Rules & regulations for margin lending

The Rudd government has given the $21 billion margin lending industry three weeks to get used to a proposed overhaul of the regulatory and legislative regime.

Nick Sherry Corporate Law Minister yesterday released a draft copy of the legislation with the view to introducing it into parliament next month.

The Australian has reported that under a standard national regime the legislation will include new national laws to regulate margin lending. Margin lending is not currently regulated in Australia and is considered to have been one of the main destroyers of investor wealth as the stockmarket collapsed last year.

Some investors lost their homes as their margin lending accounts blew out of proportion triggering margin calls that they could not afford to pay.

Mr. Sherry stated earlier this week that taking out equity on a family home was an area that the government was interested in. The area of most concern has been where people were advised to take equity out of their family home and use the debt as leverage into buying shares through a margin loan.

Using your home as security is a double-debt trap, and is of serious concern.

Under the new responsible margin lending laws the lender will be required to assess a person's true loan-to-value ratio. This means that the lender cannot assume that the money being used is not itself a debt. This major new improvement will reduce the risk of people losing their homes.

The Rudd Government agreed that properly geared margin lending, backed by a full disclosure was acceptable, but that Australians being misled into grossly inappropriate margin loans that could cost a family everything they owned was not acceptable.

The new laws will be regulated by the Australian Securities and Investments Commission and they have to hold an Australian Financial Services Licence, and be members of the low cost external dispute bodies, they will need to disclose fees and commissions before lending, and lend under a tailored margin-lending. A specific set of responsible lending obligations.

During the period June to December last year, the number of margin calls received by 205,000 Australians with margin loans increased by 458 per cent, due to the share market dropping by 40 per cent.

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Published on May 5-th, 2009 in Home Loans
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.

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