prospectus.

These changes will improve protection for retail investors who invest in debentures and promissory notes, by creating a safer and consistent regime for their regulation, backed by a national register of debenture trustees.

The register of debenture trustees will also add to transparency. ASIC will be required to create and maintain the register, which will be available for viewing by the public.

These changes were part of a much larger reworking of the nation's consumer laws.

"There are substantial benefits to be realised from the credit reform package and its implementation is long overdue. The package of reforms will see consumers and industry benefit through robust licensing regime- that will exclude the unscrupulous and incompetent from the industry," Mr Bowen said.

The reform will see the integrity of the credit market in Australia significantly enhanced. Providers of credit and credit related services will be world leading as a result of the rigorous entry conditions required for an Australian credit licence and the requirement to meet responsible lending standards when providing credit or credit assistance.

Phase one of the new national regime includes:

The Government is keen to strike the right balance in these reforms, so following extensive consultation, has made the following changes to the legislation:

The Reform Package comprises three Bills:

The Government intends to build on the reforms to enhance the regulatory framework established by this package.

Work on the next phase will include the areas of credit card limit extensions, fringe lending issues and reverse mortgages as well as extending the regulation of credit to include small business and other investment loans.

The package of consumer credit reforms will be available at www.treasury.gov.au/consumercredit.