In the past three years, Australia's margin lending sector has experienced an industry peak of $38 billion and more recently a massive 50 per cent drop in terms of industry volume.
Data from the Reserve Bank of Australia (RBA) shows margin lending spiked between 2000 and 2007, on the back of investors' greater willingness to borrow to invest in equities in a period of strong share market returns.
Between 2000 and 2007, margin debt rose from around $7 billion to a peak of $38 billion, the RBA figures show.
The RBA figures show the growth in outstanding margin lending led to an increase in the average loan size from around $80,000 in September 2000 to $190,000 in December 2007, and a rise in the number of loans from 84,000 to 200,000.
"The increase in the average loan size partly reflected strong growth in large margin loans (those greater than $10 million); these accounted for around 18 per cent of total margin debt outstanding in mid-2007, up from 5 per cent in mid-2002 (when these data were first collected)," the RBA said.
However, in 2008 the value of outstanding margin debt halved, in light of volatile and dropping equity markets.
"As at September 2009, the value of total margin debt outstanding had roughly halved from its peak to be around $18 billion, at levels last seen in mid-2005," the RBA said.
"The total number of accounts was little changed, but the average loan size declined substantially as many borrowers repaid their loans partially or fully. The fall in outstanding debt was less pronounced for protected margin loans (down 30 per cent from its peak in mid-2008), as borrowers with these loans did not receive margin calls and were guaranteed the portfolio's initial capital value."
In mid and late 2008, ASIC launched investigations into the activities of two Australian financial services companies in response to margin loan concerns raised by investors.
In March that same year, the corporate watchdog announced it had begun examining the activities of Opes Prime Stockbroking and seven months later it turned its focus on Townsville advice group Storm Financial.
At the time, the corporate regulator claimed its investigation had found around 3000 Storm clients entered into a margin loan for investment in market-linked investments. The investigation also found more than 450 clients who owed their margin lender more than the value of their portfolios, equating to around $30 million owing.
This number was later downgraded, with around 300 clients owing around $20 million.
In response to the corporate collapses, in November 2010 ASIC released guidelines for non-standard margin lending facilities aimed at improving the disclosure regimes of these products.
The type of margin lending products covered by the guidelines are those where securities are used as collateral instead of one where a loan agreement is put in place. These facilities have been used in the past by organisations such as Opes Prime Stockbroking and Tricom Equities.
Effects of collapses
Core Equity Services general manager Peter Steel wasn't at liberty to discuss the specifics of how the modern day corporate collapses such as Storm have affected the Commonwealth Bank of Australia-owned group, though he says the industry as a whole felt some effects.
"I'm not prepared to talk about any specifics, but definitely the industry was [affected]," Steel says.
"We're a responsible lender and we've always followed a certain code of conduct and not just met industry standards, but above industry standards. But definitely like every margin lender we were affected and there are some high-profile cases out there that I can't comment on.
"But I think the main thing is that coming out of the GFC (global financial crisis) we have not only embraced the legislative and government and industry-led change, we have also I think gone even slightly beyond what ASIC and others were asking for."
NAB Equity Lending head Adrian Hanley says the National Australia Bank division experienced little impact from the industry collapses.
Hanley says the reason behind this is perhaps due to being part of a large "reputable organisation".
"Again going back to this concept of this flight to quality I think we certainly saw that through the GFC. I think that is something that has helped our business," he says.
"We certainly did see that where people wanted to park their deposits or their investments with more reputable firms with stronger balance sheets. I think we certainly saw that, so as one of the largest lenders and one of the largest banks in the country have seen that happen with our business."
Despite Bendigo Wealth's leverage equities division facing concerns over its Storm clients, executive John Billington says the firm has experienced zero impact from collapses.
"I've not heard anything coming through and leverage equities is part of my area," Billington says.
New world
Flash forward six months to now and Australia's margin lending sector is an entirely different beast.
With the GFC helping to weed out unsavoury margin loan providers and the non-traditional providers, the sweeping change brought with it greater opportunities for providers with fat balance sheets.
"I think the appetite has obviously varied over the last 24 months. It was significantly down on 2010," Steel says.
"What we are starting to see is two trends in the market, certainly some confidence start to return into equities, in particular volatility. In the last couple of months there has been some good positive signs, not only profit taking but also some opportunities' re-entry into the market."
He says the company has also seen growth in its margin lending book - both the direct margin lending book and the advised margin lending book of independent financial advisers (IFA).
"Their [IFAs] observation is that the direct book is a lead indicator. What happens there we tend to see the same trend on the advised book and we are seeing planners writing margin lending again, which is good," he says.
Hanley agrees, saying a 20 per cent increase in the company's loan book is a strong indication that an appetite for the sector is returning.
"We've seen certainly over the past 18 months [with] about a 20 per cent increase in our loan book, which I think is pretty interesting," he says.
He labels the rise as part of a flight to quality that investors are taking when considering margin loans, particularly in light of a number of non-traditional margin lenders.
"The collapse of non-traditional margin lenders like Opes Prime, Lift Capital, other firms like that, I think we definitely saw a flight to quality and companies with strong balance sheets and move towards what we call more standard margin loans," he says.
Billington says the GFC had quite an impact on margin lending data.
"Normally you can correlate the rebate in the ASX (Australian Securities Exchange) with the increase of the margin loans and certainly the data I've seen shows the GFC might be a generational type of event where the ASX has rebounded and yet the margin loans haven't in accordance with historical data," he says.
"That in itself should say something. We still have retained our market share in the space, so we're still at 19.7, but that just means that the industry as a whole is seeing a market sentiment to paying down debt rather than increasing it."
He says Bendigo made it through the GFC without a bad debt, which he attributes to the group's loan-to-value ratio of 42.
"I think the lesson that people are learning from this is the decision to take a high return risk has to be linked to financial goals and I think in many cases moderating the gearing enhances the potential return without necessarily placing their goals or their financial circumstances at risk," he says.
Change in environment, change in conversation
Westpac head of distributions and sales for equities Craig Keary says since the GFC and subsequent corporate collapses, financial advisers want to have deeper conversations regarding margin loans.
"They recognise that with the market being 30 per cent off its high and the economic outlook being moderately positive in both the medium to long term that they do want to look at gearing strategies," Keary says.
"They do accept that volatility is an issue and I think we have had our fair share of natural disasters which hurt investor confidence a little bit, but certainly what we are seeing is advisers that want to get some strategies and those strategies are not just about margin lending, but they are about what other sorts of lending strategies they can have and go and engage with their clients."
He says while there is certainly a renewed appetite for margin lending, the style of conversation has indeed changed.
"It's more about what is the investment strategy? What am I actually going to invest in? And do I have transparency on what I am investing in? So it's very much around blue chip equities, ETFs (exchange traded funds)," he says.
"We're seeing advisers interest in ETFs and gearing over ETFs increase and the reason for that is that they get the benefit of diversity in their portfolio."
He says the conversation advisers and clients are having is also not purely about margin lending.
"We've recently launched self-funding instalment warrants and advisers are saying 'I want to get some leverage for my client perhaps using a self-funding instalment warrant, which is 50 per cent geared and it's over some blue chip equities or ETFs - that may be another way I can talk to my client'," he says.
"The other thing we're seeing is protected equity lending. Effectively that allows us to tailor an offering for an adviser and we're seeing interest in that, so how can I get leverage that is maybe 80 per cent protected?"
He says Westpac is in the process of publishing an end investor booklet around different types of gearing strategies.
"We're trying to get that to advisers as something they can use with their end client. So we do think the conversation is educationally led," he says.
Hanley says while the varying conversation depends on the different advice groups, advisers are treating margin lending in a different light to three years ago.
"Certainly industry perceptions have changed, given the coverage margin lending did receive through the GFC from a client perspective, so obviously there is more caution involved. So holding a client's hand and walking them through the whole process, there is probably a greater degree of that going on," he says.
For Billington, the change in conversation involves clients' willingness to seek financial advice.
"I think it all comes down to for a lot of people it's appropriate, but you should get financial advice. It's not something that should be entered into lightly," he says.
"I think some of the other things that have come out of this is that if you are going to take a margin loan it's not something that you are passive with. So with a mortgage, everyone knows you have a mortgage and you just let it roll on and all you have to worry about is your interest rate going up and your interest rate going down. But with a margin loan of course there are always those issues around calls and it can happen quite suddenly, so passive investment in margin lending doesn't make a lot of sense to me."
Regulation changes
As part of ASIC's guidelines, training requirements for margin lending regulatory guide 146 have been updated to include new training requirements for financial product advisers of margin lending facilities.
The updated regulatory guide includes margin lending facilities as tier one products, and requires that courses on margin lending facilities be placed on the ASIC Training Register.
ASIC will allow financial planners an 18-month transition period from the commencement date of the Corporations Legislation Amendment (Financial Modernisation) Act 2009 (1 January 2011) for people who provide financial product advice on margin lending facilities to comply with the new training standards.
The general consensus among providers is that ASIC's new requirements are welcome.
"Our view is that anything that improves disclosure to the end investor and provides education to the end investor is a positive," Keary says.
"We ran a roadshow about nine months ago on the legislation and what that meant. So we think it's a continual journey, we've got to provide that to the advisers and give them the tools to have those conversations with the end clients."
Hanley says elements of the regulation also mean product providers have to provide clients with a short form product disclosure statement (PDS).
"There wasn't a requirement to provide a PDS for margin loans, so typically there was a brochure that would cover the risks but it was a lengthier document, whereas this is really focusing on typically what the benefits are, what the uses are and most significantly what the risks are associated with the product," he says.
"So whilst it was a challenge to get margin lending to really provide some guidance or to educate people on margin lending within a four-page document, I think we certainly managed to get there and I think everyone has done a reasonable job to get there. I think it's quite a useful tool."
Steel says there are various ways of taking the legislation, and he believes his group has taken quite a pragmatic but risk-averse approach.
"I'm happy in a market where there is different interpretations. We certainly have chosen the safe option from a client point of view and our own point of view and I think that's ASIC's and the general public's expectation as well," he says.
"I think they are welcomed. I can't really say they were desperately needed. The industry would not only absorb the changes but be better off with the changes as well. They are part of the general evolution of the IFA industry."
Billington says from a leveraged equities standpoint, the company is already operating at risk and control levels as good as what ASIC has introduced.
"I think that all margin lending facilities [that] are now under an AFSL (Australian financial services licence) can only add protection and the fact that it's all now down to getting information and advice on a personal level around your wealth, I think that's a plus."
In line with the regulatory changes, deeper conversations between financial advisers and clients, and the increase in investor confidence, Australia's margin lending sector looks set for a more positive future.
