Margin lending: mixed reception for regulatory changes

Many in the industry feel that the legislation targeting margin lending has only served to make investors more fearful of the practice. Ashley McIntyre reports.

Margin lending became a dirty word after the collapse of Storm Financial. Legislation is currently under revision to fix the mistakes of the past, but it remains to be seen whether the sector will ever truly recover.

Slater & Gordon practice group leader in Brisbane, Damian Scattini, says that although legislation is in the works, it can’t change human nature.

“There will be some other Storm on the horizon – that’s just a fact. There are always people trying to gain from the system,” he says.

Even once legislation is introduced, Scattini feels that these retrospective measures will never be enough to fully protect consumers.

“Like in many things, people fight the last war. So this will have an effect to stop someone being ‘Stormified.’”

If a person falls into the same trap, Scattini says, it will effectively become their own fault. However, there he says there is no way to stop similar schemes in the future.

“There will always be some other way to relieve people of their hard-earned savings,” he says.

The chair of the parliamentary inquiry into the financial services industry, Bernie Ripoll, says that while that may be the case, regulation is a very important step in protecting consumers.

The biggest change for margin lending so far, Ripoll says, has been that for the first time it is regulated at a Commonwealth level and it is now under the supervision of the Australian Securities and Investments Commission (ASIC).

There have also been a range of other measures such as updates to the RG146 qualification to include margin lending, as well as need for a specific margin lending approval for Australian Financial Services Licences (AFSL).

But more changes to legislation are yet to come with the proposed introduction of the Government’s Future of Financial Advice (FOFA) reforms, which is largely based on the Ripoll Inquiry.

Ripoll says that these changes have, and will, go a long way to addressing the problems that arose out of the collapse of Storm Financial.

Those problems included the fact that many people involved in the collapse didn’t even know they had a margin loan, which Ripoll says he found very disconcerting.

“Also, a lot of people didn’t understand what a margin loan was, what it meant and what would happen in the event of a share market collapse or fall.”

It is this lack of understanding and engagement with investments that FOFA is trying to target, he says.

“But that doesn’t mean that people can’t still get themselves into trouble,” he says.

“The capacity for a margin loan for people who don’t fully appreciate or understand its features and its downsides is a very dangerous tool.”

This perception of margin loans as ‘dangerous’ has created a fear of borrowing to invest, which when combined with tightening regulations, has led to a slump in funds going into the sector.

But Eric Blewitt, general manager Bendigo and Adelaide Bank subsidiary Leveraged Equities, believes that margin lending should still be considered as part of any long-term wealth accumulation strategy.

“I think the general fear of borrowing to invest, while it is appropriately cautious, in the majority of cases is unfounded.

“There is good value in the market and if people are dealing with advisers to put together a long-term strategy, it should definitely be discussed,” Blewitt says.

“So long as you understand the risks and you can meet the appropriate contingencies to not only service the debt but, if required, pay back part of the debt, then it should at least be considered.”

Blewitt believes that margin lending is simply the enabler to invest – the problem lies with advisers and lenders to ensure that the product is appropriate for the client.

Scattini agrees that it is up to advisers and lenders to ensure the person they are giving advice to has the capacity to understand what they are doing, but that ultimately it comes down to getting independent advice.

“Storm has been very topical and it has made people sceptical of the advice given to them by financial planners, which is unfortunate because there is nothing wrong with financial planners, per se, it’s the unethical ones who are the problem,” Scattini says.

He hopes the changes from commissions to a fee-for-service will take away the incentives for schemes like this to happen.

“Fee-for-service has to be a sensible thing, as that makes it clear whether [a planner] is a salesperson or a professional – and that’s the crux of the matter,” Scattini says.

But Ripoll believes he is already seeing a change in the financial services industry, which is working to make amendments to procedures ahead of legislative changes.

“I don’t know if it’s said often or if it is said at all, but we really need to congratulate the whole financial services sector. They really have adopted this, they have accepted that change was necessary and they have done a great job,” Ripoll says.

“I think that cultural shift is as important as the regulation itself.”