The corporate regulator has reviewed the lending practices of six margin lenders, covering 90 per cent of the market.
Of the six providers, five approve ‘double geared’ margin loans.
A double geared margin loan arises where a consumer borrows money using another asset as security, such as a home, to purchase shares – and then obtains a margin loan on these shares to purchase additional shares.
“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,” said the regulator.
Following the regulator’s review, one provider has “decided to cease offering double geared loans”, said ASIC.
“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,” said ASIC.
ASIC’s review has also uncovered two lenders that provide ‘asset lend’ margin loans (ie, where a loan cannot be serviced by a consumer’s income alone, and would require the sale of an existing asset).
Following the review, both margin lenders have “agreed to cease approving double geared asset-lend margin loans”.
ASIC deputy chair Peter Kell said he is “pleased with the industry’s response” to the review.
“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,” Mr Kell said.
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