Margin Lending/Gearing Guidelines
The following guidelines must be adhered to when providing Margin Lending/Gearing advice to clients:
- To advise on the strategy of gearing, you must have completed the appropriate accreditation (fully completed the DFS or equivalent).
- The ‘Capstone Gearing Acknowledgement Form’must be completed, signed and dated by the client and retained on file. This form is available on the Capstone website in the Adviser Support section under Compliance.
- You must be proactively involved in monitoring client portfolios and assisting clients where and when appropriate. For instance, where market corrections have occurred, you will need to be aware of clients that may be potentially receiving a margin call and should be proactive in assisting their clients to take suitable action. As a minimum, reviews are to be conducted half yearly.
- You are not permitted to recommend any double-geared strategies.
- The risk profile of the client must be assessed. The client has to fall into the growth to high growth categories.
- You must have reasonable grounds to demonstrate that the client has sufficient surplus income, or surplus cash capable of being set aside for this purpose for the expected life of the facility, to service a 2.5% rise in the interest rate of all the clients drawn debt. This is to be included in the Statement of Advice (SoA).
- In the case of margin lending recommendation, you must have reasonable grounds to demonstrate that theclient has the ability to meet a margin lending call, if the value of the investment fell by 15% immediately after implementation. This is to be included in the SoA.
- In the case of margin lending recommendation, in respect of a margin lending facility, that the initial loan to value ratio is no higher than the maximum loan to value ratio permitted by the facility provider, or 80% whichever is lower.
- A full review of the clients insurance needs must be made and recommendations for the following be included in the SoA:
- Income protection insurance
- Life insurance
- TPD insurance
The insurance cover must be for at least the full amount of the loan and loan repayments if not more.If recommending insurance only for the specific amount of the loan and loan repayments, then the client should be made aware that they should make another appointment to discuss the full life insurance needs in more detail.
If the client elects not to take out the recommended insurance, an acknowledgementmust be completed, signed and dated by the client and retained on file;which clearly states that they understand the risks, they have received adequate warnings and they are aware of the implications if for example they lose their jobs/income and do not have sufficient insurance cover. This form (‘Capstone Client Acknowledgement Gearing Form’) is available on the Capstone website in the Adviser Support section under Compliance.
- The SoA should also disclose the following items:
- An explanation of the reasoning for recommending the geared strategy must include an analysis of how the client will be able to service the loan commitments and be equipped to handle any margin calls that may be made, as well as planning for completion payment intentions and loan “rollovers”.
- As geared strategies involve servicing interest repayments, cash flow and tax projection statements must be included in the SoA.
- Text is needed to explain the workings of the strategy. For example Margin Loan – investments used as security, Margin call process, first payment / completion payment, etc.
- A warning highlighting that investments in shares and managed funds can decrease in value and that if the investments were to be sold at that point a capital loss would be made.
- A warning regarding gearing along with full disclosure and disclaimers. The warning should include examples whereby the value of the funds drop by 5%, 10% and 15%. Also, a warning must be included highlighting the effects of a hike in interest rates.
Margin Lending/Gearing Guidelines v3 July 09