Julie Owens (Parramatta, Australian Labor Party) Share this | Hansard source

I am pleased to speak on the Corporations Legislation Amendment (Financial Services Modernisation) Bill 2009. Like so many members of the Joint Committee on Corporations and Financial Services, including the member for Pearce, I have also heard some of the tragic stories of loss and desperation from a range of people who invested their money in the good times, only to find that they lacked an understanding of the consequences of the kind of downturn that we have experienced over the last year.

The amending legislation seeks to amend the Corporations Act 2001 and the Australian Securities and Investment Commission Act 2001 to reflect agreements at COAG in relation to the national regulation of margin lending and trustee companies. In particular, any person providing margin loans and advising about margin loans will need to hold an Australian Financial Services licence and will be subject to the licensing conduct and disclosure requirements contained in the Corporations Act and administered by ASIC. The bill also aims to improve the regulatory framework that applies to the issuing of promissory notes and debentures, but today I will concentrate on the first part, margin lending.

Ten years ago I doubt that there would have been that many people in Australia who would have known what a margin loan was. Yet today we find that a large and growing number of people have chosen to invest using that form of finance. In short, margin lending is the borrowing of money to invest in the stock market. According to FIDO, the consumer website of the Australian Securities and Investment Commission, a margin loan lets you borrow money to invest in shares and other financial products using existing investments as security. Borrowing money to invest in this way, also known as gearing, can increase the gains from an investment but also multiply the losses. Margin loans are offered by a wide range of financial institutions and are often available online.

There has been some downturn in the number of margin loans in the last year due to the global financial crisis, but, by and large, the number has grown substantially over the last eight years. In June 1999, less than $5 billion had been borrowed through margin loans but, by December 2007, some 8½ years later, that figure had skyrocketed to over $37 billion—that is, more than a 700 per cent increase. It has not just grown but, arguably, the range of investors has also changed significantly. In June 1999, when there were a small number of investors, one could assume that they were largely institutional investors and experienced investors. But, over the last decade, with the rise in super funds and demutualisation, Australia is in a rather unique position, being one of the highest per capita investors in the world. An incredibly large number of people are coming to investment quite late in life, with relatively little experience, arriving in their senior years with large superannuation payouts or finding themselves literally receiving shares in the mail through demutualisation. That makes us a little bit unique. Perhaps it exposed a large number of our population to risks which they were unaware of or perhaps did not fully understand. Through the evidence provided to the inquiry of the Joint Committee on Corporations and Financial Services, we found that large numbers of people have found themselves in considerable hardship. Anecdotally, they were unaware of the risks of margin lending or perhaps lacked the ability to fully comprehend the risks.

During those growth years, margin loans remained largely unregulated—again, quite extraordinary, given the growth over that time. Margin lending has not been subject to the credit regime operated by the states. In fact, until now, margin loans had not been subject to any specific regulatory regime at all. The Uniform Consumer Credit Code, which currently forms the basis of a scheme of state based consumer credit legislation, does not apply to credit provided for investment purposes.

Under this amendment, margin lending will be regulated as part of the financial services regime in chapter 7 of the Corporations Act, which means that for the first time margin loan borrowers will benefit from the general investor protection regime contained in that legislation. That means that lenders will have to be licensed by ASIC, as will advisers; advisers will be required to only provide advice that is appropriate to the client’s needs and circumstances; and consumers will have access to independent, free and fast dispute resolution services. In terms of enforcement, all margin lenders for the first time will become subject to the enforcement provisions of chapter 7 surrounding market manipulation, false or misleading statements; inducing investors to deal using misleading information; and engagement in dishonest, misleading or deceptive conduct.

As well as the benefits of placing margin loan regulation under the Corporations Act, there will be an additional two specific measures which will further enhance consumer protection. The first is a responsible lending requirement. That requirement is designed to prevent lenders from giving unsuitable loans to consumers. It was quite alarming to find, in the evidence received during the current committee inquiry, that so many lenders do not consider the suitability of the loans for the consumers at all, or their ability to deal with a potential downturn. Under the new amendment, before giving a margin loan, lenders will be required to consider whether the borrower could suffer substantial hardship as a result of taking out the loan, and if that is the case the law says that the loan must not be provided.

The regulations which will accompany the legislation will provide further detail of what the lenders will need to consider, including a specific requirement for lenders to consider whether consumers will be at risk of losing their homes as a consequence of taking out a margin loan. The regulations will also require financial advisers to consider the same matters, including the possible loss of a borrower’s home, when providing advice on margin loans to consumers. Had both of these measures previously been in place, they might have gone a considerable way towards avoiding some of the tragic stories of loss that we in the committee have encountered over the last few weeks.

The second specific measure clarifies which party is responsible for notifying borrowers when a margin call occurs where both a lender and a financial adviser are involved. Again, the committee members were surprised to find that so many of the lenders did not deal directly with the customer in making a margin call but chose to advise the customer through the financial adviser. There are stories of delays in margin call notifications due to disagreements between lenders and advisers, and we have heard from people who were not aware of their losses until it was far, far too late to act.

These are extremely important amendments, part of a larger reform package of consumer protection that we will see rolled out in the near future. This bill is an extremely important one—arguably, overdue—as it recognises that over the last 10 years there has been a dramatic increase in the complexity of products and the number of complex products, and a huge increase in the number of inexperienced investors choosing, through advice, to purchase those products. For many people this legislation is, tragically, too late, but it is our hope that it will prevent a repeat of some of the tragic stories that we have heard over the recent year. I commend the bill to the House.

Debate (on motion by Mr Melham) adjourned.

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