ASIC has announced the results of its review of margin 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.

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(sections 985H and 985K of the Corporations Act).

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.

Two margin lenders also agreed to cease approving double geared margin loans based on borrowers’ assets only.