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Client Update: Capital Markets – 19 January 2009

Minister announces consultation on margin lending regulation

In brief: Following consultation with industry during 2008 about whether margin lending should be subject to more formal regulation as a financial product, the Federal Government yesterday announced that it is now proceeding with plans to implement such regulation. Partner Warwick Painter (view CV) and Senior Associate Justine Woodford provide details of the latest developments. Listen to Warwick talk about margin loan reforms.

Background

In October 2008, the Federal Government announced plans to modernise Australian financial services, with particular emphasis on national regulation and oversight of consumer credit, arising out of its 'Green Paper on Financial Services and Credit Reform' (green paper) released for discussion on 3 June 2008.

One of the key initiatives in the green paper was a proposal to extend the operation of the Corporations Act 2001 (Cth) to regulate margin lending products and, late last year, the Council of Australian Governments approved the replacement of existing state-based laws with a new national regime.

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The next stage

The next step, as announced yesterday by Senator Nick Sherry, the Minister for Superannuation and Corporate Law, is the commencement of work by the Federal Government's Financial Services Working Group, which will this week begin consultation with industry on the proposed form of a regulatory regime for margin lending, based on financial product disclosure and licensing of margin lending providers under Chapter 7 of the Corporations Act.

At this stage, Senator Sherry has outlined broad objectives for the new regulatory regime, which the Federal Government proposes will be in place by 1 July 2009 (although it is expected that there will be a transition period, probably of up to two years, for existing industry participants). Under the present proposals, all margin lenders will be required to:

  • hold an Australian financial services licence;
  • comply with general conduct standards, including to deal with investors efficiently, honestly and fairly;
  • undertake appropriate disclosure to an investor, including provision of a product disclosure statement, a statement of advice and ongoing reporting;
  • have adequate arrangements for the management of conflicts;
  • ensure representatives are adequately trained and competent to provide those services; and
  • be subject to enforcement measures regarding market manipulation, false or misleading statements, inducing investors to deal using misleading information, and engaging in dishonest, misleading or deceptive conduct.1

The Federal Government also proposes to introduce short form, plain English product disclosure documents, presumably along the lines of what it has put in place for the First Home Saver Accounts. Further, it has announced that all margin lending providers will be subject to responsible lending conduct provisions as part of broader consumer credit reforms covering all credit providers, which are also due to be finalised by 1 July 2009.

We will keep you updated on further developments in this area. Also, once further details are released on the nature and scope of the proposed regulation, we will be holding briefings in our Sydney office on what it means for industry participants.

We invite you to register your interest in attending those briefings so that we can notify you of the details - rsvpsydney@aar.com.au.

Footnotes
  1. See media release 004 'Financial Services Working Group Begins Work on Margin Lending Documents', Senator Nick Sherry, (18 January 2009).

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