Margin loan crackdown follows Storm Financial disaster

Margin lenders will need to be licensed and warn customers about the risk associated with their products under a new regulatory regime that will be introduced on 1 July.

Margin lenders will need to be licensed and warn customers about the risk associated with their products under a new regulatory regime that will be introduced on 1 July.

Federal Superannuation and Corporate Law Minister Nick Sherry says the “plain English” disclosure and licensing system will provide much greater protection for consumers, and claims it will also result in lower costs for product providers.

“It’s important that investors not only receive clear advice about why a particular product or strategy is being recommended to them, but also what’s in it for the person or firm recommending it.”

The release of Sherry’s plan comes just days after the collapse of financial planning firm Storm Financial, which advised many of its clients to take out large margin loans in a bid to turbo-charge their returns. As markets plummeted, many of these former Storm clients have been left with huge debts.

Sherry says the improved disclosure regime will ensure potential margin lending clients are fully informed about the risks and rewards offered in rising and falling markets.

Under the proposed new rules, margin lenders will be required to:

• Hold an Australian Financial Services Licence.
• Deal with investors efficiently, honestly and fairly.
• Undertake appropriate disclosure to an investor, including provision of a product disclosure statement (PDS), a statement of advice (SOA) and ongoing reporting.
• Have adequate arrangements for the management of conflicts.
• Ensure staff are adequately trained and competent.
• Be subject to enforcement measures regarding market manipulation, false or misleading statements, inducing investors to deal using misleading information, and engagement in dishonest, misleading or deceptive conduct.

Sherry will start discussing the new regulatory regime with industry representatives this week.

Margin lending has become one of the most controversial areas of the financial services sector after the collapse of Storm and margin lenders such as Opes Prime and Lift Capital.

Some of Australia’s most high-profiled investors and entrepreneurs have been forced to sell their shares to pay margin loans after sharp falls in share prices.

One of these was Eddy Groves, founder of failed childcare giant ABC Learning, who lost the bulk of his shareholding in ABC after his margin lender, Citigroup, hit him with a margin call.

It has now emerged that Groves is seeking around $8 million in damages from Citi over its decision to sell his shares.

Related stories:

• Five lessons from the collapse of Storm Financial
• 10 ways to lose your business in a downturn