Corporations Legislation Amendment (Financial Services Modernisation) Act 2009

The Corporations Legislation Amendment (Financial Services Modernisation) Act 2009 is a Commonwealth amending Act. It amends the Corporations Act 2001 and the Australian Securities and Investments Commission Act 2001. Its schedules deal with margin lending facilities, trustee companies, debentures, a technical amendment, and application and transitional provisions.

For most businesses reading this page, the key practical part is Schedule 1. That schedule inserted a new framework for margin lending facilities into the Corporations Act. It added definitions, treated margin lending facilities as financial products, and created special conduct rules for financial services licensees dealing with retail clients.

That matters because the Act is not just about disclosure wording. It changes how a provider should classify products, identify retail clients, collect and verify financial information, assess unsuitability, retain records and handle margin call communications. If your business issues margin loans, increases limits, builds digital application flows, or participates in margin call communication arrangements, this Act affects operational settings as well as legal risk.

The Act inserted a definition of margin lending facility into the Corporations Act. A margin lending facility can be a standard margin lending facility, a non-standard margin lending facility, or a kind of facility that ASIC has declared to be a margin lending facility. ASIC can also declare that a particular kind of facility is not a margin lending facility.

A standard margin lending facility is broadly a credit arrangement. Credit is or may be provided by a provider to a natural person client. That credit is or must be applied wholly or partly to acquire financial products, or to repay earlier acquisition credit of the kind described in the Act. The credit is or must be secured by property, and that secured property consists wholly or partly of marketable securities or a beneficial interest in marketable securities. The terms must also include an LVR-based trigger under which the client, the provider or another person must or may take action to reduce the current LVR.

A non-standard margin lending facility uses a different legal structure. Instead of a straightforward credit-and-security model, the client transfers marketable securities or an interest in them to the provider, the provider transfers property to the client as consideration or security, that transferred property is or must be applied wholly or partly to acquire financial products, and the client has a right in specified circumstances to receive equivalent securities back. It also includes an LVR-based trigger for action.

The Act also defines related concepts such as current LVR, margin call and limit. These definitions matter in practice because they determine whether your product falls inside the regime and when the margin call notification rules are triggered.

The special conduct rules inserted by the Act apply to a financial services licensee in relation to issuing a margin lending facility to a retail client or increasing the limit of a margin lending facility that was issued to a retail client. That is the core scope point for the responsible lending style provisions.

In practical terms, if your business is the licensed entity issuing the facility to retail clients, you are directly in scope. If your platform, brokerage or advisory business is part of the issuing process through a licensed entity, the same operational obligations need to be reflected in your workflows. If your business is another financial services licensee acting as the client’s agent under a three-party communications agreement, the Act also imposes obligations on that agent to take reasonable steps to notify the retail client of a margin call.

The Act does not frame these special responsible lending provisions around wholesale clients. That means businesses should not assume the same rules apply across all client categories. Before relying on this page, check how the client is classified under the Corporations Act framework and make sure your onboarding and account settings support that classification.

The Act also contains separate amendments on trustee companies and debentures. Those schedules may matter to some businesses, but they are not the main source of the margin lending obligations explained below.

The two main trigger points are clear. First, when a provider issues a margin lending facility to a retail client. Second, when a provider increases the limit of a margin lending facility already issued to a retail client.

The Act also deals with an important carve-out for standard margin lending facilities. A limit is taken not to be increased merely because the value of the secured property has increased under the terms of the facility, provided that increase in value did not result from the client contributing additional property. This matters for businesses whose systems automatically recalculate available borrowing capacity as market values move.

There is also a timing rule for the assessment process. Before the critical day when the facility is issued or the limit is increased, the provider must have made the required assessment within 90 days, or another period prescribed by regulations, and that assessment must cover a period in which the critical day occurs.

For businesses, the practical lesson is that your systems should distinguish between a true issue or limit increase and a value-driven change that the Act says is not treated as an increase. If your platform treats every increase in available headroom as a fresh limit increase, or the reverse, your compliance controls may not line up with the legislation.

Before issuing the facility or increasing the limit for a retail client, the provider must make an assessment of whether the facility will be unsuitable for that client. The assessment must specify the period it covers and assess whether the facility will be unsuitable if the facility is issued, or the limit is increased, during that period.

Before making that assessment, the provider must make reasonable inquiries about the retail client’s financial situation and take reasonable steps to verify the retail client’s financial situation. The Act also allows regulations to prescribe additional inquiries or verification steps, and to specify steps that must be taken or do not need to be taken.

There is a limited verification exception where a financial services licensee authorised to provide financial product advice in relation to margin lending facilities has prepared a statement of advice for the retail client within 90 days, the statement recommends the particular facility or increase, the limit or increase does not exceed what was recommended, and the statement includes the information used to prepare it. In that case, the provider is not required to verify that information for the relevant verification paragraphs.

The provider must assess the facility as unsuitable if, at the time of the assessment, it is likely that if the facility were issued or the limit increased during the assessment period and the facility were to go into margin call, the retail client would be unable to comply with the client’s financial obligations under the facility or could only comply with substantial hardship. The Act also allows regulations to prescribe other circumstances in which a facility is unsuitable.

The provider must not issue the facility or increase the limit if the facility is unsuitable at that time. The Act also limits the information that can be taken into account for the unsuitability analysis to information about the retail client’s financial situation, or other prescribed matters, where the provider had reason to believe the information was true or would have had reason to believe it was true if the required inquiries or verification had been made.

In practical business terms, this means your process needs more than a client declaration and a generic risk warning. You need a documented assessment workflow, a way to gather financial information, a verification process, a decision rule for hardship and ability to meet obligations in a margin call, and a system control that stops issue or limit increase where the product is unsuitable.

The Act gives retail clients a right to request a written copy of the assessment. If the client asks before the facility is issued or the limit is increased, the provider must give the written copy before issuing the facility or increasing the limit.

If the client asks after the critical day, the provider must still provide the written copy during the 7 year period starting on that day. If the request is made within 2 years of the critical day, the copy must be given within 7 business days after the request is received. Otherwise, it must be given within 21 business days.

The provider must give the copy in the manner prescribed by regulations, if any. The provider must not request or demand payment for giving the client a copy of the assessment. The Act states that offences based on the relevant subsections about giving the assessment and charging for it are strict liability offences, and those provisions are also civil penalty provisions.

For businesses, the practical issue is record retention and retrieval. If your systems cannot locate the assessment years later, or cannot produce it within the required timeframe, you may have a compliance problem even if the original decision process was otherwise sound.

The Act inserted a separate set of rules about notice of margin calls. A financial services licensee that has issued a margin lending facility to a retail client must, when the facility goes into margin call, take reasonable steps to notify the retail client of the margin call.

If there is an agreement between the provider, the retail client and another financial services licensee acting as agent, then the provider must take reasonable steps to notify the agent instead, and the agent must take reasonable steps to notify the retail client. This is a specific three-party arrangement set out by the Act, not a general outsourcing shortcut.

Notice must be given at a time determined by ASIC, or if ASIC has not determined a time, as soon as practicable. Notice must be given in the agreed manner, or if there is no agreement and ASIC has determined a manner, in that manner, or otherwise in a reasonable manner.

The Act also prevents a provider from making issue of the facility conditional on the retail client entering into the communications agreement used for agent-based notices. In practice, businesses cannot force every retail client into an intermediary-only notification model as a condition of getting the facility.

Although margin lending is the main operational focus for many readers, the Act is broader than that. Schedule 2 deals with trustee companies and amends both the Australian Securities and Investments Commission Act 2001 and the Corporations Act 2001. Schedule 3 deals with debentures and amends the Corporations Act 2001. Schedule 4 makes a technical amendment to the Corporations Act 2001. Schedule 5 deals with application and transitional provisions.

If your business is affected by trustee company regulation or debenture administration, you should read those schedules directly rather than assuming this page covers their full effect. This page concentrates on the margin lending provisions because they are the clearest operational compliance changes in the Act for many financial services businesses.

The Act received Royal Assent on 6 November 2009. Sections 1 to 3 and anything not otherwise covered by the commencement table commenced on that date. Schedule 1, which contains the margin lending amendments, commenced on 1 January 2010. Schedule 2 commenced on 6 May 2010. Schedule 3 item 1 commenced on 6 November 2009, while Schedule 3 items 2 and 3 commenced on 1 January 2010. Schedule 4 and Schedule 5 commenced on 6 November 2009.

The legislation is in force. Because it is an amending Act, businesses should read it together with the amended Corporations Act provisions and any relevant regulations or ASIC instruments that the Act contemplates, including ASIC declarations about what is or is not a margin lending facility and ASIC determinations about margin call notice timing and manner.

Before relying on this page for operational decisions, a business should confirm several points. First, whether the product is in fact a margin lending facility under the statutory definitions or an ASIC declaration. Second, whether the client is a retail client, because the special conduct provisions explained here are framed around retail clients. Third, whether the event is truly an issue or limit increase, rather than a change that the Act says is not treated as an increase. Fourth, whether any regulations prescribe additional inquiries, verification steps or unsuitability circumstances. Fifth, whether ASIC has determined the time or manner for margin call notices for the relevant arrangement.

If your business has older forms, legacy platform logic or adviser workflows built before these rules were embedded into your systems, it is worth checking that the assessment period, verification steps, record retention settings and margin call notification procedures still line up with the legislation.