ASIC hits double-geared margin loans
The Australian Securities and Investments Commission (ASIC) has signalled it will be continuing to monitor margin lenders following a review which revealed five of the six major lenders were allowing double-geared margin loans.
The regulator today issued the results of its latest review of the sector and concluded that while improvements had occurred, it warranted ongoing scrutiny.
It said it had reviewed the lending practices of six margin lenders, covering 90 per cent of the market, and found that five of the six margin lenders approved ‘double geared' margin loans, pointing out that double geared margin loans were where a consumer borrowed money (using another asset as security, such as their home) to purchase shares, and then obtained a margin loan on these shares to purchase additional shares.
"Because of the extra risks associated with double gearing, the law requires margin lenders to meet responsible lending obligations," ASIC said.
The ASIC announcement said that in certain circumstances, four of the five margin lenders who approved double geared margin loans did not take additional steps when approving such loans, despite the additional risks associated with double geared margin loans.
"Following ASIC's review, one margin lender decided to cease offering double geared loans. The remaining four lenders have made several commitments to reduce risks, including ensuring that their policies have, or continue to have, the following requirements for double geared borrowers:
- extra buffers to allow for interest rate rises and/or changes in expenses;
- lower maximum allowable loan amounts; and
- lower loan to value ratios."
The regulator said its review had also identified two lenders that provided double geared margin loans in circumstances where the borrower would not be able to fully service the margin loan relying only on their available income.
Commenting on the outcome of the review, ASIC deputy chairman, Peter Kell said the regulator was pleased with the industry's response and "its commitment to standards that give appropriate consideration to the potentially significant risks that a double geared investment strategy might pose to investors".
"However, given the clear need for better standards, ASIC will continue to monitor the margin lending sector. Should we find inappropriate lending we will take regulatory action to address consumer risks," he said.
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