Chris Pearce (Aston, Liberal Party, Shadow Minister for Financial Services, Superannuation and Corporate Law) Share this | Link to this | Hansard source

It is a great pleasure to rise in the parliament this morning to speak on the Corporations Legislation Amendment (Financial Services Modernisation) Bill 2009. This bill provides a mechanism for the regulation of margin lending, regulation in and around trustee companies and the regulation of so-called promissory notes. In addition, the bill also provides consistent federal regulation and oversight of these financial services and products by the Australian Securities and Investments Commission. The bill does present a good example of evidence that targeted reforms, reforms that go to particular parts of the Australian law and in particular to our financial system, can provide a positive result for all participants. This is a good example of where a bill has particularly identified areas in the law for improvement. It has targeted those areas, and it will solve some issues. All three of these financial areas, and the products and services in and around them, are very different. I guess it is appropriate to consider them independently of each other, and that is what I will do this morning.

First, let me go to the area of margin lending. The problems surrounding margin lending were highlighted during the difficulties experienced by some financial services organisations as the market turned in late 2007-early 2008. It has been widely canvassed in the press and elsewhere that there are regulatory failings in relation to margin lending. These have included many different areas, but a few of the areas identified include a potential lack of consistent and robust supervision and confusion over the adviser’s and the lender’s responsibilities, particularly in relation to the end user—the end user being the consumer, the customer, who has actually taken out the margin loan. Uniform national regulation of margin lending was agreed upon at COAG in March of 2008, and it was agreed that the responsibility for margin lending would pass to the Commonwealth so as to ensure that it was clearly and consistently regulated throughout our great country.

Federal regulation of margin lending was raised in June 2008 through the green paper on consumer credit and financial services reform. Subsequently, in June of this year an exposure draft of the bill we are currently debating was released for public comment. There have been some changes to the draft, which is good to see, as result of the consultation process. The primary change from the exposure draft to this bill has been the extending of the transitional period in relation to licensing.

There are three primary objectives of the margin-lending aspect in this bill. Firstly, the licensing of lenders and advisers who engage in margin loans will be mandatory. This will occur by instituting margin lending as a chapter 7 product in the Corporations Act. Madam Deputy Speaker Vale, you will know that chapter 7 in the Corporations Act is on financial services and markets. It is the chapter that particularly regulates all issues relating to financial products and financial services and was instituted as a result of the Howard government reforms under the Corporate Law Economic Reform Program, or CLERP, that the Howard government put in place during its time in office. Margin lending and the licensing of the lenders and advisers will now move into chapter 7 of the Corporations Act. Licensing will be compulsory 12 months after assent to the bill, and that will allow a phase-in approach. People will have up to 12 months to get themselves licensed, but once the 12 months following royal assent have passed it will be law that all people must be licensed.

Secondly, margin call responsibility and ambiguities between advisers and providers will be clarified in this bill. I think this clarification is a very important step as any grey areas over margin calls and margin loans has the potential to ultimately negatively affect the investor. Toward the end of the bull market run there were a series of allegations that investors with margin loans were not informed by their financial adviser or loan provider that they faced a margin call. I am sure all members of the House—and, indeed, the whole parliament—consider this to be an inappropriate and unsatisfactory situation for investors, particularly those investors who have taken out margin loans. Consequently, such investors essentially had the rug pulled from underneath them without warning as their equities were liquidated in order to meet the margin loan debt. That is the way the margin loan system works. Washing away any ambiguities in margin loan regulation is, I think, a positive step.

Thirdly and finally, this bill provides additional investor protection mechanisms for margin lending in terms of responsible lending. The responsible lending aspect is to be provided through subsequent regulations, and those regulations are currently on public exposure for comment. I comment here that I think that the omission from the bill of responsible lending arrangements in relation to margin lending is not a good or desirable outcome. Given that these provisions will dictate the way in which a business is to structure its margin loan business, I think it would have been much more preferable to have those sorts of substantive elements vested in the bill itself rather than in regulations.

I take the opportunity to highlight again that I think the government has a penchant for vesting the substantive measures of bills in subsequent regulations. This is something of a slippery method, because it provides the government the ability to escape some of the scrutiny that the parliament provides. It also fails to provide the business community with any sense of certainty. The reason for that is that regulations are much easier to change on the run than legislation. I think that from a practical, business certainty viewpoint, having these types of areas vested in the actual bill is a much more favourable situation than what we find today. A good example of that is a bill that went before the parliament late last year about short selling. We were told then that this bill was urgent and that the regulations would follow very soon after. I am sorry to say that bill passed this parliament in December of last year and, believe it or not, we still have not seen the regulations for that bill. That is an example of the point I am making about how important it is to vest these types of things in the actual bill. Some 9½ months after that bill was passed in this parliament, the business community still has not seen the short-selling regulations.

The next area of the bill is in relation to trustee companies. This bill provides national uniformity which will allow trustee companies to operate across multiple state jurisdictions without different laws and without prohibitive compliance costs. This is another good example, as I said in my opening remarks, of a good, targeted reform. Trustee companies are currently regulated at the state and territory level. There are currently 10 private licensed trustee companies operating in Australia. Trustee company services will, like margin loans, become part of chapter 7 and their products regulated in the Corporations Act. Again, it is a good initiative in my view.

Members of the Trustee Corporations Association, the sector’s peak body, have approximately $510 billion of assets under management, according to a Treasury estimate. It is therefore a significant sector of the financial services industry. The bill will provide authority under Commonwealth law for trustee companies to perform their traditional functions, deem such services to be ‘financial services’ and require them, as a result, to hold an Australian financial services licence when selling such services. Another result of moving it in under chapter 7 of the Corporations Act is that these people will now be required to hold an AFLS—an Australian financial services licence.

The third area of the bill is in relation to promissory notes. Under this bill, promissory notes will be regulated in the same manner as debentures. All promissory notes will now be subject to additional disclosure and regulatory requirements, which already apply to debentures. All promissory notes issued to retail clients will now be accompanied with a prospectus, appointment of a trustee and the issuance of a trust deed. There have been some notable failures of the use of promissory notes in recent years. Promissory notes are in fact very similar in function to debentures. However, they are regulated according to their value. Under the current distinction, promissory notes issued with a value less than $50,000 are regulated as debentures, while promissory notes issued with a value greater than $50,000 are not subject to debenture regulation and are treated as financial products. This bill will now regulate all promissory notes. It will require prospectuses and trustee documents to be provided. Again, this is a good and positive reform.

This bill has the three areas of margin lending, trustee companies and promissory notes. I notice here in the chamber that we have the distinguished chairman of the Parliamentary Joint Committee on Corporations and Financial Services and a fellow distinguished member of that committee, the member for Parramatta. The three of us have been spending quite a lot of time travelling Australia. The chairman has attended, I think, six public inquiries over the last couple of weeks. I have had the opportunity to attend three of those six in Melbourne, Brisbane and Sydney, where we have been hearing firsthand about some of the issues in and around margin lending. It is very clear to me that the proposals that are captured in this bill will be very important proposals. They will be positive initiatives that I think will help to overcome some of the stories that we have heard throughout the public hearings in relation to the inquiry that the committee is undertaking into financial services.

Overall, by instituting margin lending and trustee company services as chapter 7 products in the Corporations Act and treating promissory notes as we already do debentures, I believe that Australian investors will be the ultimate beneficiaries. This bill does represent worthy, targeted reforms—reforms that go to the act and improve it. This bill proves that this is a good way to ensure that the baby is not thrown out with the bathwater. You do not rewrite of the whole area; you go to the area where there is a particular problem and you put in place some reforms to improve it. This is a good example of how that can be done.

Our financial system in Australia has proven itself to be strong and robust. We hear each and every day in the parliament and in the media about the fact that Australia is travelling comparatively very well compared to other like nations throughout the world. There are several reasons for that, but one of the core reasons for that is our regulatory system—a regulatory system that was put in place years ago during the term of the Howard government, where we regulated the financial services industry in Australia. We put in place the so-called twin peaks regulatory model. We created APRA, the prudential regulator, to regulate our financial services from a prudential viewpoint and we established ASIC, the regulator of business conduct. It is through that twin peaks model that we have sustained a very robust and strong regulatory framework for financial services—and it is, as I say, one of the reasons that Australia has been performing well during these very turbulent economic terms. I think these are good initiatives, and I commend the bill to the House.

Bernie Ripoll (Oxley, Australian Labor Party) Share this | Link to this | Hansard source

I take pleasure in speaking on the Corporations Legislation Amendment (Financial Services Modernisation) Bill 2009, and I acknowledge the contributions of the previous speaker, the member for Aston, other speakers on this bill. This bill is quite important. It reflects a range of changes that the Rudd government is making to ensure not only that the financial services sector and the Corporations Act work in unison but also that there is a uniform consumer credit model across this country—across all the states and territories. One principle that underpins this good work is that of consumer protection in ensuring that we have a robust system. We heard from the previous speaker about the twin peaks model, and I concur with him that it is a very important benchmark for how we manage the financial services and products in this country. It is very welcomed that we have this legislation before us, because it bridges a gap that currently exists and that has caused some problems in the past—or, if it not has directly caused the problems, it has certainly been used as an excuse for people not to apply the sort of regulatory rigour that they might otherwise have applied if it had applied directly to them.

This bill does two basic things. One is in relation to margin lending and the other relates to trustee corporations. Margin lending, as we have heard in the media over recent times, has been the source of a lot of problems for consumers. People have lost a great deal of money—their life-savings, their superannuation retirement incomes—and, for many, even their homes through margin lending facilities and practices. It is important that we separate out the issues and the regulatory issues for how margin lending is covered by law. As it stood, margin lending was not covered specifically by responsible lending regulation and banks, lenders and other issues did not have to adhere to principles. We do not believe this was an acceptable position. We believe that margin lending as a facility should be included. It was specifically excluded from the licensing regime that existed for those people who operated under an Australian financial services licence, an AFSL, because it did not meet the definition of who a licensee was. This bill will bridge that gap, include it and cover issuers of financial products, including issuers of margin-lending facilities. So we are removing from the licensing regime the exemption that they enjoyed.

As we will hear from other speakers, and as we just heard, a whole range of issues have arisen in recent times where the matter of responsible lending has been of great concern—and certainly of great concern to me as Chairman of the Parliamentary Joint Committee on Corporations and Financial Services, which is currently embarking on an inquiry into financial products and services, with a particular focus on the collapse of Storm Financial and Opes Prime. The problems that arose were quite simple. People were encouraged to take out margin loans that were often in vastly greater quantities than they were capable of repaying. They involved large loans. When markets are rising there only appears to be an upside. A margin loan gives you the capacity to multiply or leverage up your winnings, as it were, on the way up but, of course, the tragedy is that on the way down, when the markets and shares and stocks fall, the losses are also multiplied. That is managed through a loan-to-value ratio. It is managed through a buffer or a margin. Normally, issuers of margin-lending facilities will set a maximum of up to 70 per cent. What we saw in the heady days of a rampant bull market was that those principles that were applied were set to one side, and people were encouraged into much larger margin loans that were far beyond what their incomes could support. They were based on the income generated out of the shares that they purchased. That is how margin lending normally works. The collateral that is used is normally offset against the portfolio itself and the portfolio generates the income, which meets the repayments and the interest.

The problem for the people who got into trouble was not just the quantum of the margin loan but also their ability to meet the repayments. If it is set at, say, 70 per cent, you need to meet the 30 per cent funding through your own sources. You are meant to have the cash. It is as simple as that. People often did not have that cash, depending on the size of the loan. People used a double-gear method, which means that you either mortgage your home or use the equity in your home. It is quite a dangerous practice when the market begins to fall. A margin call means that you either have to top up your loan to keep it in balance in terms of, let’s say, the 70/30, or the issuer can sell down and sell the shares to meet that call. Of course, the larger the portfolio the more critical that balance is. We heard many sad and tragic stories of ordinary people who were loaned very large amounts of money that they obviously had no income to support. We have seen some tragic outcomes where people did lose their homes or are in the process of losing their homes.

The Rudd government believe in an efficient, free market. We believe in markets, as does the former government, the current opposition. In fact, on many of those issues we share similar views because it is about providing the freedom for people to invest and to make money, or to lose money for that matter. We have provided the tools and the benchmarks for regulation through the twin peaks system—through ASIC and APRA. APRA is the prudential regulator and ASIC is the securities investment commission—the watchdog, as it were, or the policeman on the beat. And there is the Corporations Act to take out the worst effects of the market. If it were left to run rampant, to run on its own, the ordinary person would have no protection at all from those who would act in an unscrupulous manner. That is really the nub of it.

This legislation is about pulling into line and making sure that those who have the capacity and the power, the issuers, adhere to a set of principles and rules. Those rules are contained in this legislation. We are bridging that gap and ensuring that the responsible lending processes and principles that normally apply to other lending also apply to margin lending. It is not just good enough to loan people very large amounts secured against their home where they have no capacity to repay. It is reckless behaviour. It is reckless to lend people far beyond their capacity. It is all okay while markets are rising but, as we have just learnt once again, when markets begin to fall you still have to pay back the loans and the debt.

It is important that we put in place mechanisms to measure the market, check the market and balance the market to ensure that while people have the freedom to do as they will with their own money they also understand that when they borrow money it is done responsibly and in a fair manner. I am very pleased that we have moved ahead of the joint standing committee’s report which will be handed down on the 23 November. This is an issue that needed to be addressed and this government, as in other areas, will be moving as quickly as it possibly can to bridge any gaps, fix loopholes and provide more efficient markets and better systems and protections for ordinary people.

In this bill the term ‘provider’ has also been clarified in relation to margin lending facilities to make sure that there is no ambiguity or confusion as to who provides what. The consequence of this regulation power is that the issuer, or lender, of a margin facility will be required to be licensed. It is probably fair to say that most people who provided them were licensed anyway, but they were not licensed specifically for this type of loan.

I know that out of the changes we are putting forward there will be a change in behaviour. Not merely from the legislative changes we have made but from what has happened in the markets there ought to be changed behaviour in how banks provide margin loans, debt facilities and other types of financial arrangements so that they do it in a more responsible manner. In the end, they are responsible. In the end, they are the ones who are to be held to account, because they provide the finance, the means by which people can get into a lot of trouble. I support the idea that people have a free market to go to in order to borrow funds to invest, but it has to be done in a responsible manner. Laws such as these exist in other forums; they just did not exist specifically in relation to margin loans.

We have made absolutely the right move and it is about time. Sometimes it is the case that markets need to fail before you can see the structural problems that exist. It is a difficult and painful lesson to learn, but the response from a good government is to act upon it when in happens. That is what we have done and I am very proud of that. I know that this will in the future prevent many people from getting into the sorts of financial difficulties that wipe out their retirement incomes or their home equity. Perhaps even worse, they not only lose their home but continue to carry a debt into their retirement. It is abhorrent that somebody who, regardless of their status in life, has worked hard all their life to own a home and have some meagre savings, perhaps some superannuation, has it wiped out by the reckless lending practices of a third party—which, by their own standards, guidelines and policies, the banks are not allowed to do. They are not allowed to do it because it is bad for people and bad for them; they stand to lose money as well. Of course, they can absorb losses much more easily than an ordinary person can. While it might not have a personal impact on the bank, for ordinary people it is catastrophic; it is a position from which they cannot come back. I reiterate the importance of this bill and acknowledge that the opposition is supporting it because it is good legislation.

I will touch briefly on trustee corporations. ASIC has requested that a number of amendments be made to ensure that certain existing ASIC powers under the Australian Securities and Investments Commission Act 2001 are available in relation to trust property held by a trustee company. This is something we also support. Currently, the relevant ASIC powers apply only to financial products, and trustee companies may provide services that do not fall within that definition. It is important to include this provision to make sure that ASIC has the correct amount of power in the right places to deal with issues that arise out of trustee corporations and the holding of property.

Our amendments will replicate relevant parts of sections 71 and 73 of the ASIC Act and will allow ASIC to make certain orders, such as preventing the disposal of certain property due to noncompliance with a requirement made under other parts of the act. I am sure people involved in this area will understand the gravity of giving ASIC the power to prevent the sale or disposal of property, in particular if there is a dispute or we are talking about a particular estate. While these are minor amendments, they are very important amendments.

This government is committed to a range of very important changes and amendments in terms of financial services and products right across this country—not least the Uniform Consumer Credit Code, which will, for the first time in Australian history, bring together all of the different jurisdictions in this country, the states and territories, into a uniform single platform while maintaining the legislative platforms they hold in each state. I think that is very important given the vastness of our country and our population of only 20-odd million people. I think it is important that, as we trade and move not only capital but people between state borders and territory borders, we have uniform, consistent and robust laws for financial services and products. I welcome all of those changes and the principles that we have applied in these areas. I commend them to the House.

Judi Moylan (Pearce, Liberal Party) Share this | Link to this | Hansard source

The Corporations Legislation Amendment (Financial Services Modernisation) Bill 2009 is a really important piece of legislation—an amendment to existing legislation. It is targeted. It is important because, I suppose, there is nothing like a major shakeout in the financial markets to highlight the need for targeted reforms to the financial system. Sadly, during the unprecedented—at least in our contemporary history—worldwide financial collapse we have witnessed, many Australians have been attracted by the potential to increase their wealth through various schemes and have lost not only their savings but also their homes.

For those who are retired and unable to return to the workplace, or for whom it is difficult to return to the workplace, despite their best intentions to replace their lost wealth, their adventure into the financial marketplace has taken a heavy toll. We have heard evidence on this in the Parliamentary Joint Committee on Corporations and Financial Services, and there are some are absolutely heart-wrenching stories. It might be instructive to relate a couple of those in this place.

One of the people giving evidence to the inquiry said:

Our first contact regarding margin loans came from CGI with a demand for $55 000 within 48 hours.

I will talk about margin loans in a moment in a little more detail. In the past some of these financial products have been well known by the business and commercial sector, but many average Australians out there are not fully aware of the complex nature of these kinds of investment packages. For big corporations that may not seem like a lot of money, but to have a demand to pay $55,000 within 48 hours might be a very difficult thing for many Australians.

They went on to say:

Our portfolio has been sold down completely—

and, again, I will explain this in a moment—

with proceeds being deposited into a CBA accelerator account, but we had a shortfall of $55 000 in our margin loan. We contacted our advisor and he then realised—

‘he then realised’: even the advisers did not fully understand what they were getting their clients into—

our financial situation—self-funded retirees with no portfolio, no jobs, no income and a $300 000 debt on our home. When our final statement arrived, our LVR—

that is the loan-to-value ratio, and I will say a word about that in a moment—

had reached 110% before our portfolio was sold down. We decided to pay out our margin loan, rather than continue paying interest on $1.5million. This cost us a break fee—

so, to get out of this before more damage was done and more debt was accrued, they paid a fee—

of approx. $44 000. We had pre-paid interest on the loan in June 2008.

They go on to talk about the things they have had to do, as retirees, to try and recover their position, to put a roof over their heads and just to afford the weekly groceries. This is a heart-wrenching story indeed, and I will relate a couple of others as we go along. The stark reality of the parlous financial circumstances many Australians found themselves in on the back of this collapse is abundantly clear from the many witness statements to the Financial Products and Services in Australia inquiry.

The committee is currently examining a number of issues. I think they are important enough, again, to relate here. The terms of reference say the committee is to examine:

1.

the role of financial advisers;

2.

the general regulatory environment for these products and services;

3.

the role played by commission arrangements relating to product sales and advice, including the potential for conflicts of interest, the need for appropriate disclosure, and remuneration models for financial advisers;

I am just going to pause there; there are actually nine references.

These arrangements between financial advisers, bankers and other investment companies present problems in a number of areas. This has become apparent to me in my electorate, with people coming to me, on the back of this worldwide financial collapse, with terrible problems because there has been a conflict between the people advising them and the organisation selling the product, whether that is superannuation or these kinds of margin loans or other products. It is very apparent that there are deep conflicts of interest. It is also very apparent to me, from discussions with constituents, that, quite often, they believe their financial advisers did not fully understand what the implications of some of these products were. So I think that reference No. 3 of the committee is a very important one and, in some ways, this amendment that we are debating today is also endeavouring to address that.

The fourth reference is:

4.

the role played by marketing and advertising campaigns;

Again, today, many products are sold online, on computer. You can sit at your desk at home and you can get yourself into some awful trouble with online products without fully understanding what the intricacies of those packages or products are.

The fifth reference is:

5.

the adequacy of licensing arrangements for those who sold the products and services;

and the sixth is:

6.

the appropriateness of information and advice provided to consumers considering investing in those products and services, and how the interests of consumers can best be served;

I will pause again there on No. 6 to speak of one of the cases I had—a very sad case. This case was of a very elderly gentleman in my electorate who got himself into a reverse mortgage. Reverse mortgages can be fantastic products for some people, if they fully understand what the full package is about. And there is an obligation, to be fair, on people selling reverse mortgage products to get a signed statement that a consumer entering into those kinds of packages has got independent advice from their accountant and a solicitor. Nevertheless, some elderly people still do not fully understand the implications of the product. And you do not have to be elderly not to fully understand—some of them would, I think, probably perplex a Rhodes scholar, they are so intricate and difficult.

But, with a reverse mortgage, what a lot of people do not realise is that there is a break fee, which was talked about also in regard to the margin loans situation. A reverse mortgage is a handy product for older people who want to stay in their home but have got all their money tied up in it. It is their only asset. So they can unlock some cash from an institution prepared to give them a reverse mortgage. But if they want to break that arrangement anywhere in the time frame of the contract then they are up for very substantial fees.

Just the other day I had a letter from someone else who had encountered this product and had a break fee of $85,000. My constituent had a very substantial break fee but, fortunately, when I contacted the organisation they reduced the break fee. But these fees are not well understood. I am not in any way suggesting that we should not have these packages and products available because, as I say, they suit some people, and they are quite good. But if people do not fully understand what they are getting into then they can get a terrible shock when it comes to having to break the contractual arrangement. Sometimes that happens because of emergency situations. In this case, somebody was not well; they needed to move closer to their family and sell their home. And those things can happen to any of us. But we need to be aware that these products have clauses in them which can be very, very costly indeed.

So consumers do need to understand the products they are getting into, and the inquiry’s terms of reference point No. 7 is:

7.

consumer education and understanding of these financial products and services;

and the final two are:

8.

the adequacy of professional indemnity insurance arrangements for those who sold the products and services, and the impact on consumers; and

9.

the need for any legislative or regulatory change.

The committee also agreed to look at another matter—to:

… investigate the involvement of the banking and finance industry in providing finance for investors in and through Storm Financial, Opes Prime and other similar businesses, and the practices of banks and other financial institutions in relation to margin lending associated with those businesses.

I doubt that too many reasonable people would argue that there is not a need for targeted reform to the financial system, and considerable media attention has made it very clear that there are issues, as I said, about the linkages between advisers and lenders, and their individual responsibility to the borrowers or the users of these products. As our shadow minister, the member for Aston, expressed in his speech here a short while ago, there is a need for suitably targeted reforms. We do not have to throw the baby out with the bathwater. We do have a good financial regulatory system in Australia, and I think that has been evidenced by the fact that we have certainly had fewer difficulties than many other countries. It has shown that we have a fairly robust system here.

Nevertheless, there are these gaps. For instance, this bill also deals with promissory notes. I remember, as a young person working in a law firm when I left school, coming across promissory notes. They have been around for centuries. But we have no consistent, national laws that really lay out any regulation or legislation in regard to how this product is dealt with. So it amazed me when I saw promissory notes there, because I know they have been around for a very, very long time, and yet I was surprised to learn that they are not covered by any of the current laws or regulations of state, territory or Commonwealth jurisdictions.

I understand, though, that the matter of regulating margin lending was agreed to between the states and the Commonwealth at a COAG meeting in March of this year. It was resolved that the Commonwealth would undertake to ensure that there was a robust national regulatory framework governing the operation of margin lending. I know that not everybody is familiar with the term ‘margin lending’, though we hear these words bandied about. For those who are unfamiliar with the term, basically it is about using money that has been borrowed to invest in the stock market or in financial products. Existing investments can be used for this purpose, and they might include real property—that is, your house or your investment property if you have one—and these are generally used as collateral or as a guarantee against the money that is being borrowed.

They use what they call ‘gearing’. It has been used a lot. I have been around the property and financial markets for a long time, and gearing was used a lot in the property boom back in the seventies. Having bought their property years ago and having now, with inflation, seen an increase in the equity in that asset, people would unlock that equity without selling the property. They might still have a small loan as a first mortgage on their home. The home might now be worth another $200,000 or $300,000 more than when they bought it and their mortgage might be relatively small, so they could unlock that equity in their existing asset to use as a start to get into further investments, whether they be property or shares, as we are talking about in this case. That is how gearing is used. It is a common practice, as I said, in the property market. In a boom, it becomes a very attractive option because usually the value of properties is going up and it provides an attractive equity in property for investing in shares and financial products—particularly in the boom that we have seen where the share market was the flavour of the month.

While there can be considerable benefits from the financial gains available from employing these methods, they can also significantly multiply the losses when things go bad. Just to illustrate, again, some of the problems that have come out in the testimony, there was a letter of appeal on behalf of a number of unit holders to the inquiry. In their testimony, they said:

As a direct consequence of the loss of distributions, there are now thousands of previously self-funded retirees and part-pensioners requiring additional pensions and struggling to make ends meet. In addition, there are many who do not qualify for any Centrelink benefits and have been forced back into the workforce or are having to sell other assets just to live. I know of previously comfortable elderly people having to sell their family homes and live in caravans … an eighty year old lady taking in ironing, another renting her own home and living with her daughter and others selling treasured personal possessions.

Sad stories indeed.

In this day and age, when so much business, as I said before, is conducted online on the computer, sometimes these options look very attractive indeed. There are many traps for the unwary, especially as the margin lender takes a mortgage over the shares on a loan-to-value basis. If the share value falls, the margin lender can sell, just like that, to recover their loan, to cover their exposure, so they are in the No. 1 position, but this can leave the investor with considerable exposure to the shortfall or the margin. That is what margin lending does. Just to further illustrate some of the problems that arose, another of the testimonies to the inquiry said:

We have not received any disbursements and have been told we will be lucky to recoup any of our life savings, the $1 units now being valued at 12 cents). I have had to return to full-time work and we have been struggling financially ever since. We have no savings. We are not eligible for Centrelink benefits. Our weekly wages barely cover our mortgage and modest living expenses. We use our credit card to cover basic bills, electricity, gas, body corp, rates. We do not smoke or live lavishly. We have always been frugal and conservative in our expenditure.

We simply ask for justice and real help from anyone in government.

It is our responsibility to make sure that, as we see these anomalies and these gaps occur, we tighten up legislation to make sure that the worst of these abuses, in some cases, do not occur again.

Interestingly, according to the Treasury, in the June 2008 green paper on financial services and credit reform, margin lending grew from a less than $5 billion industry in 1999 to a $32.6 billion industry in March 2008. In normal circumstances that might be very welcome, but it is not welcome when the system collapses and when vulnerable people who do not fully understand the complexities of what they are getting into are left in financial ruin. It has been a largely unregulated industry both at state and at Commonwealth levels. The green paper provided an opportunity for consultations with a view to reform, including on a number of points which I do not have time to go into. All I can say is that I welcome the opportunity to participate in this debate and to join in a bipartisan way to see far better legislation to protect investors in the financial services sector. (Time expired)

Julie Owens (Parramatta, Australian Labor Party) Share this | Link to 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.