Aussie government moves to tighten margin lending regulations

The Australian government is planning to introduce laws to tighten regulations governing margin lending that will help the government crackdown on rogue lenders. The laws will also make it less likely for investors pledging their houses as collateral to buy shares to lose their homes.  

The past 12 to 18 months have seen a significant rise in margin calls as the global financial crisis engulfed the stock markets, leading to the collapse of a number of high-profile Australian stockbrokers with heavy margin-lending portfolios, including Opes Prime and Storm Financial.

The government brought draft legislation on Thursday requiring margin lenders to hold an Australian Financial Services Licence. This would provide Australian Securities and Investments Commission oversight on margin lenders. It would also discourage the use of family home as security against margin loans.

The laws will also clarify the operation of margin calls which occur with the security by the borrower falling in value by a certain amount. The lender then calls for additional security or cash or sells a part or the entire security to cover the loan.

One area that the government is especially concerned about is where people are advised to take equity out of their family home and then use this debt to leverage into buying shares through a margin loan. This double debt trap with a home as security is of serious concern, according to government sources.

Under the new legislation, the lender will be required to accurately assess a person's loan-to-value ratio, comparing the debt secured to the value of the home.

This would mean the lender can no longer discount the possibility of the money brought to the table being itself debt. This improvement would significantly reduce the risk of people losing their homes.

Under the new legislation, margin-lending providers would need to be licensed by corporate regulator ASIC. Additionally, they would need to ensure that their representatives are appropriately trained to provide advice on the product.

Industry analysts point out that since credit is currently not a financial product for Australian Financial Services licensing purposes this means that consumers do not receive the kind of disclosure about commissions on margin-lending arrangements as they receive for other financial products.

Margin lending is a lucrative business in its own right and, according to industry sources, margin lenders earn anything from 7.8 per cent to 8.1 per cent on a variable margin loan.

Last year, investigations revealed a number of dubious cases of margin lending and short selling with some short selling by hedge funds being deliberately targeted at stocks in which key executives in the company had margin loans.

The short selling triggered margin calls, which pushed down the share prices with disastrous impact on sentiment.

Meanwhile, the federal government has announced a major crackdown on controversial margin loans that led to big personal losses with the collapse of investment companies such as Storm Financial last year.