Following an ASIC review, margin lenders have moved to better address the different levels of risk for investors seeking margin loans, especially in relation to double geared margin loans.

ASIC reviewed the lending practices of six margin lenders, covering 90% of the market, and found that five of the six margin lenders approved 'double geared' margin loans. Double geared margin loans are where a consumer borrows money (using another asset as security, such as their home) to purchase shares, and then obtains 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 found 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.

ASIC's review 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. Instead, such borrowers would need to sell assets in order to meet their ongoing interest payments. While 'asset-lend' margin loans are not prohibited, ASIC considers that such margin loans are significantly more likely to be unsuitable. Following ASIC's review, both margin lenders agreed to cease approving double geared asset-lend margin loans.     

'ASIC is pleased with the industry's response to our proactive review and its commitment to standards that give appropriate consideration to the potentially significant risks that a double geared investment strategy might pose to investors,' said ASIC Deputy Chair Peter Kell.

'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.

Mr Kell also emphasised the importance for investors to fully understand the risks and costs of margin loans as well as the potential benefits. ASIC's MoneySmart website has guidance to help investors understand how margin loans work and the risks involved.

Background

A margin loan lets an investor borrow money to invest in shares or managed funds.

Margin lending became regulated under the Corporations Act 2001 (Cth) (the Corporations Act) after changes came into effect on 1 January 2011. These changes included responsible lending obligations, where margin lenders must assess whether a margin loan is unsuitable for a retail investor, including an assessment of the client's ability to comply with financial obligations under the margin loan without substantial hardship (sections 985K and 985H of the Corporations Act).

The Corporations Act specifically contemplates retail investors being able to employ a double geared investment strategy in relation to margin loans. When a retail investor applies for a margin loan, margin lenders are required to make reasonable inquiries which identify whether a retail investor will be double gearing (reg 7.8.09(1)(a) of the Corporations Regulations), including whether the initial loan is secured by the client's primary residence (reg 7.8.09(1)(b) of the Corporations Regulations).

If double gearing is identified, ASIC expects that lenders take steps to manage the different levels of risk present for double geared consumers as part of assessing whether the loan is unsuitable for the retail investor.