Thinking | 7 May 2009
Government releases draft legislation
The Federal government today released draft legislation and regulations for the regulation of margin lending, trustee companies and debentures.
Margin loans have been included in the definition of a ‘financial product’ under Chapter 7 of the Corporations Act 2001 (Corporations Act).
Importantly the definition of a margin loan captures traditional margin loans and securities lending arrangements.This means that margin lenders will need to hold an Australian Financial Services Licence (AFSL) and be regulated by the Australian Securities Investment Commission (ASIC). Margin lenders who already hold an AFSL will need to vary their AFSL so that they have specific authorisations to advise on and deal in margin loans.
Licence application must be made within three months of the legislation commencing, and the Government expects most licences to be issued within a further six month period.
Margin lenders will need to comply with all of the requirements that apply to AFSL holders and will be required to:
- be members of a external dispute resolution body
- offer margin lending products to retail clients pursuant to a Product Disclosure Statement (PDS), including clearly disclosed fees and commission (as well as Financial Services Guides (FSG) and Statements of Advice (SOA) in relation to the provision of advice) and
- lend under a margin lending specific set of responsible lending obligations.
Under the new regime margin lenders will be required to assess the ‘true’ loan to valuation ratio. This means that a lender cannot assume that the equity brought to a margin loan by a borrower, is not debt. For example, a margin lender will be required to assess the source of the equity contribution of the client and whether the equity contribution itself is a borrowing from another source.
The financial product advice provisions of the Corporations Act will apply to margin loans (meaning that loans must be appropriate to the borrower’s needs and circumstances). In addition, before issuing a margin loan or increasing the limit of a margin loan, lenders will need to make an assessment as to whether the facility will be unsuitable for the client if the facility is issued or increased. Before making such an assessment a lender must:
- make reasonable enquiries about the retail client’s financial situation
- take reasonable steps to verify the retail client’s financial situation and
- make any enquiries and take any steps to verify information as prescribed by the Corporations Regulations.
However, the lender is not required to make enquiries where the loan is advanced (or a limit increased) no more than 30 days after the issue of, and in accordance with, a SOA prepared by a financial services licensee that is authorised to provide advice on margin lending facilities.
The lender must assess that a margin lending facility will be unsuitable for a client if, at the time of the assessment:
- it will be likely, at the time the margin loan is proposed to be issued or the limit is proposed to be increased, that, if the facility were to go into margin call, the client:
- would be unable to comply with its financial obligations under the terms of the facility or
- could only comply with substantial hardship or
- if the Corporatons Regulations prescribe circumstances in which a margin lending facility is unsuitable.
A copy of the assessment is to be provided to the borrower and the lender cannot charge for undertaking the assessment.
When the margin loan goes into margin call, the lender must take reasonable steps to notify the client under the facility of the margin call. Lenders will have responsibility for informing clients of margin calls, unless separate arrangements are put in place to name another AFSL holder as being responsible. However, margin lenders cannot require clients to have such arrangements in place. A margin call notice must be given:
- in the manner agreed between the parties
- if there is no agreement and ASIC has determined the manner in which the notice is to be given, in that manner or
- otherwise, in a reasonable manner.
Notwithstanding the above, ASIC may determine:
- the time by which, and manner in which, a lender must notify a client or agent of a margin call and
- the time by which, and manner in which, an agent must notify a client of a margin call.
Senator Nick Sherry, Minister for Superannuation and Corporate Law has noted that the Financial Service Working Group will shortly release a simplified margin lending PDS.
A new Chapter 5D is proposed to be inserted in the Corporations Act 2001 (Corporations Act) which facilitates the transfer of trustee company regulation from the states and territories to the Commonwealth.
Trustee companies are defined as companies that are prescribed in the regulations for the purposes of the Corporations Act. The draft Corporations Regulations released do not deal with this definition at this stage. We assume that this will refer to those trustee companies currently listed in the schedules to the various state Acts
Chapter 5D harmonises the regulation of trustee companies, thereby reducing the regulatory burden on trustee companies and creating a national market for trustee services. Chapter 5D is also intended to protect consumers by establishing a national consumer protection and disclosure regime under the Corporations Act and the ASIC Act 2001.
The draft amendments provide that ‘traditional trustee company services’ are a financial service for the purposes of Chapter 7 of the Corporations Act. This means that the licensing, conduct and disclosure requirements of Chapter 7 will apply to trustee companies that provide traditional trustee company services.
Traditional trustee company services are defined as:
- performing estate management functions
- preparing a will, a trust instrument, a power of attorney or an agency arrangement
- applying for probate of a will, applying for grant of letters of administration, or electing to administer a deceased estate
- establishing and operating common funds or
- any other services prescribed by the Corporations Regulations.
Generally, the provisions contained in Chapter 5D reflect a harmonisation of the state and territory legislation in respect of trustee companies.
However, similar to the obligations imposed on responsible entities of a registered managed investment scheme (and directors generally), an officer of a licensed trustee company must:
- act honestly
- exercise the degree of care and diligence that a reasonable person would exercise if they were in the officer’s position and
- act in the best interests of the clients of the trustee company and, if there is a conflict between the clients’ interests and the interests of the trustee company, give priority to the clients’ interests and
- not make use of information acquired through being an officer of the trustee company in order to:
- gain an improper advantage for the officer or another person or
- cause detriment to the clients of the trustee company
- not make improper use of their position as an officer to gain, directly or indirectly, an advantage for themselves or for any other person or to cause detriment to the clients of the trustee company and
- take all steps that a reasonable person would take, if they were in the officer’s position, to ensure that the trustee company complies, in relation to the provision of traditional trustee company services, with:
- the Corporations Act and
- any conditions imposed on the trustee company’s Australian Financial Services Licence (AFSL).
These duties override any conflicting duty the officer has under Part 2D.1 (Duties and Powers of Officers and Employees) of the Corporations Act, but are subject to any conflicting duty the officer has under Part 5C.2 (Duties of Officers and Employees of a Responsible Entity).
An employee of a licensed trustee company must not:
- make use of information acquired through being an employee of the trustee company in order to:
- gain an improper advantage for the employee or another person or
- cause detriment to the clients of the trustee company or
- make improper use of their position as an employee to gain, directly or indirectly, an advantage for themselves or for any other person or to cause detriment to the clients of the trustee company.
These duties of an employee of the trustee company override any conflicting duty the employee has under Part 2D.1, but is subject to any conflicting duty the employee has under Part 5C.2.
Trustee companies that are licensed to provide traditional trustee company services will also be able to act as trustees of debenture issues under Chapter 2L.
The Corporations Act 2001 (Corporations Act) is being amended so that promissory notes valued at $50,000 or more will become regulated as debentures under Chapter 2L of the Corporations Act. This means that such issues will require a trust deed, the appointment of a trustee and the issue of a prospectus. Disclosure, advice, dealing and licensing for the issue of such products will be regulated by Chapters 6D and 7 of the Corporations Act
The amendments also require ASIC to establish and maintain a register relating to trustees for debenture holders.
The Government is seeking submissions on the exposure draft legislation by close of business Friday 29 May 2009.
Having assisted many financial services providers obtain their Australian Financial Services Licence (AFSL)and prepare Product Disclosure Statements, the Hall & Wilcox Financial Services team is able to:
- assist in making a submission to government on the proposed regime
- provide specific advice as to how the new regime will apply to your business
- assist in amending existing margin loan documents to ensure compliance with the new requirements
- assist in preparing AFSL applications and AFSL variation applications including all necessary proof documents in accordance with ASIC requirements and
- assist in drafting template documents which comply with all of the disclosure requirements (Financial Services Guides, Product Disclosure Statements and Statements of Advice) contained in the new regime.
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