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Mixed reactions to margin lending code

Mixed reactions to margin lending code

PIGGY IN THE MIDDLE: Legal opinion polarised over new margin lending code Different predictions for the proposed reg

PIGGY IN THE MIDDLE: Legal opinion polarised over

new margin lending code

Different predictions for the proposed regulations for margin lending - including greater protections for consumers but increased costs for providers - have been offered by legal experts in the field.

Ben Phi, senior associate at Slater and Gordon where a class action is being planned on behalf of Storm investors, said the firm welcomed the plan for proceedings to be commenced against financial planners and stockbrokers.

"Depending on how these reforms are actually enacted, it could actually increase the onus on margin lenders to ensure that investors are not only kept informed about the product but also that the margin loan itself ... offered to the borrower is suitable, and appropriate, given their personal financial circumstances," he said.

Peter Jones, partner at Allens Arthur Robinson, said that while it is yet to be seen how the code will actually take effect, the firm had fielded some concern from margin lenders.

"... It looks as if the lenders will have to be licensed under the Corporations Act and that will mean there is a cost to obtaining and maintaining the licence..." he said.

"If you're a happy customer at the moment you'll suffer increased costs, if you are a lender that has a good client base and you're not suffering losses with your client base, then this is going to increase costs for you," he said.

Jones believes that advisers who are appropriately trained will help consumers understand the risks but warns that relying too much on disclosure documents is risky because often people don't absorb the information.

"Even though you might try to explain things to people in documents, the explanations can be too complex and too long for the message to really get through. So that's the challenge with this reform - to make people aware of the risks and not get too bogged down in technical disclosure requirements," he said.

Phi said the firm hopes the Government will introduce an alternative compensation scheme to the recent professional indemnity insurance that has been made mandatory.

"We're still aware of and encountering financial planning firms that are either underinsured or who have taken out professional indemnity policies that contain broad exemptions which basically render their value to the consumer as being relatively low," he said.

Jones said that increasing the levels of consumers' financial literacy should be a priority of the Government. "It's not that this particular code is going to do the job by itself, it needs to be part of a co-ordinated package to increase, generally across the community, levels of financial literacy and understanding," he said.

- Sarah Sharples

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